Central banks have a direct impact on the financial markets, particularly the foreign exchange markets. The Central Bank is responsible for keeping their domestic economic affairs in order, while remaining competitive in the global environment.
Frequently, the mere expectation of central bank intervention is sufficient to stabilize a currency, but in case of aggressive intervention the actual impact on the short-term supply/demand balance can lead to the desired moves in exchange rates.
Bank traders use different strategies from swing to trend trading strategies, but the most common strategy is based on fundamental analysis, price accumulation, manipulation, and distribution. Most bank traders try to enter into the trade after the false breakout.The Interbank market caters to both the majority of commercial turnover as well as enormous amounts of speculative trading even billions of dollars daily. Some of this trading activity is undertaken on behalf of corporate customers, but a banks treasury room also conducts a large amount of trading, where bank dealers are taking their own positions to make the bank profits. The Interbank market has become increasingly competitive in the last couple of years and the godlike status of top foreign exchange traders has suffered as equity traders are again back in charge.
A new way of FOREX trading, internet has enabled the Traders with a more efficient way, while mitigating losses. Until recently, foreign exchange brokers were doing large amounts of business, facilitating Interbank trading and matching anonymous counterparts for comparatively a smaller fee.The traditional broker box, which lets bank traders and brokers hear market prices, is still seen in most trading rooms, but turnover is noticeably smaller than just a few years ago due to increased use of electronic booking systems.
The commercial companies’ international trade exposure is the backbone of the foreign exchange markets. A multinational company has exposure in accounts receivables and payables denominated in foreign currencies. They can be protected against unfavorable moves with foreign exchange. That is why these markets are in existence. Commercial companies often trade in sizes that are insignificant to short term market moves, however, as the main currency markets can quite easily absorb hundreds of millions of dollars without any big impact. It is also clear that one of the decisive factors determining the long-term direction of a currency’s exchange rate is the overall trade flow. Some multinational companies, whose exposures are not commonly known to the majority of market, can have an unpredictable impact when very large positions are covered.
The arrival of the Internet has brought us a host of retail brokers. There is a numbered amount of these non-bank brokers offering foreign exchange dealing platforms, analysis, and strategic advice to retail customers. The fact is many banks do not undertake foreign exchange trading for retail customers at all, and do not have the necessary resources or inclination to support retail clients adequately. The services of such retail foreign exchange brokers are more similar in nature to stock and mutual fund brokers and typically provide a service-orientated approach to their clients.
Pooled funds and Hedge funds have gained popularity in recent years due to aggressive currency speculation. The leverage available with hedge funds in Forex trading allows to speculate with a larger pool of funds. Hedge funds are considered to be normally beneficial to foreign exchange markets as they are able to exploit economic weakness and expose a country’s unsustainable financial plight, thus forcing realignment to more realistic levels. .
In all efficient markets, the speculator has an important role taking over the risks that a commercial participant hedges. The boundaries of speculation in the foreign exchange market are unclear, because many of the above mentioned players also have speculative interests, even central banks. The foreign exchange market is popular with investors due to the large amount of leverage that can be obtained and the liquidity with which positions can be entered and exited. Taking advantage of two currencies interest rate differentials is another popular strategy that can be efficiently undertaken in a market with high leverage. We have all seen prices of 30 day forwards, 60 day forwards etc, that is the interest rate difference of the two currencies in exchange rate terms.
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