Understanding The Foreign Exchange Market

Understanding The Foreign Exchange Market
Last Updated: 07 Feb 2022

If you do business outside Canada, you need to know about currency foreign exchange or FX. If you are leaving FX rates and charges to chance, you are likely being overcharged.    

The good news is that where small businesses were once at the mercy of big financial institutions, modern technology has leveled the playing field in the world of FX. A basic understanding of how FX works will help you get a handle on your cash flow, keep more of your profits, and satisfy your overseas customers. 

The FX Market Is Huge & Misunderstood

The FX market is bigger than Wall Street and the U.S. Federal Reserve combined. It is the largest financial market in the world in terms of trading volume (about $6.6 trillion). Unlike Wall Street, it is neither regulated by governments nor well understood by laypersons.  

As an “immaterial entity” it provides a platform to exchange, buy and sell, and speculate on the currency. Most of the trading in FX is purely speculative. The most spectacular example of FX dealing earning someone a fortune was George Soros’s famous bet against the British pound in 1992. He won the bet and profited over $1.25 billion. 

What Affects The FX Market And Currency Value

Currency is just another tradable good. It obeys the law of supply and demand, and its value falls and rises based on a variety of financial, political, and psychological factors. Along with those intangibles, changes in the value of a country’s currency depend on what is happening both inside and outside that country.   

Bank interest rates, unemployment, inflation, and local monetary policy and regulation also affect the currency’s value.  External market trends, the international situation, and a country’s international reputation among speculators and investors also pile on to make currency value volatile. 

Exchange Rates Fluctuate, But International Exchange Stays Relatively Static

A line graph of the value of a currency would look similar to the ups and downs of the Dow Jones daily average. Nevertheless, big financial institutions usually offer a relatively static and stable exchange rate for international payments. They can do that by adding an inflation factor that absorbs the ups and downs of the FX market. 

Nevertheless, the FX market is stacked against businesses doing cross-border transactions. Businesses, rather than money exchangers, take all the risks because large financial institutions are autonomous. They are not required to provide transparency and only operate in their own self-interest. 



The Ground Rules Are Changing, And The Tools Are There

Returning to the good news, technological advances since George Soros broke the bank of England have leveled the playing field, and even the smallest business startups can get a handle on international FX.  The handle relies on getting a grip on understanding the FX system.  

For the small business owner, the understanding begins with tapping into a stable and reliable payment process and finding a better international payment solution.  That solution will give small business owners more control over their revenue streams through real-time insight into currency exchange rates. That insight, in turn, will ultimately lower overseas prices for the customer and increase profits for the business. 

Are You Buying Or Selling Your Currency?

When conducting cross-border business, you need to know whether your transaction involves FX buying or selling; i.e., what is the base currency? In FX trading, currency values appear in terms of a currency pair. The first currency in the pairing is the base currency. So the base currency determines the exchange rate quoted in a particular country.  

For example: In trading CAD/USD, the Canadian dollar is the base currency. The US dollar in this instance would be the secondary. Banks use those pairings to either bid on what they will pay for the base currency, or offer a selling price using the secondary currency.  

So the difference between a bank’s bid and its offer to buy is the spread. The spread is the amount the bank will make on the deal. They influence that amount by bidding or offering on the low or high side, depending on how much they will save or earn. That difference hides in plain sight as the transaction fees, which accompany overseas business deals. 

The Key Is To Reduce The Spread

Currency exchange rate fluctuations and opaque bank practices notwithstanding, you don’t have to be George Soros to gain control of your overseas cash transactions. You can trade at a lower fee than offered by banks and FX brokers using a payment platform. 

Payment platforms have emerged as popular tools in today’s tech-savvy and consumer-oriented financial markets. Those platforms are an especially attractive option for businesses with finite resources and who would rather focus on making their product more competitive—without the encumbrance of keeping track of FX fluctuations and having to pass high transaction costs to their customers. 

Want To Learn More About Our Payment Platform?

See how our payment platform can remove FX volatility from your overseas business cash flow. Contact us and we’ll show you how you no longer have to sacrifice revenue just to gain a better footing in your overseas markets.  


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