The foreign exchange (currency or forex or FX) spot market exists wherever one currency is traded for another. It is the largest financial market in the world, and is made up of Central Banks, International and Commercial Banks, Corporate's, Hedge Funds and other currency speculators. The average daily turnover in the global forex markets is currently around US$ 3.2 trillion. Retail trade is now only a small fraction of this market and speculators have taken over.
All currencies are traded in pairs and each is assigned with an abbreviation. Here are some of them:
|
EUR |
Euro |
|
USD |
US Dollar |
|
GBP |
British Pound |
|
JPY |
Japanese Yen |
|
CHF |
Swiss Franc |
|
AUD |
Australian Dollar |
|
CAD |
Canadian Dollar |
|
NZD |
New Zealand Dollar |
|
HKD |
Hong Kong Dollar |
The rate at which currencies are exchanged one for another is called the currency exchange rate. For example, the "EUR/USD exchange rate is 1.4200" means that one EUR is exchanged for 1.4200 US Dollars.
Foreign Exchange ‘trading' is undertaken for many different reasons. Some is for commercial purposes, payments for imports or converting export receipts. Corporate's will be hedging capital flows and covering exchange risk of their offshore entities. Banks will be covering their commercial flows, corporate deals and trading for profits through their Treasury areas. Traders everywhere will try to generate profits, by speculating on whether a currency will rise or fall in value in comparison to another currency.
As of April 2007, the average daily turnover in foreign exchange markets had reached 3.2 trillion USD (BIS Survey figures). This is an increase of 71% from volumes traded in 2004, and is far stronger than the increase between 2001 and 2004. Market participants have put this down to lower levels of volatility and risk aversion, and the significant expansion in the activity of hedge funds coupled with a marked increase of ‘technical' trading.
Average daily turnover on New Zealand's foreign exchange market has ballooned to US$13 billion from US$7.5 billion in 2004 and US$4.2 billion in 2001, according to figures released from the RBNZ. Of these figures 55 per cent of total turnover was in NZ/US dollar transactions, 21 per cent was in AUD/USD and 9 per cent was in EUR/USD. The AUD/NZD, USD/JPY, and GBP/USD business each accounted for 3 per cent of turnover. The large increase in ‘spot' volumes was partly attributable to relatively high interest rates and the attraction of the NZD as a ‘carry' trade.
Follow these links to learn more about FX Trading.
How an FX trade Works Calculating Profit and Loss in Leveraged Trading Other Key Concepts in Currency trading
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