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Originally Posted by KPcurrency
Kassai:
Remember, if a U.S. company wants to invest in a French firm, there is not only a stock transaction but also a currency transaction. So the equities traders also look to the currency traders. Before a Japanese mutual fund buys Microsoft, there must be a currency trade made. So, it just seems to me that, the hours when the stock market (U.S.) is open correspond to good volume/trading in the currency market.
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Sorry, but this is not strictly accurate. Most currency trades that are executed to cover equity (or indeed fixed income) trading activity actually lag, not LEAD the equity or bond trade in question. Usually by a day. The large institutional firms (pension funds etc) trade a large proportion of their equities for T+3 settlement, and therefore can execute the fx the next day on a normal spot (i.e. T+2) basis to cover the trade.
Of course cross border investment adds its own complications due to time zone constraints, but this is broadly how it works.
GJ