At the very top of the battlefield command is the FED they are the owners of the market. Whatever you may trade its normally against the USD. Even the crossess, so in perspective you will always be walking into their radar. They have their chief Ben who have a whole squadd of people crunching numbers to determine their postions and whether there’re things they could od to improve their position.
Then down the food chain there’s the other Central Banks having their radar on their respective currencies. The hands and legs of the FED are the CB dealers who’s responsibilities are to police the markets. Making sure that its behaving itself. Its chief responsibility is to acertain that there’s no riots in the market so long as things are peaceful they leave everybody alone to do their thing.
Then just under them is the tie 1 bank dealers. These dealers are normally marketmakers to the interbank market, nad have very lanrge daylight limits and risk parameters to work within. They are also the eyes for the CB dealers as most large customers go through them to deal. So they can see who’s bying or selling dollars. If there are irregularities where by some large customers comes into the marekts to buy or sell dollars. CB dealers are put in the know and will be on standby to see if markets may be distured.
under the tier 1 there are the tier 2 banks and tier 3 banks, they functions as the lines of distribution. If as in the example above a large corp comes selling dollars and the CB dealers do not intervene, then the tier 1 banks will start selling the dollars down to tier 2 banks in smaller packages, and the tier 2 will likewise start selling to tier 3 in smaller packages, in 20 to 30 mins tat process fizz out and most dealers would be short of dollars to a certain extent.
MORE on market structure, the FX market is a global decentralized otc market it facilitates the exchange from a curerncy to another currency, it can be use for speculation, carry trade, and facilitate comerse in the international market. Any transaction made from one currency to another is concidered a forex transaction.
It can be traded in spot transactions, outright forwards, forex swaps, options and many other products. It is divided into different levels of access, at the top is the interbank market which is made of the largest commercial banks and security dealers. Then the top tier bank market, then the small banks followed by multi national corporations, large hedge funds, and even some of retail forex market makers. Pension funds, insurances, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general,
BANKS- the interbank market caters to both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is coducted by proprietary desks, trading for the banks own account. Until recently forex brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for large fees. Today however much of this business has moved on to more efficient electronic systems. The brokers squawk box lets traders listen to ongoing interbgank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.
Commercial companies= an important part of this market comes from the financial activities of companies seeking foreing exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of the banks or speculatoers and their trades often have little shrot term impact on the market rates. Nevertheless trade flows are an important factor in the longterm direction of a currency’s exchange rat. Some multinational companes can have an unpredictable impact when very large postions are covered due to exposures that are not widely know by other market participants.
Central banks- national central banks play an importan role in the foreign exchange markets. They try to control the money supply, inflationg and or interest rats and often have official or unnofficial target rates for their currencies. They cfan use their often substantial forex reserves to stabilize the market. Nevertheless the effectiveness of central banks stabilizing speculation is doubtful because central banks do not go bankrupt if they make large lossess, like other traders would and there is no convincing evidence that they do make profit.
Forex fixing- forex fixing is the daily monetary exchange rate fixed by the national bank of each conuntry. The idea is that central banks use the fixing time and exchange rate to evaluate behaviour of their currency. Fixing exchange rates reflects the real value of equilibrium in the forex market. Banks dealers, and online fx traders use fixing rates as a trend indicator.
The mre expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank. Several scenarions of this nature were seen in the 1992-93 ERM collapse and in more recent times south east asia.
hedge funds and speculators about 70-90% of the fx exchange transactions are speculative. In other words the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end. Rather they were solely speculating on the movement of the particular currency. Hedge funds have gained a reputation for agrresive currency speculationg. They control billions of dollars of equity and may borrow billions more, and this may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds favor.
investment firms- investment firm use the fx market to facilitate transactions in foreign securities. For example an investment manager bearing an internationsl equity portfolio needs to purchase and sell several pairs of foreign currenies to pay for foreign securities.
Some investment management firms also have more specualtive secialist currency overlay operations, which manage clients currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small many have large value of assets under management and hence can generate large trades.
Retail fx traders= individuals constitute a growing segment of this market with advent of retail forex platforms both in size and importance. Currently they participate indirectly through brokers or banks. Retail brokers while largely controlled and regulated in the US by CFTC and NFA have in the past been subjected to periodic fx scams. To deal with the issuea the NFA and CFTC began imposing stricter requirements. Particuarly in relations to the amount of net capitalizaition required of its members. As a result many of the smaller and perhaps questionable brokers are now gone or have moved to countries outside the US. A number of the fx brokers operate from the UK under FSA regulations where forex trading using margin is part of the wider OTC derivatives trading industry that includes CFDs and financial spread betting.
Major currency pairs (positive correlation) Euro/ usd/, Gbp/Usd, Aud/usd, nzd/usd, (inverse correlating pair) usd/jpy, chf/usd, cad/usd, and the only pair non usd based is eur/jpy
all other pairs use the usd as a base against the relative value of Usd against another pair
usd/xxx vs usd/zzz = xxx/zzz
theories on what moves the exchange rates (none so far explains with certainty the reason of movement on a floating exchanger rate system)
economic factors: gov fiscal polic (budget/spending practices) monetary poclicy, government budget deficits or surpluses, balance of trade trends, inflation levles, interest rates, economic growth, and productivity of economy. Political conditions, and market participant psychology. Risk aversion.
All economic conditions is interrelated with forex. As you purchase stocks domestic or international, commodities, oil prices, liquidation of assets, carry trades. It all affects the forex market.
