There is an economic theory that outlines the conditions for “perfect competition.” The marketplace that comes closest to the ideal for perfect competition is the foreign exchange market; also known as FX or Forex.
Since most of us do not hold economic degrees, we know little about perfect competition. Our understanding of FX is usually limited to the emails we receiving showing how we can get rich at home with FX, or during travels to other countries, or when sending money home.
- FX Basics
Currencies are traded on the FX marketplace on an almost 24 hour, 7 day a week basis with the exception of a few hours on the weekend. The marketplace is open to those looking to buy and sell currencies. That includes banks, hedge funds, currency brokers, and even individuals. Through an arcane series of calculations based on economic data (both subjective and objective), instinct and current events, the value of one currency compared to another is set.
For example the value of the pound varies greatly from country to country.
100 GBP =
144 US dollars
561 Polish zloty
15,466 Japanese yen
- Factors That Affect A Currency’s Value
Currencies fluctuate throughout the day. Many large banks will set their exchange rates twice a day. Large institutional investors and currency traders may make dozens of trades per day to realise profits on moves of less the .001 of a point.
There are three factors that have the most influence over a currency’s value.
Economic factors – Economic factors are the most objective. They include such things and GDP, balance of trade, economic regulations, inflation, and deficits and surpluses.
Political conditions – Currency traders like a stable political environment. Any sign of upheaval or instability, such as an attempted coupe or civil war, has a negative effect on the country’s currency.
Market Psychology – Some currencies, such as the Swiss franc and the US dollar, have a reputation for being a safe investment. During times of instability and unrest, many investors will buy those currencies heavily to protect their profits and assets.
- How FX Affects Most Of Us
While the values of currency are constantly changing, it goes relatively unnoticed by most of us. We may notice changes in the price of some goods such as electronics, food, clothing or petrol based on the value of the currency in the country of origin when compared to the pound.
The impact of FX is most often felt in two situations; when we are traveling abroad or when we are sending money out of the country.
When traveling in a country that does not accept the pound or euro, it is necessary for us to buy the local currency. Many of us do this in airport kiosks or at the bank; although many hotels offer currency exchange as well and the buy and sell rate is posted. Even if we use only a credit card during travel, the statement will show the exchange rate to convert back to pounds (or euros.)
When sending money back home (remittances), the exchange rate is very obvious and has a direct impact. When we make a remittance the goal is to send the highest amount of money as possible. Banks and other money transfer operators routinely set FX rates that are in the institution’s favour and then add transfer fees and commission on top. The result is fees that often reach 29% of the total being sent.
Such high fees are a burden on both the sender and the receiver. TransferGo is at the forefront of the new generation of money transfer operators who believe that these fees are unnecessarily high and that FX rates should be set at the most beneficial for the customer. TransferGo charges a low set fee to send money based on the country the sender is in. The rate is plainly displayed on the website and is fixed every day to avoid day to day fluctuations. Because TransferGo uses a local in local out structure through a partnership with banks in over 30 countries, the amount sent is the amount received. The exchange rate is easily calculated on the TransferGo website and app. There are no additional fees and no surprises.
The concept of perfect competition and the minutia of FX trading may require an advanced economics degree. The value of saving up to 90% in fess when sending money home simply requires common sense.