Clues In Currency Exchange Rates
December 18, 2015 Leave a comment
For a lot of investors who delve into the forex market, one of the most appealing factors is simplicity. In most cases, you can start out in forex through opening a mini account with your broker, allowing you to trade smaller amounts and thus risk less as you get familiar with the market. Additionally, following currency exchange rates can be a slightly less stressful process than dealing in stocks because in some ways exchange rates tend to be less volatile.
But to deal successfully in forex, it’s necessary to learn the different hints and clues to watch for in measuring exchange rate trends. Along those lines, here are some things to keep in mind.
Meaningful Currency Pairs
Before you get into any particular analysis of specific exchange rates, it’s important to narrow the focus of your account to currency pairs that facilitate meaningful investments. Somewhat surprisingly, eight currency pairs account for 72% of forex market volume, which means this is where your attention should be if you want a better chance at a meaningful return. The eight currency pairs are as follows: EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CAD, USD/CHF, EUR/JPY, and EUR/GBP.
Arguably more than any other factor, inflation plays a vital role in affecting exchange rates. When a country has a high inflation rate, its currency is generally devalued, because it has less power in the country’s financial market. On the other hand, if a country’s inflation rate is lower, its currency is essentially worth more, which puts it in higher demand. This isn’t the sort of thing you can get a quick tip on and put into action all the time, but monitoring inflation trends and projections can give you a good idea of how currencies will be valued.
Interest Rates & Central Bank Activity
Central banks have the power to raise interest rates, and a rise in interest rates can make a country’s currency value rise. Basically, as interest rates go up, foreign investors see greater value in acquiring the currency, and thus demand for that currency increases. So, just as you may look for decreasing inflation as an indicator of strengthening currency, keep an eye out for rising interest rates as well.
Government Borrowing & Debts
Every time a government needs to borrow money, either from foreign partners or from the private sector in its own country, its own currency value will likely decrease as a result. In particular, borrowing foreign currency results in a surplus of domestic currency that then becomes devalued. Meanwhile, internal debts to private sector interests can end up resulting in owing other countries money, which will cause those countries to withdraw their own assets in the indebted nation’s currency.
Finally, it’s crucial to be mindful of geopolitical events that may not begin as financial issues, but which can sharply impact currency values. Any number of events could fall into this category, but generally the ones to be mindful of are elections, financial crises, monetary policy changes, and wars. While some begin as financial matters and others don’t, each of these things can drastically alter the outlook for a country’s currency and thus shift its relevant exchange rates.
By educating yourself in these areas and looking out for any clues within them, you can gain a fairly strong understanding of how currency pairings may shift over time. This can allow you to leverage the information into stocking your forex mini account with currencies that stand to increase in value.