Foreign Exchange, primer

By Tim Strube

Every day around $5 trillion is traded in foreign exchange. While much of it is speculation (trading for the sake of making a profit), foreign currency transfers are essential to enabling global trade.

There are many factors driving foreign currency values. Fundamentally it is about the demand and supply of currencies.

But there are a lot of factors that go into driving the fundamentals.

For instance, currencies appreciate and depreciate for a range of speculative reasons, as seen by the recent implosion of the British Pound following the Brexit vote. With the UK still part of the European Union and still trading as they did before the vote, the currency is being affected by what is expected to happen. Likewise, the possible election of Trump is affecting the Mexican Peso because of his rhetoric to tax remittances.

It gets even more complex.

Inflation rates affect the exchange rate. A sustainable low inflation rate, a sign of a strong, predictable economy, typically sustains a stronger currency.

Interest rates can affect the value of a currency. Higher interest rates typically strengthen a currency by increasing demand for it, because borrowers pay higher interests, thus attracting more foreign capital.

Likewise, a country’s balance of trade and earnings influences the exchange rate. Deficits usually depress the value of the domestic currency due to the potential of instability and the associated economic performance.

Public foreign liabilities also influence the currency rates. Investors may opt to sell their public bonds when the debts are too high. This leads to a fall in demand for the currency, thus depressing the value.

Similarly, exports and imports influence exchange rates. So does the political status of a country. Just as a well-established and stable economy strengthens a currency, so does strong, transparent and predictable political leadership.

Likewise, a recession tends to weaken currencies. This tends to play out over chapters. Economic weakening is typically accompanied by reducing interest rates, which in turn attracts less foreign capital thus generating less demand for the currency. That in turn, raises the cost of imports putting even greater pressure on the economy. The one upside, exports may become cheaper, positively impacting the balance of trade and economic activity.

Indeed, in most cases, all of the forces involved tend to want to balance out any up- or downsides, and a freely trading currency provides a quick and liquid way to address these forces. And if all economic actors had all the relevant information and the markets were frictionless, all inputs should be collaborating to seek an equilibrium, even as changes are underway.

But since this is not the case, we have speculation. Speculators act on the information they have trying to anticipate where the market may move to. By trading currencies, they seek to extract a profit for correctly anticipating any movement among currencies.

In recent years a group of banks which get together twice daily to agree on the new rates of currency were found to have traded on the information they had ahead of sharing said information with the markets globally. Even though the changes were often minute, the unjust profits were significant and have now earned these banks in excess of $10bn in fines, with more to come.

All of the above points should make it clear that capturing the best rate by trying to time the market or speculating on specific outcomes is for most people probably mostly a guessing game.

However, there are several simple steps you can take to optimise your rate of exchange. By buying currency regularly, say monthly, rather than once a year, you can cost average your rate of exchange, instead of hoping to have bought at the best rate all year. This assures a strong middle of the road rate.

The best choice you can make is to optimise your currency exchange by choosing to transfer your currency with FlashFX instead of one of the big banks or traditional currency transfer agencies.

To start, you likely save several percentage points and won’t be hit up for hidden transfer fees.
Also, by sending your foreign currency transfers by FlashFX, you are able to set-up your transaction to aim to execute at a rate you would like to attain.

Unlike the traditional currency converters and the big banks, FlashFX is re-engineered from the ground up to deliver exceptional transparency, speed and transactional controls.

FlashFX enables customers to track their currency transfer like a package from start to finish, so they know exactly what they are getting, without hidden fees. Also, users can plan and automate their international money transfers.

Learn more about FlashFX and register to benefit from the cutting edge technology, great rates and transparency.

Tagged in: currency conversion, exchange rates, finance, trading, international B2B, global payments

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