The foreign exchange (forex) market is a global market for buying and selling currencies. It is the largest financial market in the world, with an average daily trading volume of more than $7.5 trillion.
Here are the Highlights of Forex Trading Turnover
- In April 2022, the daily trading volume in OTC forex markets reached $7.5 trillion, a 14% increase from three years prior.
- The majority of this trading, 51%, was in the form of FX swaps, with spot trades accounting for 28% and outright forwards accounting for 15%.
- The US dollar was involved in 88% of all trades, with the euro at 31%, the Japanese yen at 17%, and the British pound at 13%. The Chinese renminbi saw a significant increase, accounting for 7% of trades and becoming the fifth most traded currency.
- Trading activity was concentrated in the United Kingdom, United States, Hong Kong, Singapore, and Japan, which accounted for 78% of all forex trading.
- The most active currencies in terms of trading volume were the US dollar, the euro, and the Japanese yen.
- Inter-dealer trading, or trading between reporting dealers, accounted for 46% of global forex turnover while trading with other financial institutions made up 48%.
- In terms of time zones, the majority of forex trading occurred in the London and New York sessions, with the London session accounting for 36% of daily trading volume and the New York session accounting for 19%.
The forex market is decentralized, meaning that it is not located in a specific place or exchange. Instead, it is made up of a network of banks, brokers, and other financial institutions that trade with one another around the clock, except on weekends.
The forex market is open 24 hours a day, five days a week, and is accessible to anyone with an internet connection. It is a highly liquid market, meaning that it is easy to buy and sell currencies at any time.
Understanding Forex Market Participants
There are several types of market participants in the forex market, including central banks, commercial banks, investment banks, hedge funds, retail forex brokers, and individual traders.
Central banks, such as the Federal Reserve in the United States and the Bank of Japan, play a key role in the forex market by setting monetary policy and influencing exchange rates. They also act as market makers, providing liquidity to the market and helping to smooth out price fluctuations.
Commercial banks are some of the largest participants in the forex market, as they use the market to facilitate international trade and investment. They also act as market makers, providing liquidity to the market.
Investment banks and hedge funds use the forex market to speculate on currency movements and to manage their currency exposure. They often use complex trading strategies and trade in large volumes, which can significantly impact the market.
Retail forex brokers provide individual traders with access to the forex market, allowing them to buy and sell currencies online. These brokers often have a significant presence in the market, as they facilitate a large portion of the trades that take place.
Individual traders, including both retail and professional traders, also participate in the forex market. They may trade for speculation or to hedge against currency risk. Individual traders typically trade in smaller volumes than other market participants.
Factors Affecting Forex Exchange Rates
There are several factors that can affect exchange rates in the forex market, including:
- Economic indicators: Economic indicators, such as gross domestic product (GDP), unemployment rates, and inflation, can have a significant impact on exchange rates. For example, if a country’s economy is growing faster than other countries, its currency may appreciate in value.
- Interest rates: Interest rates also play a significant role in determining exchange rates. If a country has a high interest rate, it may attract foreign investment, leading to an appreciation of its currency.
- Political events: Political events, such as elections, wars, and other geopolitical tensions, can also impact exchange rates. For example, if a country’s political situation is uncertain or unstable, it may cause investors to sell off its currency, leading to a depreciation in value.
- Natural disasters: Natural disasters, such as earthquakes, hurricanes, and other natural disasters, can also have an impact on exchange rates. If a natural disaster causes damage to a country’s infrastructure or disrupts its economy, it may lead to a depreciation in the value of its currency.
- Supply and demand: Like any other commodity, the supply and demand for a currency can also affect its value. If there is a high demand for a currency, it may appreciate in value, while if there is a low demand, it may depreciate.
There are several factors that can influence exchange rates in the forex market, including economic indicators, political events, and natural disasters. As a result, the forex market is highly dynamic and can be volatile at times, making it a challenging but potentially lucrative market for traders.
Top 10 Currency Pairs
- EUR/USD (Euro/US Dollar)
- USD/JPY (US Dollar/Japanese Yen)
- GBP/USD (British Pound/US Dollar)
- USD/CHF (US Dollar/Swiss Franc)
- USD/CAD (US Dollar/Canadian Dollar)
- AUD/USD (Australian Dollar/US Dollar)
- NZD/USD (New Zealand Dollar/US Dollar)
- EUR/GBP (Euro/British Pound)
- EUR/JPY (Euro/Japanese Yen)
- EUR/CHF (Euro/Swiss franc)
These are the most traded currency pairs in the world, based on their trading volume.
Material Reference
BIS : OTC Forex Exchange Turnover in April 2022
