What Makes Currency Markets Move?

People risk money when investing in anything, including FX. The reason is simple, currencies fluctuate all the time. Exchange rates can shift on a dime in some instances, especially as there is a 24-hour window for trading. If you’re not watchful over the factors that can cause these changes, you could be left out cold when trading currencies. It’s for that reason that the following compilation of factors are so important to consider overall. These are elements that could very well change how you trade, especially if you’re just stepping into the Forex market.

Inflation Differentials

Economics 101 in action is what drives many exchange rates to shift. You have to know about inflation, and you need to be wary of it. If you don’t know what this is, or you don’t know how it can pull currencies up and down, you’re going to end up losing out big time. To simplify this, consider this in terms of prices. When prices increase the purchasing power of currency drops. If a burger costs $10 USD, but minimum wage is $2, that burger may seem out of the purchase price of workers. Inflation and currencies can be killer, as the purchasing value of money could shift dynamically. Perfect examples of this can be seen in modern examples such as Mexican Peso, or Germany after the World Wars. Either way, inflation should be on the mind if you’re going to trade long term and play with exchange rates.

Dynamic Changes To Interest Rates

Interest rates differ the world over. Every bank has a different point here, and that attracts or repels investors. When looking at it through the lens of FX, you have to consider this element in terms of how rates shift for your investments. Think of it in practical terms. If you were to put your money into a bank locally, and the interest was 1% you would be ok. But what if another branch offers a 3% rate, you’d be tempted to move your money to the other locale, right? Well, that’s something that happens on a much larger scale when you start to look at inflation, interest, and purchasing power between countries. There is a relationship here that swings like a pendulum, and can be quite difficult to analyze at first. However, it’s interest rates and differing values that cause FX elements to shift dynamically.

Debt and Deficit

People that have a lot of debt, tend not to have a lot of money saved or purchasing power. The same can be said on a larger scale. When countries have a great deal of debt, or deficits, they lose strength in their currency. These numbers are astronomical when you start to calculate them. For instance, consider the money owed to China from the United States. These numbers aren’t just simple to calculate, but they tend to cause shifts in currency values. Now, compare deficits from around the world like Mexico, Japan, France, and England. When you start to look at deficits, you’ll see that there’s a fluctuation in demand, production, and exports, or profit. When profit diminishes, and debts rise, currencies fluctuate in strength and weakness, simple as that.

Stability

Sometimes referred to as political stability, a country could have a volatile economic future if they are stuck in this arena. For instance, if a country is in the middle of a civil war, unrest, or any number of unstable political leanings, their currency is not going to perform well at all. Strong economic backbone relies heavily on whether or not there is stability within a country. When there is turmoil, currencies fluctuate wildly, inflation can swing heavily, and purchasing power can be absolutely horrendous. This is one of the major contributors to change in financial matters, and should not be left out cold when you’re looking at investing in Forex at all. Currency, politics, economics, and more fall into balance when it comes to trading.

Cost of Imports and Exports (Trade)

Perhaps one of the elements that you hear about a great deal on the news is this one, and it’s the cost of goods. Countries that are trading on a regular basis look into the cost of trading. The costs of goods traded from one country could become inexpensive. If there is a balance that doesn’t favor the export of goods, then the currency value of that country becomes diminished. There’s a ratio that needs to be in place here that favors the export prices versus the import prices, as trade has a great deal to do with economic stability for a country. If a country isn’t exporting as much, and is only importing because they are not providing goods or services that other countries need, things can become bleak in terms of financial stability.

Beyond The Aforementioned Factors

One thing about trading, economics, politics, and FX investment is that there are a lot of factors that go beyond the above mentioned elements. Yes, these are things that are commonly referred to when considering investing, but they are just a fraction of what could occur to currency values. For instance, if the United States were to print a lot more money, the value could diminish. If oil deposits dry up for certain countries, they would have dire straits. The same can be said about precious metals, mining, agriculture and more. There are many sides to the value of cash, especially when you are comparing them to one another in the Forex arena. Currency trading can be a wise move, but only if you start to focus on the bigger global picture, as there are many moving parts to this compared to the New York Stock Exchange.

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