Foreign Exchange FAQ


What is foreign exchange (FX)
trading and how does it work?

FX trading is the process of buying and selling currencies in an effort to generate a profit by speculating on the value of one currency compared to another. Foreign currencies can be traded because the value of a currency will fluctuate, or its exchange rate value will change, when compared to other currencies.1

Currencies are traded in pairs and you can trade almost any currency in the world. For example, you could choose the pairing of EUR/USD to trade with Euro as your base currency and USD as your quote currency. In this currency pairing, you can make money by either an appreciation in the value of the quoted currency or by a decrease in value of the base currency.2


How do I invest in FX?

There are a variety of ways you can invest in FX including trading in the FX market, buying foreign currency and foreign currency options, or investing in exchange-traded funds. HSBC also has several FX solutions for those who would like to invest in FX including Dual Currency Investments, Foreign Currency Time Deposits, Bonds and Structured products depending on your risk appetite and needs. For more information, please visit


When is it a good time to buy Foreign currency?

With careful research and tracking of the following factors3 that may affect foreign currency movement you can time your foreign currency trades/investments/purchases by monitoring the market and trading/investing/buying when the price is favourable to you, allowing you to build your FX investment over time:

  • Pay attention to the monetary policy stance of major central banks.
  • Keep tabs on inter-currency movements.
  • Check the major economic data indicators.
  • Keep track of major events like political turmoil, geopolitical tensions or natural disasters.

How does FX benefit me?4

The need for foreign currency is not limited to big businesses. It could be used by:

  • A borrower with loans denominated in foreign currencies
  • An investor in overseas assets denominated in foreign currencies
  • A parent paying for your children's overseas education
  • A business or investor repatriating overseas funds or profits
  • A business or investor paying or receiving other foreign currency amounts

Why is it difficult to predict
foreign exchange fluctuations?

FX rates are affected by a variety of short-term and long-term factors including inflation, interest rates, economic growth and global trade flows.3 While you can examine the various factors, it is still often difficult to make an accurate prediction especially when uncertain and unexpected events cause volatility in exchange rates.5


What are the short-term factors
affecting foreign currency rates?

Interest rates: A country's interest rate policy plays an important role in providing direction to its currency and a weak policy could lead to depreciation.3 When a government decides to lower interest rates in an attempt to stimulate economic growth, it generally means that investment funds will flow out of that currency which could cause the currency to weaken.6

Trade flows: When a country has a trade surplus where there is a greater demand for goods and services from that country, its currency needed to pay for the goods will be stronger. Conversely, a trade deficit will usually weaken a country's currency.6

Economic growth: A country's economic growth has a direct impact on the country's currency rates. Typically as an investor, you may choose to hold the currency of a country that is growing at a faster pace or is predicted to do so in the future.5

Link to commodities: For economies that depend strongly on commodities like oil, their currency exchange rates tend to increase in value when there is a rise in locally produced commodities.5


What are the long-term factors
affecting foreign currency rates?

Long-term inflation: Higher inflation rates generally lead to depreciation of a currency as each unit can buy fewer goods and services. Central banks target a lower inflation because higher rates will restrict the central bank's ability to change the rate scenario, thus expectation of inflation affects currency movement.3

Economic growth: Expectations of economic growth over a long period affects foreign currency price movements. For example the US Dollar suffered losses when the US economy went through a long period of slow growth. However, as current expectations of long-term US growth are bullish, the US Dollar has strengthened in tandem.3


How can I make informed decision
on FX trading and investments?

FX can be complex because of so many factors in play. Fortunately, there are steps you can take to help you make more informed choices and also mitigate your risks. For example, you can seek advice and guidance by speaking to your Relationship Manager or visit any HSBC branch on what type of FX trading and investment options suit you best.

One of the key questions you should ask yourself is: What is my risk tolerance? You need to decide on whether the potential rewards of FX trading and investments are worth the potential loss because it's not possible to cut out the risk entirely. By equipping yourself with more information, you will then be able to make an informed decision based on the situation, at any moment.


1, Australian Securities & Investments Commission, Foreign Exchange Trading, undated.
2, How Do You Make Money Trading Money?, undated.
3 The Economic Times, Short & Long-Term Factors That Impact Currencies Across the World, 1 July 2013.
4, Getting the Right FX Solution, undated.
5, , FX FAQs, undated.
6, 8 Key Factors That Affect Foreign Exchange Rates, undated.