The once non-existent foreign exchange (FX )market of the UAE is taking significant strides towards becoming a competitive player.
While still in its nascent stages, the FX trading landscape in the UAE is undergoing rapid transformation, offering a fertile ground for both seasoned investors and traders to reap substantial rewards.
In the realm of trading, opportunities often align with a deep understanding of the driving forces behind price movements. In this scenario, the spotlight falls on the UAE Dirham, the cornerstone of this evolving market.
Bloomberg’s report suggests that the Middle East’s contribution to the global forex market is 8%. UAE’s exact share is still unknown, but it’s significant, nevertheless. That’s because more than 1500 American and multi-national companies have global headquarters in the UAE. The region is also a major corridor for global FX flows. Establishing Dubai Gold and Commodities Exchange (DGCX) and the region’s low-risk environment has attracted capital inflow and increased AED’s significance in global markets.
UAE’s Role in Driving Global Forex Market
There are five main factors. And these are:
- Floating and Fixed Rates
In currency trading, there are two ways to determine the prices: floating and fixed rates. The floating rate is the traditional supply and demand. The more demand there is for a currency, the higher the price of it will be. Fixed rates are determined by central banks. Fixing the rate is also known as pegging.
After introducing AED, the Central Bank of the UAE pegged the currency against the USD. Thus, one USD is fixed at 3.67 AED. Because of the fixed nature, you can’t profit from AED/USD pairing since there’s no change. You’d have to pick currencies that float freely in the market.
- Differentials in Inflation
How inflated a country is affects its currency. Generally, a country with low inflation will have a stronger currency than other foreign currencies. In the UAE, inflation is expected to stay closer to the 5% range for 2023. You should likewise check the inflation rates in other countries while trading forex in Dubai. The difference and future outlook will help you predict the price movement.
- The Interest Rates
Correlated with inflation is the interest rate. And the interest rates set by the central banks determine the currency price. Higher interest rates mean a higher return on investment. This attracts more investments into that country, thereby increasing the exchange rate. But a higher interest rate in a high-inflation country almost mitigates the benefits. Thus, along with inflation rates, monitor the changes in interest rates of the central banks when forex trading in Dubai.
- Current Account Deficit
A current account deficit simply means a country spends more than it earns. This can lead to inflation, which in turn, devalues the currency. To track currency movements, monitor current account deficits announced monthly.
- Public Debt
Governments borrow now and then to fund various projects. This debt falls on the public. In UAE, however, the burden is carried by the monarchy. Large public debts often impact the currency negatively. You should track the public debt of the countries whose currencies you’re pairing in forex trades.
Several other factors can cause currencies to move. But always have the basics in place by tracking the factors mentioned above.
FX trading is inherently characterised by leverage, a fundamental practice that magnifies the potential gains and losses of trading positions. Leveraging allows traders to control a larger position in the market with a relatively smaller amount of capital, thereby amplifying both profit opportunities and risk exposure. This concept is integral to the currency market due to the high liquidity and volatility inherent in currency pairs, where currencies often move in smaller decimals. In essence, this is why the amplification effect – leverage – is needed to capture and trade the currency moves.
While leveraging offers the potential for substantial returns, it also demands prudence and risk management, as the same mechanism that can multiply gains can also lead to significant losses. Therefore, a thorough understanding of leverage, disciplined trading strategies, and risk mitigation techniques are essential for navigating the complexities of forex trading and capitalizing on its opportunities while safeguarding against its inherent risks.
For forex trading in Dubai (and for investing in bonds), it is recommended to choose the best online trading platform in the UAE.
– Contributed by Damian Hitchen, CEO, Saxo Bank MENA
