Forex looks like the future

Foreign exchange markets - or forex, the formalized trading of international currencies - have in the Middle East historically been less active than those in other emerging markets. The reason? Rigid government regulation.
But that looks like it is beginning to change. A recent report by the Washington-based International Monetary Fund commended the government of Iran for its commitment to 'eliminate all exchange restrictions' by the spring of 2002. Internationally renowned forex experts, including Sarkis Yusef Khoury at the University of California, predict that in the coming years other countries throughout the Middle East will continue to liberalize their foreign exchange restrictions.
Liberalizations, including those required for World Trade Organization membership, should lead to the development of forex markets that are competitive with other emerging markets. 'The only thing that will stop this trend,' says Khoury, 'is a backlash over the US war in Afghanistan.'
As the time of writing, that doesn't seem to be happening, at least in the financial markets. A leading maker of forex software, ACT Forex, based in New York City, says that it has recently sold its sophisticated software to customers in Lebanon and Saudi Arabia. According to Ilya Sorokin, the firm's president, 'The market is really ready to take off.'
Foreign exchange sounds complicated, but is actually rather straightforward. Here's how it generally works. A company doing business regularly in US dollars, for example, strikes a deal with a firm that regularly trades in British pounds. To minimize the risk that the value of the dollar will be diminished vis-à-vis the value of the pound at the time the product will be delivered, the company purchases what are known as 'currency futures.' These are guarantees that help lock in the price of the dollar for that specific trader, at that specific time.
'That minimizes risk,' says Sam Gejdenson, a former US Congressman, and president of Sam Gejdenson International. Many of Gejdenson's clients in the Middle East, particularly those in Egypt, are currently quite active today in forex trading, as are many of his clients in Riyadh.
According to the University of California's Khoury, who was born and raised in Lebanon, there was a lot of other forex-related activity during the fall. For example, the government of Lebanon recently tapped the futures market to the tune of $200 million. The Bank of Beirut launched its first money market fund in Lebanese pounds.
Algeria is one of the countries in the region that is rapidly expanding its presence in the international forex market. Speaking in November at the James Baker Foundation in Houston, President Abdelaziz Bouteflika said that since greater investment is vital to Algeria's economic growth, the country is amending its regulatory framework in a bid to promote foreign investment.
Algeria plans to simultaneously revitalize and modernize its banking sector and develop the country's capital markets, including, presumably, its foreign exchange markets. Bouteflika said that greater importance is being attached to banking partnerships and the establishment of financial companies in Algeria. That means less regulation. And that opens the door for forex.
'As economic reform continues in countries throughout the region,' Khoury said recently, 'look for the focus on forex industry growth to continue.'
For those in the region who are already in the forex game, the outlook for the next several months is bearish toward the euro and bullish toward the dollar, according to Keith Black, the president of KB Advisory in London. 'Trend profiles have turned bearish toward the euro,' says Black, 'but monthly directional indicators still suggest that the medium to long-term outlook remains positive.'
A yen for euros. Black recommends that investors buy euros, based on their current weakness, but stop buying them at 0.8670 to the dollar. Black also suggests that forex companies buy Japanese yen, stopping at 118.30 yen to the dollar. Another analyst, Kamal Sharma of the London office of Commerzbank AG, says that investment strategy toward yen futures should probably change, if current political developments persist.
'It seems as if every policy proposal being advocated by Japanese officials is a variation on an old theme,' Sharma says. 'It now appears as if the Japanese government will resort back to its old ways and try and spend its way out of the current malaise. A concern for the major ratings agencies is that a return to the days of fiscal stimulus will lead to a further deterioration in Japan's fiscal situation. Any further expansive fiscal policy risks breaking the prime minister's insistence on maintaining the 30 trillion yen bond issuance cap and damaging yen sentiment further.'
Black also recommends buying British pounds, with a stop on orders at 1.4194 pounds per dollar. That analysis holds a lot of weight for Middle Eastern investors. 'As many Middle Eastern countries do business in dollars - or have their currencies pegged to the dollar - following the action in the US dollar is most important,' says Khoury.
But the mighty dollars isn't everything. Soon, for Middle East traders, there will be a whole world of currency to track.