Australian Currency (FX) Market Facts
It goes without saying that the global currency (FX) market is one of the largest in the world. It's estimated that as much as $5 trillion of spot currency or derivative contracts trade each day!
The FX market is principally traded in two forms:
- Spot markets - trading of currencies like you and I would do for travel or business
- Derivative markets - options, futures and forward contracts are used by investors and businesses with interests overseas. These derivatives are traded on Over-The-Counter (OTC) markets or via Exchange options
Here in Australia, investors and traders can use the currency (FX) market for speculation, hedging or risk reduction, by positioning their portfolio accordingly.
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The FX market is a highly liquid market with trillions of dollars being transacted each day. Many short-term speculators ("traders") attempt to make money from these markets via trading accounts and occasionally with the use of high-risk products like CFDs and options.
Investors also use the currency (FX) market to their advantage by allocating part of their wealth in foreign currencies. For example, just in case the Australian economy (and the Aussie dollar) shows signs of weakness. Many investors access the global currency markets by using ETFs or managed funds.
Caution on Fees & Holding Structures
The global currency markets are the most liquid in the world. Meaning, there is a lot of trading going on every second of every day.
Therefore, when you're looking to invest in Currency (FX) ETFs on the ASX, pay close attention to fees -- obviously, lower equals better. It shouldn't cost the earth to get exposure to the major global currencies like the US Dollar or Euro.
Also, take note of the way the ETF issuer gets you the currency exposure. If they're simply taking your money and parking it in an overseas bank account, make sure they're earning a decent interest rate for that country and the bank is a reputable one.