Forex is considered the world's largest market because it empowers central banks to retail investors alike to potentially make profits from currency fluctuations in the global economy. The monetary policy of Central banks added to their exchange regime setting, and currency intervention in some rare cases, move forex markets considerably. To hedge their risk in global business operations, Corporations trade in currency.

Impact of Forex Trade on Business

The collaboration of various types of forex traders results in a highly liquid, global market that impacts businesses around the world. Movements of exchange rates play a very important role in the balance of payments account of a country, its global corporate earnings, and inflation.

Of the various strategies that can be used to trade and hedge currencies, the popular trading strategy is carry trade where a high yielding currency is used to buy a low yielding currency. The trader, by using this strategy attempts to make a profit from the difference in rates which could be quite substantial depending on the amount of leverage used. It is similar to the motto of ‘buy low and sell high”. This gives an idea of how the participants in the market influence the exchange rates and how they have a spillover effect on the global economy. The carry trade done by banks, Investment managers, Hedge funds, and Individual investors, is designed to capture the yield differences across currencies when they borrow low-yielding currencies and sell them to buy high-yielding currencies. If for example, the Japanese yen has a low yield, the market participants would sell it and purchase a currency with a higher yield.

When the interest rates in countries that give a higher yield begin to fall back toward low yielding countries, the investors sell their high yielding investments thereby unwinding carry trade. An unwinding of the yen carry trade could force large Japanese financial institutions and investors with considerable foreign holdings to their move money back into Japan as the spread between domestic and foreign yields narrows. This could result in a broad decline in global equity prices. By keeping updated about forex traders, and why they do so, Investors can benefit a lot.