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So, who actually participates in the FX market and is able to create such a huge daily turnover volume?
Well, the first category includes Governments and central banks. National Governments and central banks intervene in the FX market either to strengthen or to weaken their currency by buying it or selling it respectively and to readjust their Foreign Exchange reserves. However a central bank could intervene in the FX market in effort to boost or curb inflationary pressures within the economy as well. Should its currency be weak and have a high amount of imports, then the country may be importing inflation as a weak local currency would make imported goods more expensive, yet that will be discussed at a later a more advanced stage.
The second category includes commercial banks and other financial institutions which attend to the foreign exchange needs of their customers. For example for imports and exports, and for small-scale transactions with other banks. Other financial institutions could include hedge funds, investment managers which may also interact n the FX market with relatively high volumes.
The third category includes companies repatriating profits as well as multinational corporations. Say for example Toyota has a factory in the UK and at the end of the year it wants to repatriate the profits of the year back to the mother company in Japan. It will have to go through the FX market to be able to convert the gains made in pounds to Japanese Yens in order to send back home. Or a multinational corporation company may want to send funds from a branch in on country to a branch in another company.
The fourth category is investors buying assets in foreign countries. For instance, if a European investor wants to invest in a US stock-exchange, he or she will have to change his/her Euros into US dollars to be able to invest in anything in the US.
The fifth category is speculators. Please note that speculation is the practice of engaging in risky financial transactions in order to profit from short-term fluctuations in the market value of a tradable financial instrument.
And last but not least, tourists and travellers. On an individual basis, tourists do not have the same impact on the market but at certain points of time specific tendencies in the tourism industry could overspill in the FX market. Say for example in the summer months, if UK citizens want to spend their vacation in southern Europe in countries like Portugal, Spain, Southern France, Italy, Greece, Cyprus and Malta they will have to exchange their UK pounds into Euros in order to spend during their vacation. So this should be taken into account since there are millions of tourists. The effects could be reversed as well. For example in smaller economies from a global perspective a large influx of tourists could cause the value of its currency to appreciate but also a depreciation of the same currency could make the country a more attractive touristic destination.
