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Deconstruct the forex market

The foreign exchange market refers to the place where foreign exchange transactions are conducted. It is divided into two types: the tangible foreign exchange market and the intangible foreign exchange market. The intangible foreign exchange market refers to the fact that there is no specific foreign exchange trading venue, and the participants buy and sell through conventional methods and advanced information systems, that is, there is no market.

Participants in the foreign exchange market
Foreign exchange market trading hours
Brief introduction of each major foreign exchange market
Factors affecting exchange rate changes

Participants in the forex market        

The main participants in the forex market include foreign exchange banks, government or central banks, forex brokers and customers.

Foreign exchange banks are the main participants in the foreign exchange market, mainly including professional foreign exchange banks and some large commercial banks designated by the central bank with foreign exchange trading departments.

Deconstruct the forex market
The central bank is responsible for issuing domestic currency, setting the money supply, holding and allocating foreign exchange reserves, and maintaining the value of the domestic currency both internally and externally. Under the floating exchange rate system, in order to maintain market order, the central bank will intervene in the foreign exchange market through operations such as buying or selling foreign exchange.        

The foreign exchange broker negotiates the exchange agreement for the foreign exchange transaction for the client, draws up a match between the buyer and the seller, and conducts direct or indirect foreign exchange transactions.

Clients refer to people who conduct foreign exchange transactions through foreign exchange banks or foreign exchange brokers, such as traders, investors, overseas students, tourists, and overseas residents.   Back to top

Foreign exchange market trading hours

The structure of the foreign exchange market is very large, which is formed by the combination of financial centers in various regions. The most active areas are New York, London, Frankfurt, Hong Kong, Singapore, Tokyo and Sydney. Foreign exchange is different from other financial products. Investors can make relative investment strategies anytime, anywhere in response to changes in the global economy, society, and nature. Today's technological applications and information are developed, making the foreign exchange market a system with no boundaries between the day and the night.

The foreign exchange market is a 24/7 trading market. No matter if it is a storm or tsunami or a power change war, as long as it is not the end of the world, you can trade. The departure time of a day in foreign exchange trading, with the rotation of the earth, the first major area is Sydney, then Tokyo, Singapore, Hong Kong, then Frankfurt, London, and finally New York as the end of the day.

The following are the opening and closing times of the world's major foreign exchange markets:

New Zealand's Wellington Foreign Exchange Market: 04:00 – 12:00
Australia's Sydney foreign exchange market: 06:00-14:00
Japan Tokyo Foreign Exchange Market: 08:00 – 14:30
Hong Kong foreign exchange market: 09:00-17:00
Singapore foreign exchange market: 09:00-16:00
Frankfurt Foreign Exchange Market: 15:30 – 00:30
London foreign exchange market: 15:30-00:30
New York Foreign Exchange Market: 21:00-04:00  Back to top

Brief introduction of each major foreign exchange market

At present, there are more than 30 major foreign exchange markets in the world, which are located in different countries and regions on all continents of the world. The most important cities are London, New York, Tokyo, Singapore, Frankfurt, Zurich, Hong Kong, Paris, Los Angeles and Sydney.

London Foreign Exchange Market

The London foreign exchange market is a typical intangible market. There is no fixed trading place, but foreign exchange transactions are completed through the Internet, telephone, and fax. In the London foreign exchange market, there are about 600 banking institutions involved in foreign exchange transactions, including domestic clearing banks, merchant banks, other commercial banks, discount companies and foreign banks. These foreign exchange banks form the London Foreign Exchange Banking Association, which is responsible for formulating the rules and charging standards for participating in foreign exchange market transactions.

New York Foreign Exchange Market

The New York foreign exchange market is one of the important international foreign exchange markets, and its daily trading volume is second only to London. The New York foreign exchange market is also an intangible market. Foreign exchange transactions are conducted through modern communication networks and computers, and its currency settlement is conducted through the New York regional interbank clearing system and the Federal Reserve Bank payment system.

Japan Tokyo Foreign Exchange Market

The types of currencies traded in the Tokyo foreign exchange market are relatively single. The largest transaction on the market is still the yen-dollar swap. This is because most Japanese trade is denominated in U.S. dollars, and Japanese overseas assets are mostly in U.S. dollar assets. Afterwards, due to the slow growth of the US economy, the growth rate of the yen-dollar transaction decreased, and the yen-euro transaction volume increased significantly. Japan is a typical export-processing country, so the Tokyo market is greatly affected by the centralized collection and payment of import and export trade, which means that the market has obvious seasonal characteristics. In addition, due to the habit of the Japanese industry and commerce industry to settle at the end of the month and the period of enterprise settlement, the export exchange time is relatively concentrated.

