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Mukhtar was happy with our process: “The process was really helpful and easy for me. I was able to complete it in just 20 minutes. It will be really beneficial for my future endeavors. Thank you team Axis for your extraordinary support.“

Uday found the process easy to follow: “The guidelines were easy to follow and I received my Forex card within 6 days. Superb job, Axis Team“

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K.S. Suresh admired the branch Operations: “I got the card within 30 mins when i visited the branch , very fast and good job done.“

Uma being a senior citizen appreciated the staff: “Very Happy with the staff who helped us for the Forex Card , It was quite fast , specially since we were not net savy and Senior Citizens.“

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What Is Credit Checking?

Credit checking, with regards to forex markets, examines the financial health and creditworthiness of counterparties in a currency transaction. This credit check ensures that both parties have the means necessary to cover their side of the transaction in a trade.

Credit checking can also refer to checking the credit score of anyone, including one's self. Loans, for instance, often require a credit check before they can be issued.

Understanding Credit Checking

A credit check in the foreign exchange (forex) market is much like the credit check a landlord makes on a potential tenant. The landlord is doing a background check to see if the prospective tenant can afford to make the regular rental payments on time. 

Without the process of credit checking, one party in a forex transaction would have no assurances as to the creditworthiness of the other party involved. By engaging in credit checking before transactions take place, confidence is maintained that each party has enough credit to carry out and honor the deal.

Since the financial crisis, regulation across all markets has become more strict making credit checks a more arduous and lengthy task. In addition to checks, most firms have increased capital requirements for customers, which has acted as a form of a credit check, or safety net against traders and firms that can't make good their side of the transaction.

In January , when the Swiss National Bank (SNB) pulled the price floor between the euro and the Swiss franc, the value of the franc rose by as much as 25 percent in a matter of minutes, which wiped out margin traders, and the losses were borne by the brokers. While credit checks could not have aided these losses, the increase in capital requirements has potentially reduced the magnitude of the losses should an event like this occur again. 

When Credit Checking Occurs

Retail traders may undergo credit checking when opening a forex account, or any type of trading account. The broker is verifying the financial viability of the trader, should that trader get into a position where the money in their account can't cover their outstanding losses, essentially creating a negative balance in the trader's account.

If the client is unable or unwilling to cover the loss, the broker may have to bear those losses and then decide if they wish to legally pursue the trader for funds to cover the losses. Credit checking helps determine if the client is likely able and willing to cover losses or negative balances.

Credit checking on retail clients, opening retail trading accounts, is typically done when the client opens the account, and not for each transaction.

Over-the-counter (OTC) transactions, typically between businesses or financial institutions, may do credit checking on a counterparty on an as-needed basis. For example, if two parties are about to engage in a large currency transaction, they may wish to verify each other's financial position via a credit check prior to engaging with each other.

Once parties are aware of each other's financial position they may not require credit checks each time they do a transaction, especially if it is under a certain dollar amount. If the transactions increase in size or one party believes there has been a material change in the financial position of the other, credit checking may be required again.

Example of Credit Checking Between Institutions

Assume that two private companies want to engage in a currency swap. They are private, so their financial information may not be publicly disclosed and therefore a counterparty may not know how that company is doing.

Assume Company A needs to swap £10 million for $ million from Company B. This implies a GBP/USD exchange rate of The parties then agree on what interest rate is tied to each amount. They could both pay a fixed rate, both pay a floating rate, or one party could pay a variable interest rate while the other pays a fixed rate.

The specifics of the deal don't matter too much in terms of the credit check. What does matter is that each party feels the other side can cover their side of the transaction. Swaps are sometimes entered based on the expectation of future revenues or cash flows. Yet those revenues or cash flows may not always materialize. Therefore, Company A will want reasonable assurance that Company B can exchange the funds back and/or pay any differences in interest rates and exchange rates that may develop between when the swap is initiated and when it expires. Company B will want to see the same from Company A.

A strong commercial credit score, as well as other financial information provided by each company, such as their cash position and possibly revenues and expenses, will help each party feel more comfortable with the transaction.

Interest rate changes made by any of the world's most influential central banks can have a major impact on the foreign exchange market.

These rate changes usually are a response to economic indicators observed throughout the month. They potentially can move the market immediately and with full force.

