What is the “exchange rate” (or “rate of exchange”)?

Exchange rate (exchange rate) represents the price of one monetary unit of a country's currency, expressed in monetary units of another country. 🌍

How many types of courses are there?

❶⠀Reference exchange rate: at 13:00 of each trading day, the NBR accumulates the arithmetic means of the exchange rates (the quotation „BID” / „ASK”) of the main 10 banks in the system.

The resulting value, as an average, is published on the BNR website and in various systems (Bloomberg, Reuters, etc.), and is also picked up by the mass media. 📈

Thus, this course does not have a direct relevance for intraday transactions.

It is just a reference course, a quotation „midprice” (average of a „BID” / „ASK”), established today and used the next day in accounting records, for tax reasons. 🤓

❷⠀Market exchange rate: is formed at the interbank level, according to the supply-demand ratio.

What are the sizes of the market rate?

➤⠀BID quote(or buying rate): it is the course to which the one who „shows” price (in our case, the bank) buy currency against the other currency.

➤⠀ASK quotation (or the selling rate): is  the course at which the one who „shows” price (in our case, the bank) sell currency against the other currency.

What are the courses depending on the payment term?

❶⠀Spot rate (SPOT) or FX transaction „tdy” (oggi); „tom” (domani); „spot” (over two days): it is a transaction of selling or buying an amount in one currency in exchange for another currency.

The exchange rate is predetermined and may have 3 settlement dates for the transaction:

➤⠀„tdy”: today / today (t+0);

➤⠀„tom”: tomorrow / tomorrow (t+1);

➤⠀„spot”: in two days (t+2).

❷⠀Forward rate (FORWARD) or FX forward transaction*: is a sale / purchase of an amount in one currency, in exchange for another currency.

The transaction is carried out at a fixed future date and at a predetermined rate on the transaction date, with the actual settlement of the amounts taking place on the agreed date. 📆

*What IS NOT forward quote:

➤⠀the market expectation for the spot rate;

➤⠀indication or estimate of the spot rate in the future.

What determines exchange rate fluctuations?

In a free market, the exchange rate level is determined by the ratio between currency demand and supply:

➤⠀a high demand for foreign currency leads to an increase in price, resulting in the depreciation of the national currency;

➤⠀a large supply of currency leads to the decrease of the exchange rate, resulting in the appreciation of the national currency.

Factors influencing the demand and supply of currency will have a direct impact on the evolution of the exchange rate level. 💱

Among the most important influencing factors on the exchange rate are:

➤⠀speculative actions: inflows / outflows of large-value cash flows in the short term;

➤⠀political factors (example of positive factors: legislative stability, long-term projects);

➤⠀interventions by central banks in the market: infusions / withdrawals of liquidity, purchases / sales of currency;

➤⠀financial monetary factors: interest rate applied in the market, trade balance situation, budget deficit;

➤⠀internal economic factors: the volume of production, labor productivity, the quality of goods and services, purchasing power, etc.;

➤⠀external factors: policies (alliances, military conflicts), economic (free trade zones, economic crises in commercial partner areas) etc.