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ASSET MARKETS

FX market

Swaps one currency for another and sets the rate that prices imports.

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Its role in the system

The market where one currency is exchanged for another. Everyone who trades, invests or borrows abroad needs it, and it also sets the exchange rate — the price of a national currency, which determines import prices, the competitiveness of exports and the cost of debts in foreign currency. By volume of trades it is the largest financial market in the world.

Functions

  1. Exchange for trade and investment — an importer buys dollars or euros to pay a supplier; a foreign investor buys euros to buy German Bunds.
  2. Spot — an exchange at the current rate; settlement is usually two business days later (T+2).
  3. Forwards and FX swaps — fixing a rate for the future (a forward) or exchanging currencies today with a reverse exchange later (a swap). This is how companies insure against currency moves and how banks borrow one currency against another.
  4. Rate formation — under a floating rate the price is set by supply and demand; a central bank can step in with interventions or fix the rate.
  5. Cross rates — most currency pairs are traded through the US dollar as an intermediary; the rate of, say, the Polish zloty against the Norwegian krone is derived from their rates against the dollar or the euro.

What makes it special

  • Decentralised, round the clock, and dealer-driven: there is no single exchange — trading runs between banks (the interbank market), on electronic platforms (ECNs) and through brokers, 24 hours a day, five days a week, with 🇬🇧 London, 🇺🇸 New York, 🇸🇬 Singapore, 🇭🇰 Hong Kong and 🇯🇵 Tokyo as the main centres. The price is made by large banks quoting buy and sell rates and earning on the spread and on volume, and increasingly by algorithms and non-bank market makers.
  • The rules are largely voluntary: in most countries spot is not regulated like securities; standards of conduct are set by the 🌍 FX Global Code, while forwards and swaps fall under derivatives rules. The risk that one side pays and the other does not is reduced by the CLS system, which synchronises payouts in different currencies.
  • The exchange rate regime is a state's choice: from a free float (🇺🇸, 🇪🇺, 🇬🇧) to a hard peg (🇭🇰 the Hong Kong dollar to the US dollar).
  • The rate is also a difference in interest rates: the forward rate is determined by the difference between the interest rates of two currencies; the carry trade rests on this — borrowing in a cheap currency and investing in a dearer one.
  • 🇨🇳 China: a rate that is announced every morning: the People's Bank of China publishes a central parity rate for the dollar against the yuan, and onshore trading may move no more than two percent away from it in a day (the rule has applied since 2014); if the market pushes harder, state banks step in and sell currency. In parallel an offshore yuan (CNH) trades in Hong Kong with no such band — and the gap between the two rates shows how far the market disagrees with the official one.
  • 🇯🇵 Japan: a free rate, but a zero policy rate: Japan does not fix its exchange rate, yet it held interest rates near zero for decades, which made the yen the funding currency of the carry trade — borrow cheaply in yen, invest in something higher-yielding. When the Bank of Japan raised its rate on 31 July 2024 and US data came in weak, those positions were unwound en masse: the yen strengthened from about 162 to 143 per dollar within weeks, and the Nikkei 225 fell 12.4% on 5 August, its worst day since 1987. The lesson: one country's cheap money becomes the whole world's leverage.

Why it matters

A sharp collapse of the exchange rate raises import prices within days, inflates in national currency the debts taken in dollars or euros, and can bring down banks and companies. And where a rate is held artificially, the market sooner or later “breaks” the central bank.

🇬🇧 “Black Wednesday”, 16 September 1992

Britain was holding the pound inside the European exchange rate mechanism (ERM) even though the market thought the rate too high. In a single day the Bank of England raised its rate from 10 per cent to 12 per cent and promised 15 per cent, and spent reserves, but the selling of the pound did not stop — in the evening the government announced it was leaving the ERM. George Soros made more than a billion pounds on it; the case shows the limits of a central bank's strength against the market.

🇹🇭 The Asian financial crisis, 1997

on 2 July 1997 Thailand, having spent its reserves defending the baht's peg to the dollar, let the rate go; within a few months the baht had lost about half its value. The panic spread to Indonesia, South Korea and other countries in the region, which needed IMF rescue packages. The case shows how a fixed rate and short-term foreign currency debts together become a trap.

🇭🇺 Hungary and Swiss franc mortgages, 2008–2015

In the years before 2008 hundreds of thousands of Hungarian households took mortgages in Swiss francs because the interest was lower. When the forint weakened and the franc rose, the payments and the debt in local currency swelled, hitting borrowers and the banks alike. In 2014–2015 the state forced banks to convert about 3.3 trillion forints of foreign currency loans into forint, the central bank supplying the foreign currency from its reserves — and so, when the Swiss National Bank dropped its euro floor in January 2015 and the forint fell some 16 per cent against the franc in two days, Hungarian borrowers were already out. The case shows what an entire economy borrowing in someone else's currency costs.

