Advanced question about Forex market?

Eric F asked:


Hi,

Im wondering whether the cross pair currency rates are determined by speculative traders or arbitrage trading computers. For example you have two liquid pairs:

EUR/USD
USD/CAD

and a cross rate

EUR/CAD

I figure, since most of the speculative trading is done on EUR/USD and USD/CAD, the EUR/CAD exchange rate is made by arbitrage traders adjusting the correct cross rate so there is no cross currency arbitrage. That means there are a lot less speculative trades on the EUR/CAD pair than on the EUR/USD for example, percentage wise that is, right? Given that, trading on the cross rate is alot harder, since the market psychology is made up of less traders and more arb, right?

Jamie

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September 13, 2009 • Tags: , • Posted in: 1086

2 Responses to “Advanced question about Forex market?”

  1. Common Sense - September 14th, 2009

    You’re over thinking this!

    It all comes back to Supply & Demand.

  2. JohnGalt - September 15th, 2009

    The three markets in relatiave alignment and they could be active in any or all three.