READING FUNDEMENTAL FOREX MOVEMENTS
READING FUNDEMENTAL FOREX MOVEMENTS
Economic growth
In most cases when a country’s economy is strong, the central banks of that nation will often raise interest rates to keep inflation at bay. The resulting increase in interest rates inevitably produces more movement on financial markets and with this influx comes an increase in demand for currency. This leads to rapidly increasing exchange rates like when people rush out to buy petrol during shortage warnings. Whether its due fear or excitement (or both), nobody knows how long these runs last but by looking at the prior economic growth data at hand we can see market trends and how it might directly impact the instruments that we trade.
Interest rates
The process of currency buying, and selling is all about knowing the difference between what the countries exchange rate is and the change from the last period. You can take advantage by investing in high-interest rate currencies from countries with low rates, or vice versa if your interest lies elsewhere – just be aware that this will affect not only foreign exchange markets but also other assets and commodities depending on how you trade them.
For example, investors may reasonably predict that the Bank of England or FED might drop interest rates to encourage growth of an economy. As a result, an anticipated action could cause depreciation in a country’s currency and lead investors towards investments with higher yields instead – driving up demand for assets from said nation’s economy which would ultimately create employment opportunities within it.
Investors will always look at what is going on outside their own borders before making decisions about investing so they should follow suit by paying attention when other countries’ central banks meet publicly to announce plans related to global affects that might have an impact on their trades.
When the perceived value of a country’s currency drops, demand for that nation’s exports will decrease and investors may liquidate their US dollar investments in favour of higher paying yields.
The best way to take advantage of this depreciation would be looking at EUR/USD for example buying Euros BEFORE it happened. This will allow you, with the Euro-currency jumping against your country’s currency – buy more expensively than others so their prices go down relative too them when they eventually rise again.
But let’s say you predict that interest rate will not fall as poor employment figures are announced in this situation. On the day everyone learns about this development, those people who acted believing there would be a drop in currency now buy back their foreign exchange and supply gets tight- creating an opportunity for profit if they were wise enough to have predicted correctly what banks might do with their policies! If your forecasts paid off by being able to purchase more of your initial currency unit at higher rates versus others around world you would have made greater margin on your trade.
Trade flow
Trade and capital flows will affect the exchange rate of a foreign currency. Traders are prone to read a worsening trade balance as a sign on which countries’ currencies experience depreciation, while it is more likely that they appreciate if this imbalance has been favourable.
The Balance of Trade are of interest to a currency trader because demand and import are connected. The stronger an economy’s exports, the greater need for that country’s domestic product; thus, increasing prices alongside production levels as manufacturers strive to meet increased demands from overseas clients or buyers who have been purchasing more due them buying up some extra stock on international markets. Currency traders should be aware of the changing balance between countries, and how that will affect currencies which they trade.
Money exchanges
When capital flows exceed the investments that are leaving a country for foreign sources, there will be an increase in demand for more of its currency. An investor must convert his money into what is used domestically in order to fulfil their investment.
When there is a negative capital flow, investors will sell their local currency to buy up another. This means that it becomes more valuable because people want what they’re giving away.
The UK is one of the countries with a positive capital flow right now. This means that their currency, which sits at an exchange rate around 1 pound = $1.12 USD or more (depending on who you ask), has maintained its value well due to these flows coming into our economy and putting pressure on prices for goods – making them less affordable than they would otherwise be without foreign investment.
With these simple pointers, you can see how the market movement affects profitability of your trades. So it might be a profitable move to explore and stay in tune with what’s happening.
