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Currency exchange rates are an important monetary unity of measure that indicates the relative value of one currency against another. Typically, world currency exchange rates are quoted on the basis of a base rate. For example, one unit of the Australian dollar may be worth 91 cents expressed in US dollar terms. These rates are offered by international currency conversion brokers or money converters and can vary depending on where you attempt to change your money. The current currency exchange rate offered reflects market forces of supply and demand as determined by the fundamental factors that influence the market.

Foreign currency trading takes places in what is essentially an over the counter market where brokers and dealers negotiate with each other. There is no central exchange per se and most of the trading takes place on the interbank market via the large international banks that quote prices on the basis of bid/ask spreads. The prices offered for retail transactions do not necessarily reflects these spreads. Retail customers are subject to bank mark ups. If you have ever tried to conduct money currency exchange you would notice that currency exchange rates can vary between exchangers. Usually, you get better rates at the banks themselves as the rates charged by money converters and exchange booths such as American Express reflect the base rates and any markup the provider is adding to these rates.

There are a number of participants comprising the currency exchange markets. The banks comprise the largest forces and consist of a combination of transactions to facilitate business between multinational corporations and proprietary traders who are predominantly speculative or hedging bank currency exposure. International central banks are also active in the markets. Retail traders comprise a very small volume of currency transactions.

The current currency exchange rates are influenced by the economic fundamentals that affect the country. Current Account Deficits, interest rate differentials, growth rates, employment and business activity all affect the demand and supply of the currency. When demand for resources is high, this puts upward pressure on commodity producing countries such as Australia and Canada. High interest rates in one country can also affect a countries currency exchange rates because it encourages capital inflow from international speculators who borrow in one country at a lower rate and seek to exploit the difference between interest rates. This is called the carry trade and has been facilitated by the Yen in recent years due to the low interest rates on offer in Japan. The US, who have enjoyed a strong currency exchange rate and the world's 'reserve currency status' for many years have had a distinct advantage over other countries due to the fact that crude oil is priced in US dollars. This has helped to keep the US rate artificially high.

If you are traveling and want to secure the best rate, it is best to carry currency in the major denominated currencies such as the US and Euro. Some countries do not readily carry foreign exchange for lesser known currencies and it can be difficult to do currency exchange conversions.

Currency’s Relation to It

Fundamental Outlook: Bearish

- G7 forecasts a ‘weak’ rebound later this year; though banks’ toxic assets still a serious problem
- Japanese trade balance marks it worst annualized deficit in 29 years
- Bank of Japan Governor Masaaki Shirakawa tells economists not to mistake a temporary rebound as a genuine recovery

There is an ongoing debate as to whether the yen is a sensible safe haven currency considering the financial and economic troubles Japan is suffering. This is argument that will carry over into next week – and just as the market’s tolerance for risk is put to the test through a wave of major fundamental catalysts. Therefore, traders will first have to assess the ever-fluctuating level of sentiment through G20 and IMF policy statements, a mooring US first quarter growth report and ongoing register of market health derived through earnings releases. Then, they will have discern the level of optimism or panic that is borne from this mix and judge whether the Japanese currency is a viable safe haven via the depth of its markets and sheer size of its economy. Anything less than borderline fear or a dour forecast for the markets will likely see the once sacrosanct safe haven / yen correlation drift apart.

First, in taking stock of the economic mines that could leverage panic and volatility; we can see that there is a lot to keep track of. This weekend, the spot light will fall on the various meetings scheduled for the world’s policy makers. The G7 meeting has already passed with little more than cheerleader optimism; and any G20 statement is likely to provide little more. What traders really crave is tangible policy steps with responsibility and consequence along the way that can truly put the world on track to correcting what is clearly a global problem. To the extent of its capabilities, the IMF’s semi-annual meeting will likely produce better results. However, while this group has been very blunt on the current state of affairs and what needs to be done to genuinely turn economic activity around; the organization doesn’t have the clout to push policy onto the world’s leading nations. Moving beyond the weekend, the risk barometer will find input from the change in sentiment derived from earnings. Better-than-expected revenues is not the same thing as profits that are expected to expand as the year progresses. Net profit, write downs, delinquencies and non-performing assets are components that will not be overlooked. Finally, in measuring the health of the financial markets; we first gauge the health of the economy that supports it. The first quarter reading for US GDP will fill this role nicely. Should the world’s largest nation report a slower pace of contraction as expected, it could interpreted as the first (meaningful) step towards a working recovery.

