Forex – Factors Affecting Market Movement
What exactly are the factors which determine the strength of one money against another and, consequently, the direction of the foreign exchange (FOREX) market? Is there a precise formula for plugging in various factors and getting a foolproof timetable and map for money movement? This article highlights certain factors relied upon by experienced money traders in formulating a trading plan.
It is in understatement to say that every money trader wishes to know which direction the FOREX market will be moving next in order to maximize profits. While no guru can prediction market direction with flawless accuracy, probability of market movement may be a more realistic aim. countless strategies, trading models, and software packages have been built in response to the insatiable desire to harness the inconsistent FOREX. As in any arena, some approaches are more successful than others. in spite of of which approach is used, they all must realistically defer to several very germane factors.
State of the Economy
The general economic conditions of a country whose money is being traded has a marked impact on the strength and movement of the money. If the economic conditions are languishing, the money may also lag in the marketplace, as investors start to lose confidence. Because currencies are traded in pairs, a comparative examination becomes necessary as between the respective economies of both countries underwriting the money.
Specific Economic Reports
Various countries regularly issue economic reports reflecting specific aspects of that nation’s economy. Examples of such reports include those that review the retail sales, home building, trade balance and manufacturing data. Depending, in part, on the size and worldwide economic ranking of the particular republic, the economic reports will vary regarding the impact on its money in the confront of other currencies. Naturally, reports from countries like the United Kingdom, United States, Canada and those comprising the European Economic Union tend to have the greatest impact on the market. Reports which press the employment statistics and interest rate changes (e.g. the U.S. Non-farm payroll and FOMC, respectively) generate tremendous interest and activity on the part of traders, causing the market to make drastic movements.
When domestic prices in a country go up, the affiliated money tends to decline in value internationally. An extreme example to illustrate this would be the nation of Zimbabwe. experiencing from an inflation rate of about.7,000%, this African country has seen its money go from 57:1 five years ago to now almost 31,000:1 against the U.S. Dollar. This of, course, makes imports more expensive which, in turn, continues the upward thrust of inflation.
Certain countries, such as those comprising the G8 (Canada, France, Germany, Italy, Japan, Russia, U.K and the USA) generally enjoy political stability. This helps to strengthen their currencies against other countries that do not proportion such stable governments. If the political future of a country is threatened by disrupting events such as a coup, civil war, international war on its own soil, nationalization of private resources, etc., foreign and some local investors tend to shy away from direct investment in addition as investment in the money and equity markets of that country. When a money is not traded in large amounts, it is said to have minimal or no liquidity. When the liquidity of a money is insubstantial, the spread–i.e. the broker’s compensation–tends to be very high, to adjust to for the high risk associated with an illiquid money.
There is no doubt that the ultimate factor calculating the movement of a given money is the amount of trust the universe of investors have in its ability to resist all of the factors affecting it. If there is no trust, the value will fall.
Sandy Robinson, J.D., Copyright 2007