Foreign exchange | 10 Jun 2023

What is FX?

Key takeaways

FX is the exchange of one currency into another.
The US dollar is the most heavily traded global currency.
The FX market is the largest and most liquid financial market, trading more than $6tln every day.

Simply, foreign exchange (also known as FX or forex) is the exchange of one currency into another: sterling into dollars, euro into yen, or any of the other countless combinations possible with the 180 legal currencies worldwide.

Transactions can range from the small and mundane, to market-moving cross-border M&A, and everything in between, taking place 24/5.5, from Monday morning in New Zealand, to Friday night in New York. The market tends to be cyclical in nature – trading volumes rising as the economy grows and contracting as economic activity declines. Currencies also move in line with economic shifts; stronger growth and higher interest rates attract overseas capital, while a sluggish economy and loose monetary policy tend to spark capital flight.

Unsurprisingly, the US dollar is the most heavily traded global currency, sitting on one side of almost 90% of all foreign exchange trades. EUR/USD is the most traded currency pair, followed closely by both the JPY and the GBP against the US dollar.

Volumes, in fact, are one of the most notable points of the FX market, with it being the largest and most liquid of all global asset classes, trading more than $6tln every day. London, benefitting from its favourable geography allowing overlap with both Asian and US desks, sits as the global centre of this flow, and has done for many years. The City remains the primary global financial centre.

What is Speculative FX?

Trades themselves can take place for numerous reasons, speculation being the most dominant, and making up the biggest chunk of market flow. Currency speculation has been around almost as long as the market itself, with market participants ranging from ‘one-man-band’ retail traders all the way up to the world’s largest investment funds.

Participants bet against each other, using leverage to increase exposure, on the direction that a market will move, basing their trading decisions on a range of complex factors. These range from fundamental (monetary policy, geopolitics, macroeconomics, news) to technical (support & resistance, momentum, moving averages, cycles) factors, and even include things like typical seasonal trends, as well as political developments.

What is Deliverable FX?

Deliverable FX is where the two currencies involved are exchanged and settled on the same date. Because this is often related to a business transaction (such as a sale or purchase), this is where SMEs are significantly more likely to be exposed to shifts in currency markets. Again, transactions range in size, volume, and rationale – from paying invoices to purchasing assets or services (suppliers), from executing payroll runs to e-commerce. Historically, trading took place over the phone. But in recent years, there's been a dramatic shift away from loud, crowded dealing rooms, to slick, fast, and secure online payments platforms.

Bearing in mind the size of the market, and amount of volatility often seen, SMEs can benefit from forging an efficient working relationship with a trusted and experienced FX provider, which will be able to guide them through the sometimes complex and murky world of foreign exchange.

Caxton – how we can help?

It is deliverable FX, however, where Caxton specialises. Over 20 years of business and expertise in the payments industry, we’ve developed a fit-for-purpose digital platform for local and global payments – alongside digital payment modes that allows you make up to 1,000 payments in one go.
FCA-authorised and regulated.
With over 600,000 customers, you’re in safe hands.
You can reach payees in over 195 countries and territories. Choose from 28 different currencies and exchange over 750 currency pairs.
Speed up international payments: keep your business suppliers happy, and avoid late fees with secure same-day, next-day, and scheduled overseas transfers.
Send more, pay less: enjoy excellent, real-time rates in multiple currencies when you send, receive, and exchange money. You’ll get more for your money with Caxton.
Reduce time and admin: our powerful online platform can help remove manual administration, speed up reconciliation, and help you to manage all of your payments, all from one place.
Your own expert: your dedicated business account manager will help you to safely negotiate the currency markets, to maximise value and minimise risk.
Expense Management: with our payments platform, you can also control your business expenses. Save time and reduce errors with our smart company cards and expenses app. Track spending in real-time and integrate with your accounting system.

For more information on how our platform can support all of your business payments, expenses, and currency accounts in one place, please visit Caxton. Every payment, one platform. 

About the Author
Michael Brown is Head of Market intelligence at Caxton. You can join him every Monday at 8.30am for a succinct, 15-minute analysis of the global and local economic situation, so you can decide the best route to take for your business.