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Wednesday, 15 January 2014

What Affects Currency Rates?

In a word - information. Information is what drives every financial market, but the forex market has its own unique roster of information inputs. Many different, cross-currents are at play in the currency market at any given moment. After all, the forex market is setting the value of one currency relative to another, so at the minimum, you’re looking at the themes affecting two major international economies. Add in half a dozen or more other national economies, and you've got a serious amount of information flowing through the market.

Fundamentals drive the currency market


Fundamentals are the broad grouping of news and information that reflects the macroeconomic and political fortunes of the countries whose currencies are traded. Most of the time, when you hear someone talking about the fundamentals of a currency, he's referring to the economic fundamentals. 

Economic fundamentals are based on:
  • Economic data reports
  • Interest rate levels
  • Monetary policy
  • International trade flows
  • International investment flows

There are also political and geopolitical fundamentals. An essential element of any currency's value is the faith or confidence that the market places in the value of the currency. If political events, such as an election or scandal, are seen to be undermining the confidence in a nation's leadership, the value of its currency may be negatively affected. Gathering and interpreting all this information is just part of a currency trader’s daily routine.

Unless it’s the technicals that are driving the currency market


The term technicals refers to technical analysis, a form of market analysis most commonly involving chart analysis, trend-line analysis, and mathematical studies of price behaviour, such as momentum or moving averages, to mention just a couple.

We don't know of too many currency traders who don't follow some form of technical analysis in their trading. Even the stereotypical seat-of-the-pants, trade-your-gut traders are likely to at least be aware of technical price levels identified by others. It you've been an active trader in other financial markets, chances are, you've engaged in some technical analysis or at least heard of it.

If you’re not aware of technical analysis, but you want to trade actively, l strongly recommend that you familiarize yourself with some of its basics. Don’t be scared off by the name. Technical analysis is just a tool, like an electric saw - you don’t need to know the circuitry of the saw to - know how to use it. But you do need to know how to use it properly to avoid injury.

Technical analysis is especially important in the forex market because of the amount of fundamental information hitting the market at any given time. Currency traders regularly apply various forms of technical analysis to define and refine their trading strategies, with many people trading based on technical indicators alone.

Or it may be something else

I’m not trying to be funny here. Honest. What I’m trying to do is get across the idea of the many cross-currents that are at play in the forex market at any given time. Earlier in my post yesterday, I note that currency trading is just one form of market speculation, and that speculative trading involves an inherent market dynamic. See "what is currency trading"?

Call it what you like, trader’s instinct, market psychology, sentiment, position adjustment, or more buyers than sellers. The reality is that the forex market is made up of tens of thousands of different traders, each with a different view of the market and each expressing his view by buying or selling different currencies at various times and price levels.


That means that in addition to understanding the currency - specific fundamentals, and familiarizing yourself with technical analysis, you also need to have an appreciation of the market dynamic. And that’s where trading with a plan comes in.

1 comment :

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