Surprise interest rate changes can have a substantial impact on traders. Therefore, it's important to understand how to predict and react to them in your quest to secure profits.

Interest Rate Basics

Interest rates are crucial to day traders in the forex market. That's because the higher the rate of return, the more interest accrued on currency invested, and the higher the profit.

Of course, the risk in a strategy involving interest rate change is currency fluctuation, which can dramatically offset any interest-bearing rewards. While you may always want to buy currencies with higher interest rates (funding them with currencies with lower interest rates), such a move is not always wise.

Interest rates should be considered carefully, as should any news release about interest rates from central banks.

How Rates Are Determined

Each central bank's board of governors controls the monetary policy of its country and the short-term rate of interest at which banks can borrow from one another. The central banks will raise rates in order to curb inflation and cut rates to inject money into the economy and encourage lending.

Relevant economic indicators may provide an idea of actions a central bank may take. Some important U.S. economic indicators include:

Predicting Central Bank Rates

Data from these and other economic indicators can help a trader project and prepare for an interest rate change. Healthy economic activity can mean rates may be left unchanged. If the economy is too strong, the central bank may raise rates. On the other hand, weakness measured by indicators can portend a rate cut to encourage borrowing.

It's also possible to predict an interest rate decision by taking note of major announcements and analyzing economic forecasts.

Major Announcements

Major announcements from central bank leaders can provide vital information about interest rate moves. They shouldn't be overlooked in sole favor of economic indicators. When the board of any of the eight major central banks is scheduled to talk publicly, traders can glean insights into how a bank views inflation and, therefore, actions it might take.

For example, on July 16, , Federal Reserve Chair Ben Bernanke gave his semi-annual monetary policy report to the House Committee on Financial Services. At a typical session, Bernanke reads a prepared statement on the U.S. dollar's value and answers questions from committee members.

Bernanke, in his statement and answers, was adamant that the U.S. dollar was in good shape and that the government was determined to stabilize it although fears of a recession were influencing all other markets.

His statement was widely followed by traders who took it as a positive sign that the Federal Reserve would raise interest rates. This perception resulted in a short-term rally on the dollar in advance of the next rate decision.

The EUR/USD declined 44 points over the course of one hour, which was good for the U.S. dollar. The move resulted in a $ profit for traders who acted on the announcement.

Forecast Analysis

The second way to predict interest rate decisions is by analyzing forecasts. Interest rates moves can be anticipated. As a result, brokerages, banks, and professional traders will already have a consensus estimate of what the rate may be.

Traders can take four or five of these forecasts (which should be very similar) and average them for a more accurate prediction.

When a Surprise Rate Change Occurs

No matter how good a trader's research or how many numbers they've crunched before a rate decision is made, they still may be caught off guard by a surprise rate change by a central bank.

When this happens, a trader should understand in which direction the market will move. If there is a rate hike, the currency will appreciate. This means that traders will buy. If there is a rate cut, traders will probably sell and buy currencies with higher interest rates.

Once a trader has determined the market movement, it is crucial to do the following:

• Act quickly. The market tends to move at lightning speed on a surprise because all traders vie to buy (or sell) ahead of the crowd. Proper preparation and fast action can lead to a significant profit.
• Watch for a volatile trend reversal. Traders' perceptions may rule the market at the first release of data, but then the trend will most likely reverse back to its original path.

The following example illustrates the above steps:

In early July , the Reserve Bank of New Zealand had an interest rate of %—one of the highest of the central banks. The rate had been steady over the previous four months and the New Zealand dollar was an attractive buy for traders due to its higher rate of return.

In July, contrary to all predictions, the bank's board of governors cut the rate to 8% at its monthly meeting. While the quarter-percentage drop seems small, forex traders took it as a sign of the bank's fear of inflation and immediately withdrew funds or sold the currency and bought others (even if those others had lower interest rates).

The NZD/USD dropped from to for a total of 83 points, or pips, over the course of five to 10 minutes. Those who sold just one lot of the currency pair gained a net profit of $ in a matter of minutes.

As quickly as the NZD/USD dropped, it was not long before it reversed and continued its upward trend. It did not continue falling because, despite the rate cut, the NZD still had a higher interest rate (at 8%) than most other currencies.

