Key words here

Economic Factor

These include:

(a) Economic policy, disseminated by government agencies and central banks,
(b)Economic conditions, generally revealed through economic reports, and other economic indicators.

1. Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).

Exchange-traded funds (or ETFs)

Exchange-traded funds (or ETFs) are open ended investment companies that can be traded at any time throughout the course of the day. Typically, ETFs try to replicate a stock market index such as the S&P 500 (e.g., SPY), but recently they are now replicating investments in the currency markets with the ETF increasing in value when the US Dollar weakens versus a specific currency, such as the Euro. Certain of these funds track the price movements of world currencies versus the US Dollar, and increase in value directly counter to the US Dollar, allowing for speculation in the US Dollar for US and US Dollar denominated investors and speculators.

Trading Characteristics

There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currencies instruments are traded. This implies that there is not a single exchange rate but rather a number of different rates (prices), depending on what bank or market maker is trading, and where it is. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs instantaneously. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. A joint venture of the Chicago Mercantile Exchange and Reuters, called Fxmarketspace opened in 2007 and aspired but failed to the role of a central market clearing mechanism.

The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends.

Fluctuations in exchange rates are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in gross domestic product (GDP) growth, inflation (purchasing power parity theory), interest rates (interest rate parity, Domestic Fisher effect, International Fisher effect), budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.

Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXXYYY or YYY/XXX, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX is expressed (called base currency). For instance, EURUSD or USD/EUR is the price of the euro expressed in US dollars, as in 1 euro = 1.5465 dollar. Out of convention, the first currency in the pair, the "base" currency, was the stronger currency at the creation of the pair. The second currency, counter currency or "term" currency, was the weaker currency at the creation of the pair. Currencies are occasionally incorrectly quoted with the pairs inverted e.g. EUR/USD but this is incorrect. The "/" acts the same as the divide mathematical operator and derives the actual exchange rate. e.g. an amount of $140,000 equates to €100,000. $140,000/€100,000 = $/€ = USD/EUR = a rate of 1.4 hence EURUSD or USD/EUR. See Exchange rate

The factors affecting XXX will affect both XXXYYY and XXXZZZ. This causes positive currency correlation between XXXYYY and XXXZZZ.

On the spot market, according to the BIS study, the most heavily traded products were:

• EURUSD: 27%
• USDJPY: 13%
• GBPUSD (also called cable): 12%

and the US currency was involved in 86.3% of transactions, followed by the euro (37.0%), the yen (17.0%), and sterling (15.0%) (see table). Volume percentages for all individual currencies should add up to 200%, as each transaction involves two currencies.

Trading in the euro has grown considerably since the currency's creation in January 1999, and how long the foreign exchange market will remain dollar-centered is open to debate. Until recently, trading the euro versus a non-European currency ZZZ would have usually involved two trades: EURUSD and USDZZZ. The exception to this is EURJPY, which is an established traded currency pair in the interbank spot market. As the dollar's value has eroded during 2008, interest in using the euro as reference currency for prices in commodities (such as oil), as well as a larger component of foreign reserves by banks, has increased dramatically. Transactions in the currencies of commodity-producing countries, such as AUD, NZD, CAD, have also increased.

Money transfer companies/remittance companies

Money transfer companies/remittance companies perform high-volume low-value transfers generally by economic migrants back to their home country. In 2007, the Aite Group estimated that there were $369 billion of remittances (an increase of 8% on the previous year). The four largest markets (India, China, Mexico and the Philippines) receive $95 billion. The largest and best known provider is Western Union with 345,000 agents globally. Send Money Home is an international money transfer price comparison site that allows consumers access to a range of alternative products/ rates available when remitting (transferring) money worldwide. Provides impartial and unbiased advice for those looking to send money overseas

Hedge funds

About 70% to 90%^{[citation needed]} of the foreign 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 that particular currency. Hedge funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.

Non-bank foreign exchange

Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as foreign exchange brokers but are distinct in that they do not offer speculative trading but currency exchange with payments. I.e., there is usually a physical delivery of currency to a bank account. Send Money Home offer an in-depth comparison into the services offered by all the major non-bank foreign exchange companies.

It is estimated that in the UK, 14% of currency transfers/payments are made via Foreign Exchange Companies.These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services.

National central banks

National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high—that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading. The mere 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 scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent times in Southeast Asia.

Banks

The interbank market caters for 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 conducted by proprietary desks, trading for the bank's own account. Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank 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 foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.

High Risk Invetment

Trading forex, CFDs and spread betting on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade any such leveraged products you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading on margin, and seek advice from an independent financial advisor if you have any doubts.

What Is Forex??

The foreign exchange market (currency, forex, or FX) trades currencies. It lets banks and other institutions easily buy and sell currencies. [1]

The purpose of the foreign exchange market is to help international trade and investment. A foreign exchange market helps businesses convert one currency to another. For example, it permits a U.S. business to import European goods and pay Euros, even though the business's income is in U.S. dollars.

