The foreign exchange market (forex, FX) is a worldwide decentralized over-the-counter financial market for the trading of currencies.

Trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The forex market determines the relative values of different currencies. (The Economist)

The forex markets underpin all other financial markets. -directly influence each countrys foreign-trade patterns, determine the flow of international investment and affect domestic interest and inflation rates. -operate in every corner of the world, in every single currency. Collectively, they form the largest financial market by far. (The Economist)

As such, it has been referred to as the market closest to the ideal of perfect competition, notwithstanding currency intervention by central banks.

The foreign exchange market is the largest and most liquid financial market in the world.

As of end of April 2010, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily volume as of April 2007 (3year horizon). Some firms specializing on foreign exchange market had put the average daily turnover in excess of US$4 trillion.
(Bank for International Settlements )

In Billion USD

The $3.98 trillion break-down is as follows: $1.490 trillion in spot transactions $475 billion in outright forwards $1.765 trillion in foreign exchange swaps $43 billion currency swaps $207 billion in options and other products

The $3.98 trillion break-down is as follows: $1.490 trillion in spot transactions $475 billion in outright forwards $1.765 trillion in foreign exchange swaps $43 billion currency swaps $207 billion in options and other products

The following theories explain the fluctuations in FX rates in a floating exchange rate regime (In a fixed exchange rate regime, FX rates are decided by its government): (a) International parity conditions: Relative Purchasing Power Parity, interest rate parity, Domestic Fisher effect, International Fisher effect. Though to some extent the above theories provide logical explanation for the fluctuations in exchange rates, yet these theories falter as they are based on challengeable assumptions [e.g., free flow of goods, services and capital] which seldom hold true in the real world.

The following theories explain the fluctuations in FX rates in a floating exchange rate regime (In a fixed exchange rate regime, FX rates are decided by its government): (b) Balance of payments model: This model, however, focuses largely on tradable goods and services, ignoring the increasing role of global capital flows. It failed to provide any explanation for continuous appreciation of dollar during 1980s and most part of 1990s in face of soaring US current account deficit.

The following theories explain the fluctuations in FX rates in a floating exchange rate regime (In a fixed exchange rate regime, FX rates are decided by its government): (c) Asset market model: views currencies as an important asset class for constructing investment portfolios. Assets prices are influenced mostly by peoples willingness to hold the existing quantities of assets, which in turn depends on their expectations on the future worth of these assets. The asset market model of exchange rate determination states that the exchange rate between two currencies represents the price that just balances the relative supplies of, and demand for, assets denominated in those currencies.

Determinants of FX rates
Parity Conditions
1. 2. 3. 4. Relative inflation rates Relative interest rates Forward exchange rates Interest rate parity

Is there a well-developed and liquid money and capital market in that currency?

Spot Exchange Rate

Is there a sound and secure banking system in-place to support currency trading activities?

Asset Approach
1. 2. 3. 4. 5. 6.
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Relative real interest rates Prospects for economic growth Supply & demand for assets Outlook for political stability Speculation & liquidity Political risks & controls

Balance of Payments
1. 2. 3. 4. 5. Current account balances Portfolio investment Foreign direct investment Exchange rate regimes Official monetary reserves

It is understood from these models that many macroeconomic factors affect the exchange rates and in the end currency prices are a result of dual forces of demand and supply.

ECONOMIC FACTORS These include: (a)economic policy, disseminated by government agencies and central banks, (b)economic conditions, generally revealed through economic reports, and other economic indicators.

Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates). Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.

ECONOMIC FACTORS These include: (a)economic policy, disseminated by government agencies and central banks, (b)economic conditions, generally revealed through economic reports, and other economic indicators.

Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. I.e., trade deficits may have a negative impact on a nation's currency. Inflation levels and trends: Typically a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. Inflation erodes purchasing power, thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation.

ECONOMIC FACTORS These include: (a)economic policy, disseminated by government agencies and central banks, (b)economic conditions, generally revealed through economic reports, and other economic indicators.

Economic growth and health: Reports such as GDP, employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be. Productivity of an economy: Increasing productivity in an economy should positively influence the value of its currency. Its effects are more prominent if the increase is in the traded sector.

POLITICAL CONDITIONS Internal, regional, and international political conditions and events can have a profound effect on currency markets. All exchange rates are susceptible to political instability and anticipations about the new ruling party. Political upheaval and instability can have a negative impact on a nation's economy. For example, destabilization of coalition governments in Pakistan and Thailand can negatively affect the value of their currencies.

POLITICAL CONDITIONS Similarly, in a country experiencing financial difficulties, the rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive/negative interest in a neighboring country and, in the process, affect its currency.

MARKET PSYCHOLOGY AND trader perceptions influence the forex market in a variety of ways: Flights to quality: Unsettling international events can lead to a "flight to quality," a type of capital flight whereby investors move their assets to a perceived "safe haven." There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts. The U.S. dollar, Swiss franc and gold have been traditional safe havens during times of political or economic uncertainty.

MARKET PSYCHOLOGY AND trader perceptions influence the forex market in a variety of ways: Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends.

MARKET PSYCHOLOGY AND trader perceptions influence the forex market in a variety of ways: "Buy the rumor, sell the fact": This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought". To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much on the relevance of outside events to currency prices.

MARKET PSYCHOLOGY AND trader perceptions influence the forex market in a variety of ways: Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talismanlike effect: the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight. Technical trading considerations: As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form apparent patterns that traders may attempt to use. Many traders study price charts in order to identify such patterns.

In a special survey done by Economic Consensus Inc. on March 2010 (including the Philippine Peso) in an attempt to compare and rank the differing degrees of sensitivity with which different currencies respond to these various influences the following are the results: Note: Scores are assigned to each of the economic factors shown in the table below on a scale of 0 (no influence) to 10 (very strong influence).

