As it is known, a currency rate is affected by many factors. Let's name the fundamental...
As it is known, a currency rate is affected by many factors. Let's name the fundamental factors:
State of commodity market which represents the economic life of a country or region, its supply/demand, and productive forces. Monetary policy of сentral banks which affects the size of interest rates, the cost of money, interest in foreign currencies;
State of the labor market which indicates the rate of economic growth of the country characterizes commercial activity. Business activity which represents production, commercial activity;
External and geopolitical factors: known political risks, spontaneous social risks, natural hazards, and so on. Today we will talk about the main fundamental economic factors and their impact on exchange rates.
Some of the features of the analysis of the economic indicators in the Forex market. The largest group is formed by economic ones, which can be interpreted with the help of indicators regularly published in Forex.
The list of economic indicators in Forex includes great domestic product, producer price, and consumer prices indexes, unemployment rate, dynamics of housing building, business activity index, etc.
It is useful to analyze economic indicators in the exchange market for several reasons regardless of an investor’s trading type. Classification of the indicators by their importance enables to forecast a quotation movement.
A surge in the rate after a renewed indicator release can reach 200 points and more in just a few hours. News background has a direct influence on the rate dynamics and often contradicts technical indicators. Such a disparity can cause losses that could have been avoided.
The understanding of economic processes allows feeling the market better. It should be borne in mind that traders reacting to the economic indicators release analyze the secondary information.
This information has been given to them by the news companies, which have got it from special agencies calculating the major indicators.
The market does not always change its course after such a news release but it always becomes more active.
As a rule, the indicators of those currencies are followed which form a trader’s portfolio. Almost always it includes the USA dollar, Japanese yen, and the pound sterling.
All the most important indicators are presented in Forex economic calendar and this considerably simplifies trader’s work. The indicators with current values significantly different from predicted ones have the greatest influence on the market.
For example, expecting the Bank of Canada not to change the interest rate, traders are not going to carry out any speculation or revise the rate dynamics.
However, if the rate is reduced, an upward trend is likely to start in the market. The following indicators have the greatest influence on the market:
Indicators of the general economic performance of the country. (GDP and GNI, consumer prices and production prices indexes, inflation level, interest rate, export surplus);
Index of employment (unemployment rate, jobless claims). Indexes of industrial production (business activity index, industrial production index, amount of nonfarm payrolls, volumes of housing construction, the volume of durable goods orders)
The major indicator is the gross domestic product. All the other data are interpreted from the point of view of if there are any economic problems and what influence they will have on the production level.
GDP is released quarterly, and the predictions of its dynamics are renewed every month.
Gross domestic product is the total value of everything produced by all the people and companies in the country during a certain period of time. One of the most well-known ways of GDP calculations is by the expenditures.
According to it, GDP is a sum of personal consumption expenditures, government spendings, business investment, and net export (the difference between export and import).
Such a structure shows that GDP growth should not always be interpreted positively. When it grows due to the growing government spendings a currency rate can easily go down.
This is because the list of such costs includes military spendings which further can destabilize the economy in the country. Gross national income is considered more seldom than GDP but it indicates the volume of production only by the residents of the country.
The comparison of GDP and GNI shows who earns more, residents of the country working outside the country, or non-residents, whose companies work inside the state.
Inflation level and correspondingly the rate of the national currency depreciation can be followed by several indicators; consumer prices index CPI, production prices index PPI and inflation rate.
CPI indicates a commodity bundle cost that includes the most necessary goods and services. Production prices index unlike CPI doesn't include retail margin or imported goods prices.
Every month this indicator shows the rise of prices for semi-finished products, components, and end products. The interest rate, which is determined by the central bank, is the indicator of the economic situation in the country.
If inflation growth is accompanied by an interest rate rise, a country’s economy is likely to have middle-term or short-term problems which can't be solved by market forces.
From the investors’ point of view, the increase of interest rate causes a currency appreciation, its reduction causes a national currency depreciation. Trade balance indicates the ratio of imported foreign goods volume to that of exported goods.
If the country’s export exceeds its import, the national currency is strengthened and vice versa. The dynamics can be analyzed through an export surplus.
Sometimes the dynamics of import and export prices and current account deficit are used for analysis.
Money Market And Monetary Policy
The monetary policy of central banks is the most important indicator of currency dynamics. In a sense, the monetary policy reflects the reaction of central bank officials to the general state of economic life in the country.
The Bank of Japan regulates the yen, the Bank of England regulates the British pound sterling, and so on.
And since the currency itself is an instrument for regulating economic relations, the cheapening or appreciation of money affects the prospects of certain economic spheres.
A tight (or dear) money policy is an anti-inflationary policy. The central bank limits the money supply by increasing the rate at which commercial banks are credited. (Continue reading with LiteFinance)
