FOREX MARKETS – FEATURES/ ISSUES :
Foreign Exchange Markets (forex markets) play a very crucial role in international trade and financial sector. Salient features of Forex markets and their implications on international banking operations:
– Forex markets operate on 24×7 basis and therefore provide greater opportunity to the international banking system to handle the current account and capital account transactions
– These markets have become a driving force for vibrant global economies.
– In view of various PESTEL factors, forex markets are sensitive to the volatility, which results in the movements of exchange rates/ interest rates, and are also exposed to various kinds of risks
The forex markets invariably operate on 24x7bbasis, in different time zones (as shown in the diagram)
However, it is not that all markets are active simultaneously. On account of geographical distribution of forex centers (as shown in the above diagram) starting with Japan (Tokyo), Hongkong, Singapore, India (Mumbai), Middle East (Baharin), Europe (Germany), UK (London), USA (New York) Canada (Toronto),Australia (Sydney), different markets operate in different time zones. In view of this peculiarity it is all the more difficult to perceive, predict and forecast about the market movements (exchange and interest rates as well as prices)
Some of the important factors that influence market movements are as below: Foreign Exchange Rates – Fundamental Factors:
– Balance of Payments – Surplus leads to a stronger currency, while a deficit weakens a currency
– Economic Growth Rate – Rise in value of imports leads to fall in the currency
– Fiscal Policy – Lower taxes can lead to higher economic growth rate.
– Monetary Policy – The way a central bank attempts to influence and control interest rates and money supply.
– Interest Rates – High interest rate attracts overseas capital and appreciates currency in the short term, in the longer term, however, high interest rates slows the economic growth, thus weakening the currency.
Foreign Exchange Rates – Technical Factors:
– Government Controls
– This can lead to an unrealistic value of currency resulting in violent exchange rate movements.
Speculation:
– Speculative forces can have a major effect on exchange rates.
Example:
– There are expectations that a currency will be devalued.
– Speculator will start selling the currency in preparation for buying it back later at a cheaper rate, hence selling pressure from speculators extends to other market participants.
– This activity creates liquidity in the Foreign Exchange Market.