Links to other zones · 10

  • Banking & Credit InstitutionsBanking & Credit Institutions are the dealers and market makers of the FX market, and each bank treasury manages its currency position every day.
  • Card networksCard networks are the largest retail channel for currency exchange: every purchase abroad is converted by the network itself at its own rate, and both the scheme and the issuing bank earn on it through their mark-up.
  • Clearing & settlementThe CLS system and settlement banks inside Clearing & settlement guarantee that both sides of an FX market deal actually receive their currency.
  • Commodities marketOil and metal prices drive the commodity currencies of the FX market, while the Commodities market itself is priced mainly in dollars.
  • Corporations & Corporate FinanceCorporations & Corporate Finance are the main clients for FX market forwards and swaps used to insure against currency moves.
  • Debt marketThe rate gap between countries sets the forward rate on the FX market and steers foreign money into the Debt market.
  • DerivativesThe FX market is not only spot: its forwards and swaps fall under the Derivatives rulebook, and the forward rate comes straight out of the interest rate gap between the two currencies.
  • International transfersBehind each of the International transfers stands a currency conversion on the FX market, executed through correspondent accounts.
  • Monetary PolicyMonetary Policy picks the exchange rate regime, intervenes on the FX market out of reserves, and imposes or lifts currency restrictions.
  • Retail accessRetail access to the FX market through high-leverage forex brokers is an area of raised risk for private investors.

Careers in this zone · 6

FX dealer (spot, interbank)

Quotes buy and sell rates to other banks and to clients and runs the bank's currency position within limits. Reacts to central bank decisions, macro data and interventions within seconds, and earns on the spread and on a right feel for order flow.

What you need to know

  • The mechanics of the spot market and settlement
  • Monetary policy and macroeconomic indicators
  • Electronic trading platforms and ECNs
  • The FX Global Code and dealer conduct rules

Skills

  • Fast decisions under pressure
  • Discipline about limits and stop-losses
  • Concentration through an entire trading session
  • Clear communication with clients

Certifications: The ACI Dealing Certificate is the industry standard

Corporate FX sales

Helps companies — importers, exporters, investors — manage currency risk: offers forwards, swaps and options, and explains their price and their consequences. Translates the language of the market into the language of the client's business and makes sure the product matches their real needs.

What you need to know

  • FX products: spot, forward, swap, options
  • Hedge accounting and the effect of the rate on the client's reporting
  • Client protection rules (🇪🇺 MiFID II — product suitability assessment)
  • The currency regulation of the client's country

Skills

  • Explaining complex products simply
  • Building long-term client relationships
  • Honesty about the risks — not selling more than is needed

Certifications: The ACI Dealing Certificate; the CFA is a plus

FX forwards and swaps trader

Runs the bank's position in trades for future dates: calculates forward rates from the interest rate differential, funds currency liquidity through swaps, and watches the rate curves in different currencies. Works where the FX and money markets meet.

What you need to know

  • Interest rate parity and forward points
  • The money markets of different currencies (SOFR, €STR, SONIA)
  • FX swaps and cross-currency basis spreads
  • Managing the bank's liquidity

Skills

  • Precise calculation and modelling in Excel / Python
  • Coordination with the treasury
  • Handling very large notionals without error

Certifications: The ACI Dealing Certificate; the ACI Diploma

FX strategist

Forecasts the rates of the major and the emerging market currencies: analyses central bank rates, trade balances, capital flows and politics. Writes reviews and trade ideas for clients and traders, and explains why a rate is moving.

What you need to know

  • International macroeconomics: the balance of payments, parities
  • The monetary policy of the leading central banks
  • Models of the fair exchange rate
  • Investor positioning and capital flows

Skills

  • Econometrics and data work
  • Writing concise analytical reviews
  • Speaking in public to clients

Certifications: The CFA; a strong economics background counts for no less

Electronic FX quant trader (e-FX)

Builds and tunes the algorithms that automatically quote rates to thousands of clients on electronic platforms and execute large trades in slices. Makes sure the prices are competitive but not loss-making, and that the algorithm does not “break” at the moment of a sharp move.

What you need to know

  • FX market microstructure and ECNs
  • Statistics and time series
  • Pricing and execution algorithms
  • The risks of automated trading

Skills

  • Python / C++ / kdb+
  • Analysing large real-time data flows
  • Testing algorithms before launch

Certifications: The CQF is useful; a mathematical background and practical code matter more

Emerging markets FX trader (EM FX, NDF)

Trades the currencies of countries with capital controls or thin liquidity — from the Polish zloty to the Indian rupee. Where a currency cannot be freely taken out, uses non-deliverable forwards (NDFs): the parties settle the difference in dollars without exchanging the currencies themselves. Follows politics, interventions and exchange controls.

What you need to know

  • Non-deliverable forwards (NDFs) and their fixings
  • Exchange controls and rate regimes in different countries
  • The balance of payments and devaluation risks
  • Political risks and IMF programmes

Skills

  • Assessing risk in illiquid markets
  • Fast reaction to political news
  • Working with local counterparty banks

Certifications: The ACI Dealing Certificate; the CFA is a plus

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