From a GD thread:
Can someone explain how this can be true, that “lower prices [can] beget supply”? Is this caused by people dumping currency as it begins to lose its value, or is there a greater phenomenon present here? Is this an FX market issue, or a macroeconomic one (relating currency prices to investment in a country, perhaps?)
I don’t know if there’s something specific to the FX market, but the same effect is common to many items should the price change rapidly. Buyers and sellers expect the trend adverse to them to continue, so buyers may buy more at a higher price or sellers provide more at a lower price.
Over the last year, we’ve seen panic buying of gasoline as drivers top off their tanks when prices start rising quickly.
Another example, home mortgages. If rates start dropping, home owners may actually delay applying, as they think rates will continue to go lower and likewise, sharply higher rates may cause a short term rush for loans in anticipation of even higher rates.
The law of supply and demand will (usually) take over rather quickly. Of course, exceptions can on rare occassions go on for weeks, months or sometimes years. Remember the internet bubble?
I think that the FX market is run by two main types:
-Speculators who hope to profit by buying low amnd selling high
-Businessmen who want avoid lossesby buying a ciurrency in advance of an anticipated decline (in the value of that currency)
In any event, your abiliy to make money in the FX market depends upon your access to information. If you know that the USA will lower interest rates (before every other trader does), you stand to make money. In any case, the action of the FX markets has been to amplify the natural oscillations of exchange values…the speculators have been able to engineer “runs” on several currencies, and profit by buying up depressed currencies before the markets have a chance to react.
I thought the supply of most currencies was controlled by central banks, but maybe that’s not the “supply” the Kid’s talking about. If we’re talking about a controlled exchange rate, then deliberate devaluation could indeed spur and increase in trading volume, as nervous FOREX traders dump. However, the general rule is that, demand remaining equal, increased supply will cause prices to fall. Changes in price are more likely to affect the demand side, with supply adjusting in the fallout.
The biggest traders on the FX markets tend to be banks.
For the previous poster’s question, recall that short selling is just as easy in a fx/futures market.