An explanation to currency pairs correlation in Singapore

 

There would be an abundance of different currency pairs in countries with developed financial markets to choose from when carrying out foreign exchange transactions. In the case of Singapore, however, there are less than a handful of over-the-counter (OTC) forex companies operating in the country. As such, only a few currency pairs exist for trading purposes.

 

Since 2008, Singapore has been ranked as one of the top 3 global foreign exchange trading hubs with nearly US$99 billion worth of trades made by just three banks daily. Speculative trading activities undoubtedly fuel such a large volume. Still, it also shows that Singapore is a significant player in the international market for money transfers and exchanges.

 

Forex market in Singapore

FX, being an international financial hub, it is natural to assume that forex markets in Singapore are highly efficient and competitive. It would make sense for traders to trade with several different companies to avail themselves of better forex rates. However, a large part of retail forex trading occurs through the OTC market, mainly of foreign banks and wealthy individuals.

 

Currency pairs in Singapore

Since most of these transactions occur between bank branches or between banks and their customers, the number of currency pairs available for trades would be limited. In fact, out of all the major currencies traded globally, only ten currency pairs exist for trading purposes in Singapore – primarily due to foreign exchange regulations imposed by local authorities.

 

It means that there could be instances where traders are forced to engage in multiple round trips before completing a transaction. Considering that investors are already paying commissions on each transaction carried out, it would be wasteful. Hence, it is no surprise that several forex traders favour the concept of one-stop shopping where they can access all their banking needs from a single provider instead of engaging with several different companies.

 

The presence of this unique “one-stop” convenience makes Singapore an attractive prospect for fx brokers who aim to differentiate themselves from their competitors through their foreign exchange rates and quality customer service provided to clients. As such, having a limited number of currency pairs available has given rise to a strong preference for cross pair trades – i.e. trading between two different currencies based on relative price levels – among FX traders.

 

Most traded currency pairs

The EUR/USD is the most traded currency pair in the world at about US$1.9 trillion worth of trades made daily, while USD/JPY ranks second with a daily volume of over US$1.2 trillion. Singapore being one of Asia’s financial hubs makes it an attractive prospect for forex brokers to establish their presence due to the strong preference for cross-currency pairs among retail foreign exchange traders, which gives rise to high trading volumes on many deals concluded between two different countries.

 

However, how should one choose a suitable broker when only a limited number of quality providers are operating in Singapore? The logical thing would be to choose a provider based on their rates and reputation instead of basing your decision on the number of currency pairs available for trade.

 

Long-term investment strategies

It is important to note that “long-term investment strategies” can be applied when trading options on currencies with a low active range or where all major currency pairs have a decoupled relationship with each other. High yield option strategies such as calendars, diagonals and butterfly spreads are good examples of strategies for less active pairs. 

 

Long-term trading strategies also allow investors to gain exposure to specific conditions where currencies with a low active range can be profitable when applied correctly. However, one needs to be careful because markets do not offer unlimited opportunities to meet certain conditions. 

 

It is known as “the law of small numbers”, which states that people tend to find trends in random data sets under certain circumstances because they have selective memory and overlook high probability events that did not occur.