5 Key factors that move the forex market.
In order to succeed from the fascinating world of forex trade, we must understand the basic factors that effect a currency's value.
When making forex trades we analyze the following five key factors, they are:
(1) Interest rate
(2) Economic growth
(4) Trade and capital flows
(5) Merger and Acquisition Activity.
*Note:if you can predict how each of these factors affect your forex trades, you have the foundation to make serious returns or forex gains.
(1) Interest rates
We use two methods to profit from the difference in countries interest rates:
(a) Interest income
(b) Capital appreciation
(a) Generating interest income.
Every currency in the world comes attached with an interest rate that is set by its country's central bank. All things being equal, you should always buy currencies from countries with high-interest rates and finance these purchase with currency from countries with low-interest rates.
(b) Generating income from capital appreciation.
Just as a country's interest rate increases, the value of the country's currency also increases. This phenomenon gives you a chance to profit from yours currency's increased value or capital appreciation.
(2) Economic growth
The next factor that is considered when predicting a country's currency movements is its economic growth. The stronger the economy, the greater the possibility that the central bank will raise its interest rate to tame the growth of inflation. And the higher a country's interest rates, the bigger the likelihood that foreign investors will invest in a country's financial markets. More foreign investors means a greater demand for the country's currency. A greater demand results in increase in a currency value.
This involves the use of both political and economic releases to analyze forex successfully, this is where the political and also economic assets are very responsive to disturbances in the political landscape, because currencies represents countries rather than companies.
Therefore, the general rule of thumb in the forex market is that politics almost always trumps economics. The history of forex is littered with examples of political trades.
(4) Trade and Capital flows
This entails that before making your final prediction about a country's currency, you should take a moment to categorize the country as dependent on either trade flow or capital flow.
Trade flow refers to how much a country earns through trade.
Capital flow refers to how much investment a country attracts from abroad.
Some countries like Canada,Australia,New Zealand and Germany are sensitive to trade flows.These countries achieve a large portion of their growth through the export of various commodities.
In the case of Canada oil is the primary source of revenue. For Australia, industrial and precious metals dominate trade, and in New Zealand, agricultural goods are crucial source of income. Trade flows are also important for export dependent countries such as Japan and Germany. For countries such as US and UK, which have large liquid investments markets, "capital flow" are of far greater importance. In countries financial services are paramount, in fact, in the US, financial services represent 40% of the total profit of the standard and poor500(S & P 500).
(5) Merger and Acquisition
This is an area of corporate finances, management and strategy dealing with purchase and or joining with other companies. In a merger, two organizations join forces to become a new business usually with a new name. Because the companies involved are of typical size and stature the term "merger of equals" is sometimes used.
Example, if a European company wants to buy a Canadian asset for $20 billion, it would have to go into the currency market and acquire the currency to effect this transaction. Typically, these deals are not price sensitive because the acquirer may have a date by which the transaction is to be completed. Because of the underlying dynamic, merger and acquisition flow can exert a very strong temporary force on forex trading, sometimes skewing the natural course of currency flow for days or weeks.
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