Pros are assigned by coverage. For example an FX desk at a bank is structured to cover g10, em, and exotics. Within g10 you may have 1-3 traders covering 2-6 pairs within coverage, with one in London, NYC, and Tokyo/HK/Singapore. This is because banks use a “follow the sun” strategy to provide liquidity and coverage to their corporate and investor client base. The main job of a professional fx trader is to get the currency for the client.
Why would a client want a currency? If you’re a corporation, you may need to make payment in other currency (e.g. US company may need to pay vendor in Malaysian Ringgit). If you’re an investor you may be searching for yield (e.g. Japanese insurance companies and banks buy US treasuries because it pays a higher rate). If you’re a speculator then you are trying to predict what corporates (economic activity and balance of payments) and investors (real yield differential) will do.
The job of a professional fx trader is mainly in managing your book risk. There is a wholesale and customer price for currencies… wholesale is the inter dealer market, while customer facing is everyone else (including hedge funds and central banks).
Wholesale is mainly banks trading to each other via repos, swaps, and options. Your pnl is the difference between your carry (interest rate you’re getting on your cash) vs liquidity cost (what you pay to get, or what you get to sell).
Customer facing side makes pnl by being competitive within a bid/ask spread. This is harder than it sounds because you’re taking risk either on your asset side or your liabilities side.
speculators (traders ex-bank) who wish to trade fx should focus on some sort of primary coverage — g3, g5, em 5, etc., with no more than 6-7 pairs.
Since fx speculating requires looking at trade flow, economic activity, and rates, you should pair it with interest rate futures / yield curve analysis.
e.g. euro is in a bear steepener, which will boost the currency vs. dollar… if economic activity does pick up then you might look at their trading partners currency and yield curve as well. Then you make your forecast on yield curve and economic activity and that’ll inform you as to where you think the currency will go vs trading peers or class.
l hope this helps.
