Understanding Forex trading and the banks?
It’s pretty hard to exaggerate the size of the foreign exchange market! It is the largest financial market in the world, with around $5.3 trillion traded every day. The stock and equities markets alone pale in comparison to this staggering figure. There are a number of key reasons why so many traders focus predominantly on Forex trades and this article aims to highlight those reasons for you.
What Forex is all about?
Exchange rate is defined as the rate at which one currency is exchanged against another currency. This type of exchange pushes the entire Forex market forward. There are many different official currencies of the world. Some of them are constantly being used for making international payments while others are used for Forex trades. Some ways to trade currencies are forwards, spot transactions, option contracts, and swaps. Globally, trading happens 24 hours a day, five days a week.
The main players;
The largest currency volume is traded within the inter-bank market. This market comprises all types and sizes of banks that trade currency over electronic networks with one another. The ‘big banks’ are highly involved in such trades. Banks are known to facilitate all the Forex transactions for their clients and also conduct certain speculative trades over their trading desks.
Central banks are highly important players when it comes to the Forex market. Interest rate policies and open market operations have a great influence on currency rates. Central banks are responsible for Forex fixing lies. The central bank’s actions within the Forex market are done primarily to stabilize or increase the economy’s competitiveness. Central banks, along with speculators and governments, take part in currency interventions so that currencies can be depreciated or appreciated.
During long trends of deflation, central banks might weaken their currency through additional supply, which will then be used in the purchase of foreign currency. Effectively, this strategy will weaken the domestic currency and make exports more competitive within the global market. Through this strategy, long term estimates can be assessed by the Forex traders.
Central banks are known to dramatically move Forex markets with monetary policy, currency intervention, and with an exchange regiment setting.
The role of the banks In shaping the markets
When different Forex traders collaborate, the market becomes more global and highly liquid, which ultimately impacts all types of businesses in the world. Exchange rate movements impact inflation, balance of payments, and global corporate earnings for all countries. A great example is that of carry trade which highlights the influence on exchange rates by participants and the related spillover effects on the entire global economy.
Banks are also known to execute carry trade in addition to other participants such as hedge fund managers and individual investors. This process involves borrowing low yielding currencies and then selling these for the purchase of higher yielding currencies.
Performing trade highlights how the different Forex players, particularly the banks, have a great impact on the global economy. Investors can benefit greatly if they know how bank Forex trading works and why they are so heavily involved. This will give them an idea of how powerful banks really are in the field and why they should go for them when making a Forex trade.
The banks reputation in the field of Forex trading suffered a tremendous setback in 2014 and 2015. In 2014 a case brought forward by the US regulator agencies enacted against a number of big players and a total of $4.3 billion in fines was paid as a result of systemic and widespread manipulation within the market. A year later in 2015, a number of prominent banks, Barclays, RBS, JP Morgan and Citigroup were fined around $5.7 billion for further manipulation of the FX market. Given the widespread and apparent systemic nature of such abuses within the system, it is easy to detect an alarming relationship between the banks and the Forex market, and a seemingly inept ability to address this corrupt cultural element from within.