What exactly are the factors that determine the strength of one currency against another and, thus, the direction of the foreign exchange market (FOREX)? Is there a proper formula for plugging in different factors and getting a useless timetable and map for moving money? This article highlights some of the factors that experienced money traders rely on to create a trading plan.
The following statement says that every money trader wants to know which direction the FOREX market will next move to maximize profits. While no teacher can predict the direction of the market with absolute accuracy, the possibility of market movement can be a more realistic objective. Countless strategies, trading models, and software packages have been developed in response to the unsatisfactory desire to use unchanging FOREX. As with any arena, some methods are more successful than others. No matter which method is used, they all have to be realistic to defer a lot of things very well.
State of the Economy
The general state of the economy of a country whose currency is traded has a marked effect on the strength and movement of the currency. If economic conditions weaken, money may also be delayed in the market, as investors begin to lose confidence. Since currencies are traded in pairs, a comparative analysis is needed rather than between the individual economies of the two countries that underwrit the currency.
Special economic reports
Different countries regularly issue economic reports that show specific aspects of the economy of that country. Examples of such reports include those that review retail sales, home construction, trade balance and manufacturing data. Depending, in part, on the size and global economic ranking of a particular republic, economic reports will differ as to the impact of its currency against other currencies. Of course, reports from countries such as the United Kingdom, United States, Canada and those comprising the European Economic Union are likely to have the greatest market impact. Reports highlighting employment statistics and interest rate fluctuations (e.g. U.S. Non-farm payroll and FOMC, respectively) generate significant interest and activity on the part of traders, causing the market make a strong movement.
If local prices in a country rise, the partner currency is likely to decrease in value internationally. A great example to illustrate this is the country of Zimbabwe. Suffering an inflation rate of around.7,000%, this African country has seen its currency up from 57: 1 five years ago to now almost 31,000: 1 against the US Dollar. This, of course, makes imports more expensive which, in turn, continues to push up inflation.
Some countries, such as those comprising the G8 (Canada, France, Germany, Italy, Japan, Russia, UK and USA) generally enjoy political stability. This has helped to strengthen their currencies against other countries that are not the same as strong governments. If the political future of a country is threatened by disrupting events such as a coup, civil war, international war on own land, nationalization of private resources, etc., foreigners and some locals investors are likely to avoid direct investment as well as investing in the currency and equity market in that country. If a currency is not sold in large amounts, it is said to have little or no liquidity. When the liquidity of a currency is rather insubstantial, the spread-i.e. the broker’s compensation-is likely to be too high, to accommodate the high risk associated with an illiquid currency.
There is no doubt that the ultimate factor that determines the movement of a given currency is the amount of trust in the universe of investors who have the ability to withstand all the factors that affect it. Without trust, the value will fall.
Sandy Robinson, JD, Copyright 2007