Trading in the Australian Foreign Exchange Market
The market for for foreign exchange is the most heavily traded financial market. Theoretically exchange exchange rate movements are determined by economic fundamentals, such as inflation and interest rates, which influence the supply and demand for currencies. However, empirical models of exchange rate determination based on these fundamentals have not been very successful in predicting exchange rate movements, especially over the short run. Furthermore, market practitioners argue that they have successfully developed profitable trading strategies, which do not rely on an analysis of economic fundamentals. A reason for the poor performance of econometric models and trading strategies based on fundamental analysis could be the attitudes and behaviour of practitioners trading in the foreign exchange market. In order to obtain information about trading behaviour in the Australian foreign exchange market dealers authorised to trade in this market were approached in a survey for their views on market behaviour and trading strategies. This paper provides a detailed analysis of the responses to the survey questions.
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