As a side note, it is important to read actual central bank press releases to determine how a bank views future rate changes and decisions. The data in a release can spur a new trend in the currency after any short-term effects from a surprise change have taken place.

The Bottom Line

Following the news and analyzing the actions of central banks should be high priorities for forex traders.

As central banks determine their regions' monetary policies, currency exchange rates tend to move. As currency exchange rates move, traders have the ability to maximize profits. Profit potential exists not just with interest accrual from carry trades, but also from actual fluctuations in the market.

Thorough research and analysis can help a trader take advantage of surprise rate moves when they inevitably happen.

OH! RiCH (SRT FOREX) was founded in to provide comprehensive currency solutions for the digital age in the ever-dynamic monetary world. Uniquely placed to take on modern solutions, we have a deep-rooted history in the currency exchange business through our parent company, Superrich Thailand, who have been a long-established currency exchange provider in Thailand.

Since our inception, we have become synonymous for providing a unique and exceptional customer experience, as well as offering the best rates in Thailand. The trust we have built with our customers and partners have allowed us to grow exponentially within a few short years.

We have a registered capital of two hundred million baht and as of mid, provide our services to over eleven locations throughout Bangkok.

The regulation presents a dilemma for individuals whose foreign expenses are not likely to cross ₹7 lakh. They will be inclined to use a debit or credit card to save the 20% upfront cost levied on forex, but the downside is that they will have to shell out an extra % per transaction in the form of forex markup and transaction fees, which is less than the 1% in the case of zero-cost forex cards..

Nevertheless, there is some relief. Select fintech firms have partnered banks to offer zero forex markup debit cards, significantly reducing the cost of international spending. Presently, three such credit cards are available that also waive markup fees, which typically range from % to %.

Read the fine print

Niyo Global card, Fi Visa Platinum debit card and Jupiter debit card have zero forex markup fee. While Niyo has tied up with Equitas Small Finance Bank and SBM Bank, Fi and Jupiter have a partnership with Federal Bank.

In early , the Reserve Bank of India had put restrictions on international debit and credit cards issued by SBM Bank after finding slip-ups in regulatory compliances. The clamp down hit Niyo Travel card users, said Swapnil Bhaskar, head, strategy, Niyo, which is in the process of inking a partnership with other banks. “Niyo Global customers can take credit and debit cards from multiple bank partners with zero mark- up forex charges," he added.

In the case of these debit cards, the issuing bank waives off its own markup fee but the markup charged by the payment network, though small, is still levied. “Rates offered by payment networks to these fintechs are already marked-up," said Sudarshan Motwani, founder and CEO, BookMyforex. This means the conversion rate on these cards is slightly higher than mid-market exchange rates despite the zero markup promise.

Moreover, in the case of Fi and Jupiter, forex fee is not waived for all debit card users (see graphic). Fi charges % forex mark-up on accounts that do not mandate minimum balance. Accounts that require ₹10, minimum balance are offered zero forex markup up to ₹50, monthly spends and those with ₹50, minimum balance mandate get zero forex fee on all spends. Also, % and % markup is charged on all transactions at first on Fi and Jupiter, respectively, but is reversed for eligible transactions within days.

Zero-forex credit cards too have certain conditions. For example, the IDFC First Wow credit card is issued only against a fixed deposit (of ₹5,) opened with the bank. “Credit limit is equal to the FD amount," Sumanta Mandal, founder, TechnoFino, said.

This could be a costly proposition for some as you have to lock-in money in an FD, which is akin to locking in 20% with the government through TCS. It can be argued that an FD earns an interest of %, unlike the TCS, the two are similar as they require you to pay the amount upfront.

RBL Bank World Safari credit card could be a good option for those travelling overseas frequently in view of the zero forex fee and free medical insurance, despite not earning any rewards on international transactions.

Axis burgundy private credit card is another option but it is available only for HNIs. “One needs burgundy private relationships with Axis bank to get the card, which requires ₹5 crore NRV (net relationship value in the form of salary, deposits, demat holdings etc)," said Mandal.

Before taking your pick, do find out about annual maintenance fee or transaction fee, to calculate how much you will effectively be saving (see graphic).

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Published: 06 Jun , PM IST

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