The Global Foreign Exchange Market - An Introduction

The foreign exchange (FX) market is the largest financial market in the world with a daily average turnover of approximately AUD$2.2 trillion. It's where global currencies are bought and sold against one another however, unlike the commodity and stock markets, it is not a physical market based on one building or location. Rather, it is an organisational framework within which participants, linked by telephone and computers, buy and sell global currencies.

The foreign exchange market runs 24 hours a day from Monday 5:00am Australian Eastern Standard Time (AEST), to Friday 5:00pm New York time. FX trading starts each day in Sydney and moves around the globe as the business day starts in each financial centre; next in Tokyo, then London, then finally in New York. Actual currencies are not physically traded; instead, they are transferred electronically from one back account to another.

The FX market has historically been dominated by banks including central banks, commercial banks, and investment banks. However the number of other participants is growing rapidly and now includes large multinational corporations, global money managers, registered dealers, international money brokers, futures and options traders, small businesses and private speculators.

The most commonly traded, or "liquid", currencies are those from countries with stable governments, respected central banks, and low inflation. Today, over 85% of all daily transactions involve trading of the major currencies which include the US Dollar (USD), Japanese Yen (JPY), Euro (EUR), British Pound (GBP), Swiss Franc (CHF), Canadian Dollar (CAD) and the Australian Dollar (AUD).

The FX market is an over-the-counter (OTC) market. This means that the size of the "deal" and the "settlement date" are negotiable between the two counterparties in the market.
Currency prices are affected by a variety of economic and political conditions, but the most important factors are interest rates, inflation and political stability. Any of these factors, as well as large market orders, can cause high volatility in currency prices. However, the size and volume of the FX market makes it impossible for any one entity to affect the market significantly for any length of time.

The size of the FX market is determined every three years. Central banks and monetary authorities around the world measure activity in the FX market during the month of April. The submit their findings to the Bank for International Settlements (BIS), which then produces the Triennial Central Bank Survey for Foreign Exchange and Derivatives Market Activity