Hong Kong foreign exchange market

Hong Kong is a free port and an important international financial center in the Far East. The Hong Kong foreign exchange market is an international foreign exchange market developed after the 1970s. Since the removal of foreign exchange control in Hong Kong in 1973, there has been a large inflow of international capital, the increasing number of financial institutions operating foreign exchange business, the foreign exchange market has become more active, and it has gradually developed into an international foreign exchange market. The Hong Kong foreign exchange market is an intangible market with no fixed trading venues. Traders conduct foreign exchange transactions through various modern communication facilities and computer networks. Hong Kong's geographical location and time zone conditions are similar to Singapore, and investors can easily trade with other international foreign exchange markets.

Singapore Foreign Exchange Market

Singapore's foreign exchange market is an intangible market. Most of the transactions are handled by foreign exchange brokers, and they are used to connect Singapore with the world's financial centers. The transactions are mainly in US dollars, accounting for about 85% of total transactions. Most transactions are spot transactions, the exchange rate of which is quoted in US dollars, and the exchange rate between non-US dollar currencies is calculated by calculation.

Frankfurt, Germany

Due to the establishment of the European Central Bank in Frankfurt, Germany, and the birth of the Euro, the position of the Frankfurt foreign exchange market is gradually improving, and its influence is also increasing. It is gradually becoming the focus of the market. The early foreign exchange market in continental Europe consisted of Zurich, Switzerland, Paris, France, Frankfurt, Germany, and some small European markets. With Germany's strong economic foundation and long-term implementation of freely convertible monetary policies, Frankfurt's foreign exchange market ranks second only to the London foreign exchange market in Europe.   Back to top

Factors affecting exchange rate changes

Supply-demand relationship-The basic factor of exchange rate fluctuations is determined by the relationship between supply and demand in the market. The exchange rate price, interest rate, and market sentiment all affect the relationship between supply and demand. When demand exceeds supply, the exchange rate will naturally rise; on the contrary, when supply exceeds demand, the exchange rate will naturally fall.

Speculative activities-Speculative activities have led to the expansion of short-term exchange rate volatility, promoting market liquidity, improving the profitability of the foreign exchange market, and attracting investors to participate in transactions, which have become an influential factor in exchange rate changes.

Unexpected news-Unexpected news caused large fluctuations in the exchange rate. Due to a sudden accident, the market lacked mental preparation, and the economic and technical aspects were ignored by the market, resulting in unclear market development. The market has carried out risk aversion or speculative transactions.

Social factors-The social risks of the foreign exchange market are mainly natural and man-made disasters, including coups, wars, earthquakes, floods, typhoons, etc. The exchange rate is greatly affected by social factors. When the market encounters unexpected events, due to the rapid flow of the foreign exchange market, the exchange rate fluctuates dramatically. The impact of social factors is not short-term. The assessment of the country’s economic prospects and the expectations of monetary policy prospects, in turn, affect the changes in relevant exchange rates and cause significant impacts.

Economic factors-Economic factors are the most important factors affecting exchange rates. Whether the economic performance is good or bad will affect the central bank's monetary policy and the government's fiscal budget, resulting in the adjustment of the exchange rate development trend. In economic statistics, changes in gross national product, industrial production, trade balance, unemployment rate, and employment numbers reflect economic performance; while producer price index, consumer price index, and inflation rate affect changes in interest rates. In addition to economic statistics, other reports on economic activity will also have a significant impact on the market.

Central bank intervention-In order to prevent speculative activities from harming national interests, the central bank will intervene when necessary to maintain national currency stability and economic benefits. When the exchange rate reaches a reasonable level, the central bank will stop intervening, causing short-term exchange rate fluctuations.

Monetary policy-The function of the central bank is to maintain monetary stability and protect the national economic interests. The central bank uses the money supply to regulate economic development. If the economy is in recession, the central bank can adopt loose monetary policy in a low inflation rate environment to reduce interest rates and cause short-term capital outflows, thereby reducing the country’s currency demand and causing the exchange rate to fall. Conversely, if the economy overheats, causing high inflation to increase prices, the central bank may adopt a tightening monetary policy, raise interest rates to control inflation, attract foreign capital inflows, increase the demand for the country’s currency, and increase the exchange rate.   Back to top  


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