As you must be aware of forex market beholds several exclusive features and our aim here will be looking at them to assist you in making more informed decisions while working in the market. Foreign exchange market additionally consists of various factors that we will look at here to give you a better perspective of how these work.
Currency market is created in a way that it is devoid of any central trading market. Additionally, the market lacks regulations that can possibly be applied together on multiple countries.
Forex Marketӳ Nature
Forex market has a system known as over the counter system & because of it several internally connected markets have been created. Different currency instruments are used for trading in such markets. Foreign exchange market has a typical nature due to which it does not have any single exchange rate for various transactions which occur. However, traders make the attempt so that rates are maintained at similar level through various markets and arbitrageurs can be discouraged from taking advantage out of it.
PQP (Primary Quoted Price)
London Market Price or LMP gradually became quoted price used in various markets due to London being the most dominant player for years in forex market. However, nowadays many strong players exist in the market like New York, Hong Kong, Tokyo & Singapore with important role in different currency markets.
Why forex rates fluctuate?
Primary reasons for forex rate fluctuations are the different kinds of monetary flows. In many other instances market is expecting changes in monetary flows due to various events like:
1. Growth of GDP
2. Increase in trade surpluses
3. Fisher effect
4. Interest rate variations
5. Deficits of budget
6. Inflations & similar other several macro economic events.
Currency Trading Norms
Forex trading products get formed if 2 currencies are part of any transaction. Such a currency pair holds definite format like BBBWWW or BBB/WWW where BBB & WWW refer to country codes used for currencies as specified in ISO 4217. In this currency pair the first currency, i.e., BBB is known as the base currency.
The currency against which rates get quoted is the USD, which is also base currency for most currency pairs except when currencies such as GBP, EUR, NZD or AUD are part of the currency pair. In all other situations the dollar becomes the base currency. To provide you better understanding of how it works, we now look at one currency pair of EUR/USD 3.2136 and it means value of 1 EUR is equivalent to 3.2136 USD.
Here you should also know that if somehow one currency gets affected then all the currency pairs in which it is a part will also be affected. This kind of currency behavior also assists in development currency correlation among currency pairs in which the affected currency exists.
Different currency pairs that are traded more in different foreign exchange markets are:
a. EURUSD with trading in excess of 20%
b. USDJPY with trading in excess of 10%
c. GBPUSD with trading in excess of 5%
A Final Note
We would conclude here and hope that you learned many things from these details about the way forex market functions and different factors that play their role in day to day transactions occurring in the market.