In a typical foreign exchange transaction a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market started forming during the 1970s when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.

The foreign exchange market is unique because of

* its trading volumes,
* the extreme liquidity of the market,
* its geographical dispersion,
* its long trading hours: 24 hours a day except on weekends (from 22:00 UTC on Sunday until 22:00 UTC Friday),
* the variety of factors that affect exchange rates.
* the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)
* the use of leverage

As such, it has been referred to as the market closest to the ideal perfect competition, notwithstanding market manipulation by central banks. According to the Bank for International Settlements,[2] average daily turnover in global foreign exchange markets is estimated at $3.98 trillion. Trading in the world's main financial markets accounted for $3.21 trillion of this. This approximately $3.21 trillion in main foreign exchange market turnover was broken down as follows:

Euro, British Pound Stumble as Investors Curb Appetite for Risk

The Euro weakened against the greenback for the third day and slipped to a low 1.4788 during the overnight session, and the lack of momentum to push back above the 20-Day SMA (1.4874) may lead the single-currency to retrace the advance from the previous month as investors scale back their appetite for risk.

Talking Points
• Japanese Yen: USD/JPY Slips Back Below 91.00
• Pound: Continues to Hold Narrow Range
• Euro: ECB Holds Improved Outlook for Bank Lending
• US Dollar: Durable Goods Orders, New Home Sales on Tap

Euro, British Pound Stumble as Investors Curb Appetite for Risk

The Euro weakened against the greenback for the third day and slipped to a low 1.4788 during the overnight session, and the lack of momentum to push back above the 20-Day SMA (1.4874) may lead the single-currency to retrace the advance from the previous month as investors scale back their appetite for risk. As a result, we may see the EUR/USD continue to trend lower and could test the 50-Day SMA at 1.4657 for near-term support however; a break below would expose the monthly low at 1.4480 as the reserve currency continues to benefit from safe-haven flows.

The economic docket showed import prices in Germany fell more than expected in September, with the index slipping 0.9% from the previous month amid expectations for a 0.7% decline, while the annualized rate tumbled 11.0% from the previous year after falling 10.9% in August. At the same time, a report by the European Central Bank showed a net 8% of commercial banks surveyed said they tightened lending standards for businesses in the third-quarter, which compares with 21% during the three-months through June, and credit conditions may continue to improve throughout the second-half of the year as policy makers take unprecedented steps to shore up the financial system. The ECB said that the survey “confirms the indications of a turning-point in the tightening trend,” but went onto say that “the cumulated net tightening during the financial turmoil has not yet start to reserve itself and remains very substantial.” As the central bank maintains a dovish outlook for inflation and continues to see strains in the banking system, the Governing Council is likely to sustain the expansion in monetary policy throughout the remainder of the year as the economic recovery remains fragile.

The British pound pulled back from the intraday high (1.6407) and slipped back below the 100-Day SMA (1.6365) to reach a low of 1.6311, and the GBP/USD is likely to remain range-bound going into the North American trade as investors weigh the outlook for future policy. Philip Hammond, the Shadow Chief Secretary of the HM Treasury, said that “it is essential” for the Bank of England to maintain a “relatively loose” monetary policy to foster a sustainable recovery, and pledged “to get the deficit under control,” which would allow the central bank to maintain an activist approach for policy. As the government presses on the central bank to uphold the expansion in monetary policy going into the following year, investors may continue to scale back expectations for higher interest rates in the U.K. as the BoE maintains a dovish outlook for inflation.

The greenback rallied against most of its major counterparts following the slump in risk appetite, and the reserve currency may continue to strengthen throughout the North American trading session as equity futures foreshadow a lower open for the U.S. market. Nevertheless, the economic calendar is likely to spark increased volatility in the foreign exchange market as market participants anticipate private-sector spending to improve in September, and the data could spark a rise in risk sentiment as the outlook for global growth picks up. U.S. durable goods orders to forecasted to rise 1.0% in September after falling 2.4% in the previous month, while demands are expected to climb 0.7% after excluding transportation. At the same time, new home sales are projected to rise 2.6% from August and are anticipated to reach an annual pace of 440K from 429K in the previous month, and the rise in private spending could spur speculation for higher interest rates in the U.S. as policy makers see the economy emerging from the worst recession since the Great Depression.

Australian Dollar Outperforms, Japanese Yen Loses Ground

The Australian dollar rallied 100+pips against the greenback following the rebound in risk appetite and the higher yielding currency may continue to appreciate as investors speculate the Reserve Bank of Australia to tighten policy throughout the second-half of the year, while the Japanese Yen remains the only currency lower on the day, with the USD/JPY rising to a high of 91.46.

How to trade in forex

Learn about the price of forex transaction costs, selling or purchasing in Forex trading market. Learn to calculate rates and transaction costs of currency trading