The currency market is a 24/5 market, open for business Monday to Friday. Although transactions don’t take place over the weekend, investors often find that market gaps occur on Monday’s opening due to events happening over the weekend (e.g. elections). For this reason, investors can’t exclude weekends from their trading strategy. This makes Friday’s closing an important one, as investors seek to reduce risk exposure in their portfolios ahead of unknown factors over the weekend. The uncertainty over the weekend becomes certainty during the trading week. From Monday’s opening until Friday’s close, the FX market “follows the sun” around the world. Time zone by time zone, different financial centers start the trading day, with flows already influencing price action by the time trading activity begins in one place or ends in another.

Most Important Financial Centers of the World

The trading world is split into three main regions: Asia, Europe, and North America. Note that the alignment is from east to west, following the sun as mentioned earlier.

Monday’s price action starts with the Asian session, which is typically slow providing no gaps that appeared at the opening. The first to open is the New Zealand market, and investors from around the world look at the opening prices. Typically, liquidity is dry during these early hours, as it is still Sunday in many parts of the world. With low liquidity levels, spreads tend to widen, and prices can move unpredictably. Yet, when conditions are harsh, investors try to use this opportunity to position themselves accordingly. As more cities in Asia open, the session becomes lively, but liquidity is still scarce. This is a characteristic of all Asian sessions, not only for the Monday session. With ranges dominating, investors typically use range-trading methods to potentially scalp on small market movements. The important financial centers in Asia are Tokyo, Hong Kong, Shanghai, and Melbourne.

After the Asian session, the European session, also known as the London session, sees an increase in trading activity. As the most significant financial center in the world, London is responsible for substantial intraday volumes, and FX trading takes place at ideal conditions; standard spreads, ideal liquidity, etc. The most active part of the London session is when North American investors start trading. There are a few hours every day when both the London and North American (New York) sessions trade at the same time. During these hours money flows into or out of major currencies/currency pairs, currency “fixings” influence levels, and expirations of major options drive price action higher or lower. After London’s close, the liquidity starts to dry out and by the time the U.S. equity market closes, the FX market is again preparing for the Asian opening.

Each day of the trading week follows this pattern, and this comprises the price action during the entire week. In between, the economic calendar is responsible for plenty of economic data that creates volatility and makes the currencies move. Naturally, the European and U.S. data is responsible for more extensive moves than the data from the Asian session.

Take-aways:

  • The London session is responsible for substantial market movement.
  • The few hours when London and New York trade together are the most volatile.
  • Economic data out of London and New York sessions create major market moves.