Political conditions

Political conditions

All exchange rates are susceptible to political instability and anticipations about the new ruling party. Political upheaval and instability can have a negative impact on a nations economy. Like as destabilization of coalition governments in India Pakistan and Thailand can negatively affect the value of their currencies. Similarly in a country experiencing financial difficulties, the rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also events in one country in a region may spur positive or negative interest in a neighboring country and in the process affect its currency.

Economic factors

Economic factors

(a) Economic policy, Disseminated by GOV. banks (b)economic conditions generally revealed through economic reports and other economic indicators.

1. Economic policy comprises government fiscal policy and monetary policy
2. Economic conditions include:

Government budget

The market usually reacts negatively to widening government budget deficits and positively to narrowing budget deficits. The impact is reflected in the value of a country currency.

Balance of trade levels

The trade flow between countries illustrates the demand for goods and services which in turn indicates demand for a countrys currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nations economy. Like trade deficits may have a negative impact on a nations currency.

Inflation levels

Typically a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising . This is because inflation erodes purchasing power thus demand for that particular currency. However a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short term interest rates to combat rising inflation.

Economic growth

Reports such as GDP employment levels retail sales capacity utilization and others detail the levels of a countrys economic growth and health. Generally the more healthy and robust a country's economy the better its currency will perform and the more demand for it there will be.

Productivity

Increasing productivity in an economy should positively influence the value of its currency. It affects are more prominent if the increase is in the traded sector

Retail foreign exchange brokers

Retail foreign exchange brokers

There are two types of retail brokers offering the opportunity for speculative trading retail foreign exchange brokers and market makers. Retail individuals are a small fraction of this market and may only participate indirectly through brokers or banks. Retail brokers while largely controlled and regulated by the cftc and NFA might be subject to foreign exchange scams. At present the NFA and cftc are imposing stricter requirements particularly in relation to the amount of net capitalization required of its members. As a result many of the smaller and perhaps questionable brokers are now gone. It is not widely understood that retail brokers and market makers typically trade against their clients and frequently take the other side of their trades. This can often create a potential conflict of interest and give rise to some of the unpleasant experiences some traders have had. A move toward No Dealing Desk and Straight through Processing has helped to resolve some of these concerns and restore trader confidence but caution is still advised in ensuring that all is as it is presented

Currency

Currency

The currency band is a system of exchange rates by which a floating currency is backed by hard money. A country selects a range band of values at which to set their currency and returns to a fixed exchange rate if the value of their currency shifts outside this band. This allows for some revaluation but tends to stabilize the currency value within the band. In this sense it is a compromise between a fixed exchange rate and a floating exchange rate. Like when the exchange rate of the reminder of the mainland of the Peoples Republic of China has recently been based upon a currency band the European Economic Communities snake in the tunnel was a similar concept that failed.

Investment Company Management

Investment Company

Investment company use the foreign exchange market to facilitate transactions in foreign securities. Like an investment manager bearing an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases. Some investment management firms also have more speculative specialist currency overlay operations which manage clients currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small many have a large value of assets under management and hence can generate large trading.

Companies

Companies

An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods and services. Commercial companies often trade fairly small amounts compared to banks and their trades often have little short term impact on market rates. Nevertheless trade flow are an important factor in the long term direction of a currency exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposure that is not widely known by other market participants.

Forex Competent

Market participants

Unlike a stock market, where all participants have access to the same prices, the foreign exchange market is divided into level of access. A Bank market, which is made up of the largest investment banking farms. With in the inter-bank market, which are the difference between the ask prices, and usually unavailable, and not known to players outside the inner circle. The difference between the bid and ask prices within (from 0-1 pip to 1-2 pips such as the EUR). This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the ask price, which is referred to as a better spread. The levels of access that make up the foreign exchange market are determined by the size of the line. The inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations , large hedge funds, and even some of the retail Forex-metal market makers. According to Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in Forex markets in particular, since the early

(2004) In addition, Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size Central banks also participate in the foreign exchange market to align currencies to their economic needs.