For the majority of FX trades there is no unified or centrally cleared market , and there is very little cross-border regulation. As the currency market is having the over-the-counter (OTC) nature, there are rather a number of interconnected marketplaces, where the trading of different currencies instruments take place. This shows that rather than having  a single exchange rate there are a number of different rates (prices), and that depends on what bank or market maker is trading, and where the trade is taking place. In practice the rates are often very close, because if this is not done then they could be instantaneously by the arbitrageurs . Due to the fact that the market is dominated by London, a particular currency’s quoted price is usually the London market price.

Although the main trading center is London, but the importance of New York, Tokyo, Hong Kong and Singapore cannot be denied. Throughout the world banks participate. Throughout the day currency trading happens continuously; as there is an end of Asian trading session, the European session begins, that is followed by the North American session and then back to the Asian session, excluding weekends.

Causes of Monetary Flows

Usually actual monetary flows as well as by expectations of changes in monetary flows causes the fluctuations in exchange rates. These monetary flows are usually caused by changes in gross domestic product (GDP) growth, inflation, interest rates, budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often they are released on scheduled dates, so same news have to be accessed by many people at the same time. However, the large banks enjoys an important advantage; and that is they are able to see their customers’ order flow.

Pairing of Currencies

At the market currencies are traded against one another. Each pair of currencies thus forms an individual product and traditionally it is noted as XXX/YYY, here YYY signifies 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 example, EUR/USD is the price of the euro that is expressed in US dollars, as in 1 euro = 1.5465 dollar. Out of convention, at the creation of the pair the first currency that is present in the pair, the base currency, was the stronger currency. While that of the second currency, counter currency, was the weaker currency at the creation of the pair.

The factors that have their effect on XXX will affect both XXX/YYY and XXX/ZZZ. This lead to the positive currency correlation between XXX/YYY and XXX/ZZZ.

According to the BIS study, on the spot market, the most heavily traded products were:

• EUR/USD: 27%
• USD/JPY: 13%
• GBP/USD which is also referred to as sterling or cable: 12%

and there has been the  involvement of the US currency in 86.3% of transactions, which is followed by the euro (37.0%), the yen (17.0%), and sterling (15.0%). Here you must note that the volume percentages should add up to 200%: Out of which 100% for all the sellers and 100% for all the buyers.

Dollar-Centered Foreign Exchange Market

Since the currency’s creation in January 1999, trading in the euro has grown considerably, and the how long the foreign exchange market will remain dollar-centered is the topic that is open to debate. Until recently, if the trading takes place between the euro and a non-European currency ZZZ then two trades would have been involved: EUR/USD and USD/ZZZ. EUR/JPY is the exception to this, which is considered as an established traded currency pair in the interbank spot market. As during 2008 the dollar’s value has been eroded, so there has been a dramatic increase in 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. There has also been an increase in the transactions in the currencies of commodity-producing countries, such as AUD, NZD, CAD.

People who liked this Post also read

• Forex trading course on DVD
  The main purpose of Forex Trading is to support international trade among the countries and allow investments for the businesses to convert one currency to another. Due to this you can also make a good relation with other countries. ...
• Foreign Exchange Market: Determinants of FX Rates
  For any given currency Supply and demand, and thus its value, are not influenced by any single element but rather than that they are influenced by several factors. These elements are generally divided into three categories these are......
• Foreign Exchange Market: Market Participants
  Unlike a stock market, where it is required that all participants have access to the same prices, the foreign exchange market has been divided into levels of access. The inter-bank market is at the top, which is constituted of the largest investment banki...
• Foreign Exchange Market: Market Size and Liquidity
  At present, one of the largest and most liquid financial markets in the world is the foreign exchange market. Large banks, central banks, currency speculators, corporations, governments, and other financial institutions are all included among its traders....
• Worlds Biggest Currency Market
  The Forex markets are usually citizen friendly system that saves their money and keeps it from inflating. Where at one end citizens save, the Forex market protects it. Where the citizens carry out good deeds to make money, the Forex system empowers them f...