There are many types of participants in the forex market. Each type of participant has its own purposes for entering the currency exchange markets. It is essential for traders and investors to understand the motivations underlying decisions made by the main forex market participants.
Central Banks and Governments
Federal governments and central banks are among the most influential entities participating in the forex markets. Usually the central bank makes monetary policy decisions in tandem with a country’s federal government. The central banks are essentially a part of the federal government. However, some countries have a central banks that are more independent from their federal governments. Generally, central banks aim to influence inflation and interest rates in order to yield economic growth.
Banks and Financial Institutions
Banking firms and other financial institutions are also some of the largest entities participating in the forex market. Banks allow individuals and other entities to make transactions with foreign currencies. However, it is within the interbank market where banks have the most influence in foreign exchange rates. The interbank market is the system that large banking firms use to make currency exchange transactions with each other.
Hedging is another common motivation for some businesses participating in the forex market. These companies have business models which can easily be negatively affected by unexpected fluctuations in the currency markets. This creates uncertainty which management and shareholders of multinational corporations find undesirable. Hedging strategies attempt to lock in specific exchange rates for future use or remove risks from currency market fluctuations for specific transactions.
Speculating is another common motivation for forex market participants. Unlike hedging against currency exchange fluctuations, speculators aim to profit from currency market fluctuations and volatility. Some of the largest speculators in the forex market are hedge funds which are unregulated funds that unconventional investment strategies and techniques to obtain large profits. Since hedge funds usually control large amounts of capital they can have significant affects on currency exchange rates via large bets in the forex market.
Being familiar with the various types of forex market participants and their various goals will enable a forex trader to obtain a more comprehensive view of the marketplace for currencies. Therefore, keeping a close eye on the decisions and actions taken by the most significant participants in the currency markets will be important in understanding the underlying supply and demand dynamics. This can give traders clues regarding future market movements.
Le Bach Pham has been writing professionally after receiving his Bachelor’s of Art in English Literature from the University of California, San Diego in 2002. He now specializes in writing about legal, business and financial topics. Pham also earned a Paralegal Certificate from the University of San Diego and has experience working in the legal field. He also has experience in writing business plans for clients from various fields, including banking, finance, retail, education, beauty and various other sectors