The foreign exchange industry exists whenever one currency is traded for another. It is by far the largest market in the world in terms of cash value traded, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The market is unique due to several factors including trading volume, the extreme liquidity of the market, geographical dispersion, the 24 hour trade day, the large number and variety of traders in the market and the variety of factors that affect exchange rates.
Among these factors that affect exchange rates is the news. This is one of the greatest advantages that the forex market has over all of the other markets; there is no such thing as insider trading. All a trader needs to do in the forex market is to stay abreast of the news, develop an opinion and apply that opinion to the markets. Some of the best currency trades in the world have been placed by investors following the news and taking advantage of the information given to them.
During the summer of 1992 there was wide spread speculation that England was going to be rejected from the European Monetary Union, which would severely hurt the English pound. George Soros, founder and head of one of the largest hedge funds in the world, The Quantum Fund, took advantage of England’s poor fortune, by placing a ten billion short position in the market. The Bank of England attempted to stabilize the pound’s value by intervening and depleting all of their foreign currency reserves. Despite their efforts, on September 16, 1992, known around the world as Black Wednesday, the fight was over and the pound plummeted. England was forced to withdraw from the European Monetary Union and in one day, Soros earned $1 billion. He is now known as the man who broke the Bank of England.
Stanley Druckenmiller, former money manager for George Soros, now runs Duquesne Capital which he founded in 1981. In 1989, he developed one of his greatest ideas. While working at George Soros’s Quantum Fund, Druckenmiller bought two billion German marks. He believed that due to the falling of the Berlin wall and the reunification of Germany, the deutschemark was set for a huge rally. That one idea made him a very rich man, with the deutschemark climbing enormously in value over the next few years. Druckenmiller’s exact profits on this investment remain unknown, but the Quantum Fund posted returns of over 60%.
Andy Krieger, once a star at Banker’s Trust before resigning to work for no other than Mr. George Soros, is best remembered in New Zealand. During the U.S. stock market crash of 1987, traders were buying up any currency that was appreciating against the dollar, the most popular being the New Zealand dollar or the “kiwi” as it is known in the currency market. Mr. Krieger, knowing that this rally could never last and believing that the kiwi was one of the most overvalued currencies in the market, shorted 200 million kiwi which is more than the entire money supply of New Zealand. The currency not surprisingly buckled under this pressure, allowing Kreiger to cover his positions and walk away with a huge profit. .
All of these trades have one common underlying factor. Each of these traders had an opinion that was based on pure economic, fundamental data. Due to markets being more efficient and traders being more regulated, it would be nearly impossible to replicate any of these trades, however it would be rather easy to replicate the foundation on which each and every one of these trades were based.