You don’t need to be a wizard in economics or international trade to do forex trading. But if you know how key economic factors affect currency pairs you automatically put yourself on a higher pedestal in forex trading.
Given below are a few enlightening features pertaining to this aspect of forex trading.
Let us assume for a moment that a country raises its interest rates. What happens then? People who used to invest their money in stock market will now move their funds to greener financial pastures. While this has the potential to weaken the internal economy of that particular country, the fact remains that the economic position of that country is strengthened in relation to other countries. But the extent to which the move would affect currency markets is something that each investor in forex market will have to decide for himself.
Similarly when a country reduces its interest rates, it normally leads to strengthening of the internal economy of that country. Here again the extent to which the move would affect currency markets is something you would have to figure out yourself. For example, look at the paradoxical situation we see in currency markets at present. Today, most of the experts are of the opinion that the US economy is in the worst recession since the Great Depression of the 20s. Yet we see the US Dollar getting stronger every day even as the economy is supposedly in a recession mode. As a matter of fact, the Dollar has regained in the past four months much of what it lost against other currencies during the last three years. This proves the great resilience of the dollar, apart from emphasizing the fact that fundamental analysis has to be carefully interpreted.
Canada produces crude oil and exporting crude oil raises Canadian GNP, improves its balance of trade and bolsters the overall economy.
When the price of crude oil goes up, USD/CAD goes down. Why is that so? The reason is the Canadian dollar has appreciated against the base currency, which in this case is the US Dollar.
If you lay the chart of USD/CAD over the chart of crude oil price over a particular period you will find both the charts coinciding in several ways.
Japan has hardly any energy reserves of its own and because of its strong industrial base is an oil consuming nation. When Japan imports crude oil at higher prices it raises the cost of Japanese industrial production and impinges on its overall economic growth. So how does this impact the USD/JPY chart?
The correlation between USD/JPY charts and the oil price charts is not very apparent as in the case of USD/CAD.
The reason is obvious. The cost of crude oil as a commodity has affected the USD half of the equation as well as the JPY side unlike in the USD/CAD example.
In times of economic stress as we are seeing today investors tend to move capital from speculative enterprises to something more solid like gold and other precious metals. That is because the value of precious metals tends to go up during periods of economic downturn. As the situation gains normalcy investors would seek higher returns from their money and consequently the price of precious metals like gold tends to decline.
It is strange but true that the Swiss franc like gold is considered a safe bet for investing capital. Generally when the price of US Dollar depreciates partly due to low interest rates and governmental deficits, investors tend to move their capital to safe avenues like the Swiss franc. So when the price of gold goes up, so does the Swiss franc in relation to the dollar.
Take another example. Assume for a moment the USD/CHF has declined because of the pressure of the cross currency against the base. Here again if you lay the USD/CHF chart over the gold price chart over the same period it would most likely indicate a mirror similarity.
Australia mines both gold and copper. Apart from being a precious metal, copper finds great use in the housing market. So as the demand for copper rises, the Australian dollar usually climbs against the US Dollar. Another reason could also be the incidence of high Australian interest rates as compared to low interest rates in the US.
The points outlined above are simply nuggets of information that could possibly help you in your forex trading strategy. Don’t take them to be a set of hard and fast rules. It is never meant to be that. Always analyze present trends for what they really are and not what they seem to be. Analyzing fundamental data always requires a lot of intuitive foresight.