The first thing to say about the currency market is that it possesses and obeys a different set of dynamics to other financial markets. Unlike in the case of equity or fixed income markets, the vast majority of currency market practitioners are speculators of one sort or another. Global merchandise trade going through the currency market makes up around 1–2% of total volume. Let’s say we more than double that to allow for foreign direct investment, making a volume contribution of around 5%. Asset market volumes have risen sharply over the past 20 years as barriers to capital have fallen. Having made up only a small proportion of currency market volume before the end of the Bretton Woods exchange rate system, they probably now make up as much as 35% of total currency market volume on a daily basis. That still leaves 60% of daily currency market volume, which has to ascribe to “speculation”. Granted, these are very rough, back-of-the-envelope figures, but they give a good idea of the proportions that are involved. Given this, is it any wonder that many of the traditional exchange rate models that are based on the current account and therefore on trade flows are poor predictors of exchange rates over the short term?! Equally, this gives some clue as to why the portfolio balance approach to exchange rates also achieves unsatisfactory results.