Let’s start with the most important things:
- Foreign currency markets work day and night and their participants are banks, corporations, central banks, investment management firms, hedge funds, retail forex brokers, investors.
- The international foreign exchange market facilitates global transactions, namely loans, investments, and global trade in goods and services.
- Please note that the currency market is not one organisation, but a network of global markets that are located in different time zones, and therefore they don’t work simultaneously.
How the international currency market works
You have probably already realised that the largest financial market in the world is the international currency market. Its average daily trading volume is $ 5 trillion.
The foreign exchange market, or Forex, facilitates money exchange in the case of foreign trade – this is its main task. Imagine, Wakanda (Wakanda forever!) sells vibranium to Stark Industries, it wants to get paid in Wakanda dollars, so Stark Industries needs to facilitate the conversion of foreign money through its bank for payment. The US Bank transfers it to the Bank of Wakanda. Money will be converted into Wakanda $ at the specified exchange rate and credited to the account.
As a result, the world currency market enables companies to sell their goods around the world while still being paid in local money. All companies’ expenses are denominated in local currency, which is why it is so important for them to receive payment in it.
The forex market and the stock market differ in that there is no clearinghouse (appointed intermediary between a buyer and a seller in the financial market) on it. No intermediaries! To ensure that each party complies with its obligations, transactions occur directly.
Currencies are priced in other currencies without having a single price.
About the major foreign exchange market players?
So, who are the currency market players:
To hedge (an investment that is made to reduce the risk of adverse fluctuations in the price of an asset), or just to pay for something, or even to invest, their international remittances and foreign profits, corporations are able to enter the forex market.
For example, Stark Industries actively works in Wakanda (ok, just imagine it). They’re able to enter into a forward contract that will fix the exchange rate between the US $ and the Wakanda $. When Stark Industries wants to return profits from Wakanda to the US, there will be no exchange rate surprises. This won’t happen, because the Wakanda $ is converted to the US $ at the exchange rate established by the forward contract. Thus, it prevents exchange rates from affecting profits.
- Governments and Central Banks
Have you heard about devaluation? This is when governments try to influence the value of their currencies to increase their exports. The country’s money supply is controlled by the central bank. If it enters the market to sell the country’s currency, it is able to reduce the value of the currency. Consequently, the exchange rate declines compared to other currencies, and the country gets benefits only from cheaper exports because of it.
Here is an example. Suppose the US $ and Wakanda $ exchange rate is 5 US $. T’Challa invited Tony Stark to live in Wakanda (what an imagination we have!). Stark agreed and decided to buy a house there. Of course, he chose the best one for 1,000,000 Wakanda $, in US $ it will cost him 5,000,000 (5 * 1,000,000). But if Wakanda lowers the exchange rate to $ 4, then Tony Stark will save a million.
The devaluation of the Wakandan money is likely to generate a lot of interest from foreign investors. This will further boost the demand for vibranium and support the economy of the country.
The currency market FAQ
Now we’ll answer a couple of questions.
What are some of the most popular currencies to invest in 2021?
- United States dollar (of course)
Despite everything, the popularity of the US $ is beyond question and it’s still the world’s reserve currency.
Note that over the past couple of years, about 90% of all transactions on global currency markets were made in US $.
- European Euro
You can also invest in the second most popular currency. It remains high and stable despite the difficult economic situation in some European countries.
- Swiss Franc
Also, apart from the ‘classic’ dollar and euro, we’ll highlight the Swiss Franc.
Switzerland has a stable market economy, high GDP, low unemployment rate, the country’s orientation towards supporting its national currency, and an extremely advanced banking system. In other words, everything you need to be confident in your investment.
What are commonly traded currencies today?
Here are the main currency exchange pairs that are most often exchanged for each other.
- EUR/USD (the European Euro versus the United States dollar)
- USD/JPY (the United States dollar versus the Japanese yen)
- GBP/USD (The Great British pound versus the United States dollar)
- USD/CHF (the United States dollar versus the Swiss franc)
- USD/CAD (the United States dollar versus the Canadian dollar)
- AUD/USD (the Australian dollar versus the United States dollar)
Can you get rich by trading forex?
You can get rich by trading foreign exchange market if you are a hedge fund with a big budget or a skilled foreign exchange trader. But for the average trader, Forex trading can be tricky and you have to prepare yourself for losses.