When you compare the forex Australia market to the equity market, you will notice the difference in market participants. In the equity market, you will find individual investors or institutional investors, such as mutual funds. In the forex Australia market, there are additional entities that take part for very different reasons than the ones who trade in the equity market. It is a good idea for you to be aware of the motivations of all the players in the forex market
Banks and Large Financial Institutions
Banks are often the largest participants in the forex market. They are the ones that individuals go to when they require small-scale forex transactions. These small transactions are insignificant when compared to the volumes of forex that are traded via the interbank system.
The interbank market is the system that allows the large banks to undertake transactions with each other. This is the system that indicates the currency price that individual traders are allowed to see on trading platforms. The banks deal with other electronically and these transactions are based on credit. Banks can only deal with other banks that they have credit relationships with. The larger banks have more credit relationships than the smaller ones which mean that they can offer their clients a better price. The smaller banks do not have these relationships which mean they also do not enjoy the preference in pricing.
Banks get involved in the forex market because they are willing to buy or sell a currency at a price. They make their money by charging a premium to the price at which they obtained the currency. As this financial market is not centralized, you may see different banks that offer different exchange rates for the same foreign currency.
Forex Australia Hedgers
The banks generally have big clients who deal internationally. This creates an environment where the company requires foreign currency, regardless of whether they are selling to a global company or buying from a global company. Owners of businesses do not like uncertainty, so having to deal with the uncertainty of the forex market does not appeal to them. The one option that these corporations have is to go enter the spot market and immediately purchase the forex they require. Unfortunately, this is not always possible as the company may not have the funds available to do so or they do not want to hold on to foreign currency for extended periods of time. This prompts them to implement hedging strategies which allows them to lock in a specified exchange rate for sometime in the future. This alleviates the exchange rate risk for that particular transaction.
The central bank and government of Australia plays a huge role in currency exchange. The central bank is a mere extension of the government and its policies are in line with governmental policies. The central bank is often involved in using the forex market to adjust their forex reserves.
Speculators are the ones who hope to make money with the constant fluctuation of exchange rates. Hedge funds fill the role of the most controversial speculators in this financial market. They make use of unregulated funds and use unconventional strategies to reap huge returns on their investments.