Exchange Rates per US$, unless Otherwise Stated

Relative Growth

Inflation Differential

Trade/ Current Account 4.8 5.8 4.5 5.7 4.9 5 7.5 6.7 4.3 5.7 6.8 7 5.8 4.7 5

Interest Rate Differentials Short (Long) 6.8 (4.5) 7.5 (5.5) 7.3 (4.8) 7.3 (4.7) 7.9 (5.7) 8.6 (6.4) 6.5 (6.0) 7.0 (5.7) 7.0 (4.5) 7.3 (5.7) 5.3 (5.0) 2.4 (1.6) 4.8 (4.0) 4.3 (3.7) 5.5 (5.5)

Equity Flows 4 3.5 5 3.7 4.7 5.8 5 6.7 4.7 5.3 3.9 1.8 5 4.3 6.5 4.7

Other Factors (Score)

G-7 & Western Europe

Euro Japanese Yen UK Pound Swiss Franc* 7.3 4 7 5 6 6.6 6.0 7.7 6 3 3.7 3.8 4.8 5.3 4.5 5.5 4.8 4.8 5.3 4.1 4.8 6 4.7 3.5 5 5.7 5 4.5 3.3 4.5 Fiscal Concerns (10.0) Risk Aversion/Carry Trade (6.0) Fiscal Concerns (10.0) Sovereign Debt Risks (8.0) Euro Fiscal Concerns (10.0) Commodity Prices (7.0) A$ Trend (7.0) Electoral Cycle (7.0) Relations with North Korea (6.0) Market Sentiment (7.0) Market Sentiment (8.0)

Asia Pacific
Australian $ New Zealand $ Philippine Peso South Korean Won

Eastern Europe
Czech Koruna* Hungarian Forint* Russian Rouble

Latin America
Argentinian Peso Chilian Peso Mexican Peso Peruvian New Sol Economic Policy (8.5) Copper Prices (8.0) Reform Agenda (8.0) Oil Prices (4.0) Commodity Prices (5.0) Average 5.3 4.8 5.7 6.4 (4.9) * Analysis refers to determinants of the exchange rate against the euro.

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The roots of the Asian currency crisis extended from a fundamental change in the economics of the region, the transition of many Asian nations from being net exporters to net importers. The most visible roots of the crisis were the excess capital inflows into Thailand in 1996 and early 1997. As the investment bubble expanded, some market participants questioned the ability of the economy to repay the rising amount of debt and the Thai bhat came under attack.

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The Thai government intervened directly in the fx market and indirectly by raising interest rates in support of the currency. Soon thereafter, the Thai investment markets ground to a halt and the Thai central bank allowed the bhat to float. The bhat fell dramatically and soon other Asian currencies (Philippine peso, Malaysian ringgit and the Indonesian rupiah) came under speculative attack.

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The Asian economic crisis (which was much more than just a currency collapse) had many roots besides traditional balance of payments difficulties:
Corporate socialism Corporate governance Banking liquidity and management

What started as a currency crisis became a region-wide recession.

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120 110 100 90 80 70 60 50 40 30 20 10 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep 97 97 97 97 97 97 97 97 97 98 98 98 98 98 98 98 98 98
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INSERT EXHIBIT 5.3

Philippine Peso Thai Baht Malaysian Ringgit Indonesian Rupiah

Fundamental Approach vs. Technical Approach Fundamental Approach is focused on a great variety of data. The other method, the Technical Approach, is based on a smaller sub-set of data. Understanding these two approaches and how they work will help a new trader to select the approach and method that will be most effective for them. Using the Fundamental Approach involves incorporating data from the trade balance, GNP, unemployment, productivity indexes, trade balance, consumption, inflation rates, and trade balances that are based on a modified structural equilibrium model. When using the Fundamental Approach, trading signals are generated when there is a significant difference between the expected exchange rate and the current, or moving rate. The trader receives a buy or sell signal when the difference is due to a mispricing.

Fundamental Approach vs. Technical Approach Fundamental Approach is focused on a great variety of data. The other method, the Technical Approach, is based on a smaller sub-set of data. Understanding these two approaches and how they work will help a new trader to select the approach and method that will be most effective for them. Using the Fundamental Approach involves incorporating data from the trade balance, GNP, unemployment, productivity indexes, trade balance, consumption, inflation rates, and trade balances that are based on a modified structural equilibrium model. When using the Fundamental Approach, trading signals are generated when there is a significant difference between the expected exchange rate and the current, or moving rate. The trader receives a buy or sell signal when the difference is due to a mispricing.

Fundamental Approach vs. Technical Approach The Technical Approach is a more simplified method for forecasting because of its use of a smaller data sub-set and filters. Using extrapolations of past price trends and based on price information, the Technical Approach relies on moving averages or momentum indicators. This approach determines when rates start to show significant changes, not the daily sporadic changes that occur with no real impact on futures. With the filter method, trading signals are generated when rates rise above, or drop below a specific percentage point. The signal generator is usually set for 0.5% to 2%, depending on the risk anticipated. The daily fluctuation or noise is filtered out of data so that an individual is able to determine steady changes and indicators. Incorporating the Momentum Model in this approach, a buy signal will be triggered when the price climbs quickly. Using the Moving Average Model, a signal is triggered when the short-term moving average (SRMA) crosses the long-term moving average (LRMA).

Main differences between the two types of approaches Fundamental approach Technical approach Focuses on what ought to happen in a Focuses on what actually happens in a market market Charts are based on market action Factors involved in price analysis: involving: 1. Supply and demand 2. Seasonal cycles 3. Trade Balances 4. Government policy The fundamentalist studies the cause of market movement, while the technician studies the effect. 1. Price 2. Volume 3. Open interest