This article looks at the participants on the forex Australia market.
The forex Australia market differs from the equity market where investors generally trade only with institutions or individuals. In the forex market there are other participants that undertake trading for very different reasons than those who trade on the equity market. If you are a forex trader, you should understand and identify these players and their motivations.
The Governments and Central Banks
The central banks and governments are undeniably the most influential players in the forex Australia market. Central banks in most countries are simply a government arm and most of its policies are decided upon in conjunction with the government. There are certain countries where the government prefers not to intervene with the decisions made by the central bank as they feel that an independent entity would have more effect when it comes to curbing inflation and maintaining low interest rates. Irrespective of the level of independence of the central bank, government officials generally have regular contact with the central bank to allow both entities to keep up to date on monetary policy.
Central banks often play a role in manipulating foreign reserve levels to meet particular economic goals of the country. Central banks participate in the foreign exchange market to make adjustments to the volumes of the reserves they hold. They have significant influence in the currency markets due to the volume of funding they have at their fingertips.
The Large Financial Institutes on the Forex Australia Market
Other than governments and central banks, banking institutions are the largest participants in the forex market. Banks use an interbank market to trade with other banks and they make the determination of the currency price you see on your trading platform. The banks undertake transactions with each other on brokering systems via electronic means. These transactions are based on credit which depends upon the size of the bank. The larger the institution, the more institutions it will have credit relationships with, hence they will offer better pricing to their clients. The smaller banks have fewer credit relationships and fall into the lower pecking order when it comes to pricing.
Banks carry the role of dealers as they are willing to buy or sell currencies at the bid or ask prices. They make their money on the foreign exchange market by selling currencies at a premium compared to what they paid for it. The forex market is not centralised, hence it is possible to see different exchange rates being offered by banks for the same currency.
Some of the major clients in the banks are corporations that deal with international forex transactions. Regardless of whether the corporation is buying or selling, it requires forex and needs to take into account the constant fluctuation in currencies. To overcome this, a business has a couple of choices. One is to enter the spot market and enter an immediate transaction for the currency they require. If they do not have the cash available to do this, they will use hedging strategies to lock in an agreed upon exchange rate for a future date. This eliminates the risk for that transaction.
Speculators are in the foreign exchange market to make money from the trading of currencies. They use the fluctuation of the rates to their advantage.