Forex exchange rate

A forex rate of exchange is the price of one currency in terms of another currency. It is the means by which banks are able to trade foreign currencies in exchange for Australian dollars.

Banks quote prices at which they will buy and sell foreign currency. These prices are based on prices that are quoted in the major wholesale foreign exchange markets and can change constantly throughout the day, depending on market forces.

Every currency has a unique three-character International Standardization Organization (ISO) code. The ISO codes are based on the 2-letter country code, plus a third character derived from the name of the currency (e.g. GBP represents the Great Britain Pound and USD the United States Dollar)

Every currency pair is expressed as two ISO codes separated by a division symbol (e.g. GBP/USD), the first representing the "base” currency and the second the "quote” currency (also known as "counter" or "secondary" currency).

GBP/USD

Base Currency/Quote Currency

The exchange rate is usually displayed to the right of the currency pair

GBP/USD = 1.6545

This denotes that one unit of the British Pound (the base currency) can be exchanged for 1.6545 US dollars (the quote currency). If you are buying the base currency, it specifies how much you have to pay in the quote currency to obtain one unit of the base currency. If you are selling the base currency, the exchange rate is telling you how much you get in the quote currency for one unit of the base currency.

The smallest increment by which a currency can move is called a “pip” (similar to “point” in equity trading). The last two decimal places measure the pip movement of a currency. For instance, in the example above, 45 represents the pips. If, in the same example, the GBP/USD appreciated to 1.6560, you would say it moved up (or rose) 15 pips. Or, if it depreciated to 1.6541 you would say is fell (or moved down) 4 pips.

There are 3 major groups of factors that influence on exchange rate development:
1) Fundamental Factors

Fundamental trading strategies consist of macro-economic strategic assessments; these criteria often include the economic condition of the currency’s country of origin, the country’s monetary policy, and other "fundamental" elements.

Typically, on the world markets, the US economy has the greatest influence. Fully 80% of financial operations conducted in world markets are transacted in dollars. This causes the dollar rise or fall against all other currencies. The fundamental factors affecting world markets are:

* Gross national product
* The level of real percentage
* The level of unemployment
* Inflation
* An index of industrial production

Therefore, the common rule for a trader is to orient to the expectations and moods of the majority of investors in the market. Exchange rate movement tendency can be analyzed by reading publications, studying reviews of market situation in information systems such as Reuters, Bridge (Dow Jones), and CQG. Following the publication of the leading economic indicators, the market will inevitably begin to move. A trader’s primary task is to participate in such movement, which invariably will be lead by the majority in the market. The axiom is - “don’t miss the boat”.
2) Technical Factors

Technical analysis is a field of market analysis, which supposes that market has a memory and consists primarily of a variety of technical aspects, each of which can be interpreted to generate buy and sell signals or to predict market direction.

During the past few years, in response to rapid growth of electronic analytical devices such as those offered by Reuters, Bridge (Dow Jones), CQG and others, greater numbers of traders make their decisions according to the technical analysis, which regularly increases its influence on any real rate movement.

Technical analysis is a method for price forecasting based on historical market movement studies. For the last 30 years, studies in the field of technical analysis have proven themselves a science with its own philosophical system and set of operative axioms.
3) Aside from the fundamental and technical factors

* Insuperable circumstances – acts of nature (earthquakes, a tsunami, a typhoon, flooding, etc.)
* Political events – war, political scandals, terrorist acts, etc
* Political speeches
* Currency interventions by central banks.