Liquidity provision in the overnight foreign exchange market

We present evidence that non-financial customers are the main liquidity providers in the overnight foreign exchange market using a unique daily data set covering almost all transactions in the SEK/EUR market over almost 10 years. Two main findings support this: (i) the net position of non-financial customers is negatively correlated with the exchange rate, opposed to the positive correlation found for financial customers and (ii) changes in net position of non-financial customers are forecasted by changes in net position of financial customers, indicating that non-financial customers take a passive role consistent with liquidity provision. (c) 2004 Elsevier Ltd. All rights reserved.