After assessing the ebb and flow of risk sentiment, the fundamental crowd then has to decide whether the yen is indeed the proper currency to represent safety. This leads us to examine the health of the island economy. Over the past few days, Japanese policy officials have painted a grim outlook for economic activity (even taken within the context of a global recession). Despite confirming the worst recession for the world’s second largest economy in over a quarter of a century through the fourth quarter, the Bank of Japan’s top economist predict worse over the opening months of this year. The same sentiment was shared by BoJ Shirakawa. Data is working hard to confirm such fears as well. This past week, the ministry reported the worst annual trade deficit in nearly three decades. This will be followed up by employment, spending, factory activity, and auto sales data in the days ahead. When measuring this economic fodder against sentiment, questions will only arise should pessimism reign. Otherwise, if sentiment is improving, there is no need for a safe haven and the bleak future for Japan means there is really no reason to buy yen. – JK

Currency Markets

Foreign exchange transactions that are settled immediately are said to occur in the spot market, while transactions to be settled at a future date occur in either the forward or the futures market.

These markets are summarized below:

1. Spot Market:

This is the market for currencies for immediate delivery. The price of foreign exchange in the spot market is referred to as the spot exchange rate or simply the spot rate.

The spot FX market is unique to any other market in the world, as trading is available 24 hours a day.

Somewhere around the world, a financial center is open for business, where banks and other institutions exchange currencies, every hour of the day and night with generally only minor gaps on the weekend.

Essentially foreign exchange markets follow the sun around the world, giving traders the flexibility of determining their very own trading time.

2. Forward Market:

This market is for the exchange of foreign currencies at a future date. A forward contract usually represents a contract between a large money center bank and a well-known (to the bank) customer having a well-defined need to hedge exposure to fluctuations in exchange rates.

Although forward contracts usually call for the exchange to occur in either 30, 90 or 180 days, the contract can be customized to call for the exchange of any desired quantity of currency at any future date acceptable to both parties to the contract.

The price of foreign currency for future delivery is typically referred to as a forward exchange rate or simply a forward rate.

3. Futures Market:

Although the futures market trading is similar to forward market trading in that all transactions are to be settled at a future date, futures markets are actual physical locations where anonymous participants trade standard quantities of foreign currency (e.g., 200,000 EURO per contract) for delivery at standard future dates (e.g., March, June, September, and December).

Up until recently, only banks, hedge funds, and other large institutions have had access to currency trading in the spot market.

With an approximate volume of $2 trillion traded on a daily basis internationally, the individual trader looks for an opportunity to take advantage of the most liquid market in the world.

Day-traders are no longer confined to trading stocks and commodities, and now have the ability to trade all of the major currencies, including US Dollar, Yen, Euro, British Pound, Australian and Canadian Dollars, Swiss Frank and etc, 24 hours a day.

There is considerable exposure to risk in any Forex (FX) transaction.

Before deciding to participate in FX trading, you should carefully consider your objectives, level of experience and risk appetite ...

Forex of FX or Foreign Exchange (Currency) market is the largest liquid financial market around the world. Here currency of a single country is exchanged with a different country through currency exchange rate scheme. Moreover it provides trading between central banks, large banks, currency speculators, government, multination corporations and many other financial institutes and markets. Trader’s or broker’s purpose is to get the revenue by the foreign exchanges buy and sale. From the latest estimation, FOREX trading average daily constitution is about 4 trillion US dollar.

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