FACTORS AFFECTING FOREIGN EXCHANGE RATES

Foreign Exchange being a commodity likes any other commodities the exchange rates tend to fluctuate from time to time. There are various factors that cause the fluctuation in the rates of exchange. These factors can be divided into several following groups. These groups can affect the exchange rates on a short term as well as long-term basis.

1. Fundamental Factors:

The fundamental factors include all such events that affect the basic economic and fiscal policies of the concerned government. These factors normally affect the long-term exchange rates of any currency. On short-term basis on many occasions, these factors are found to be rather inactive unless the market attention has turned to fundamentals. However, in the long run exchange rates of all the currencies are linked to fundamental causes. The fundamental factors are basic economic policies followed by the government in relation to inflation, balance of payment position, unemployment, capacity utilization, trends in import and export, etc. Normally, other things remaining constant the currencies of the countries that follow the sound economic policies will always be stronger. Similar for the countries which are having balance of payment surplus, the exchange rate will always be favourable. Conversely, for countries facing balance of payment deficit, the exchange rate will be adverse. Continuous and ever growing deficit in balance of payment indicates over valuation of the currency concerned and the dis-equilibrium created can be remedied through devaluation.

2. Political and Psychological factors:

Political and psychological factors are believed to have an influence on exchange rates. Many currencies have a tradition of behaving in a particular way for e.g. Swiss franc as a refuge currency. The US Dollar is also considered a safer haven currency whenever there is a political crisis anywhere in the world.

3. Technical Factors:

The various technical factors that affect exchange rates can be mentioned as under:

(a) Capital Movement: The phenomenon of capital movement affecting the exchange rate has a very recent origin. Huge surplus of petroleum exporting countries due to sudden spurt in the oil prices could not be utilized by these countries for home consumption entirely and needed to be invested elsewhere productively. Movement of these petro dollars, started affecting the exchange rates of various currencies. Capital tended to move from lower yielding to higher yielding currencies and as a result the exchange rates moved.

(b) Relative Inflation Rates: It was generally believed until recently that one prima-facie direction for exchange rates to move was in the direction adjusted to compensate the relative inflation rates. For instance, if a currency is already overvalued, i.e., stronger than what is warranted by relative inflation rates, depreciation sufficient enough to correct that position can be expected and vice versa. It is necessary to note that exchange rate is a relative price and hence the market weighs all the relevant factors in a relative term, (in relation to the counterpart countries). The underlying reasoning behind this conviction was that a relatively high rate of inflation reduces a country's competitiveness in international markets and weakens its ability to sell in foreign markets. This will weaken the expected demand for foreign currency (increase in supply of domestic currency and decrease in supply of foreign currency). But during 1981-85 period exchange rates of major currencies did not confirm the direction of relative inflation rates. The rise of the dollar persistently for such a long period discredited this principle.

(c) Exchange rate policy and intervention: Exchange rates are also influenced in no small measure by expectation of changes in regulation relating to exchange markets and official intervention. Official intervention can smoothen an otherwise disorderly market but it is also the experience that if the authorities attempt half-heartedly to counter the market sentiments through intervention in the market, ultimately more steep and sudden exchange rate swings can occur. In the second quarter of 1985 the movement of exchange rates of major currencies reflected the change in the US policy in favour of co-ordinated exchange market intervention as a measure to bring down the value of dollar.

(d) Interest Rates: An important factor for movements in exchange rates in recent years has been difference in interest rates; i.e. interest differential between major countries. In this respect the growing integration of the financial markets of major currencies, the revolution in telecommunication facilities, the growth of specialized asset managing agencies, the deregulation of financial markets by major countries, the emergence of foreign exchange trading etc. having accelerated the potential for exchange rates volatility.

4. Speculation

Speculation or the anticipation of the market participants many a times is the prime reason for exchange rate movements. The total foreign exchange turnover worldwide is many a times the actual goods and services related turnover indicating the grip of speculators over the market. Those speculators anticipate the events even before the actual data is out and position themselves accordingly in order to take advantage when the actual data confirms the anticipations. The initial positioning and final profit taking make exchange rates volatile. These speculators many a times concentrate only on one factor affecting the exchange rate and as a result the market psychology tends to concentrate only on that factor neglecting all other factors that have equal bearing on the exchange rate movement. Under these circumstances even when all other factors may indicate negative impact on the exchange rate of the currency if the one factor that the market is concentrating comes out positive the currency strengthens.

5. Others

The turnover of the market is not entirely trade related and hence the funds placed at the disposal of foreign exchange dealers by various banks, the amount which the dealers can raise in various ways, banks' attitude towards keeping open position during the course of a day, at the end of the day, on the eve of weekends and holidays, window dressing operations as at the end of the half year to year, end of the month considerations to cover operations for the returns that the banks have to submit the central monetary authorities etc. - all affect the exchange rate movement of the currencies.

(b) Demand and supply: The demand for a foreign currency to pay for imports, etc, and the supply of a foreign currency by way of receipts on account of exports, etc. vary at various rates of exchange. The rate which equilibrates the demand and supply should be the rate of exchange.

(c) Purchasing power parity: This theory maintains that free international trade equalises prices of tradable goods in different countries. So, a product will sell for the same price in common currency in all countries. Different rates of changes in prices i.e. different inflation rates must eventually induce off-setting changes in exchange rates in order to restore approximate price equality. Mathematically, the rate (or the expected rate) of change of the exchange rate should equal the rate (or the expected rate) of change of the inflation rate. Evidence shows that there do exist disparities between changes in observed exchange rates and those in inflation rates in the short-run. But, the theory should hold in the long-run.

(d) Interest rate: Interest rates are often highly related with inflation rates, and interest rate differentials between countries may be the result of inflation rate differentials. Therefore, interest rate differentials are also used as an important determinant of exchange rates.

Interest rates in a country are determined, under free market conditions, by supply of and demand for money. Funds flow across countries in search of opportunities for higher returns. These flows between any two countries cause opposite changes in demand of and supply for their respective currencies. According to the theory of International Fisher Effect, the exchange rate of a currency with higher interest rate will depreciate to offset the interest rate advantage achieved by foreign investments till an equilibrium is achieved.

Investments abroad have to be converted into home currency on maturity. Exchange rate may have changed in the meanwhile. An investor may make a forward sale of funds to be rapatriated on maturity. The process of investing abroad for higher returns and making a forward sale of the proceeds is known as covered interest arbitrage. An investment abroad will be undertaken if the return from interest rate differential exceeds the forward margin (difference between the forward and spot exchange rates). In general terms, the forward rate of the foreign currency will contain a discount (premium) if its interest rate is higher (lower) that that of the home currency. Covered interest arbitrages will go on fill the market forces realign the forward margins with the interest rate differentials.

(e) Relative Income Levels: If income level in a country raises and that in her trading partner remains unchanged, the demand by the former for the goods of the later may increase. That is, the former would need more units of currency of the later, while their supply remains unchanged. This would put upward pressure on the exchange rate of the later. There can be different configurations of the relative income levels and of corresponding exchange rates.

(f) Market expectations: Like other financial markets, foreign exchange markets react to any news that may have an effect on exchange rates in future. Expected developments regarding polity, economy etc. of a country are used to figure out how exchange rates would move. These peeps into future impinge on the present as well as the future spot rates.

GDP Revision Doesn’t Happen — EUR/USD Gains

EUR/USD reacted with a small drop immediately after the GDP release today but then retraced and is now trading with a considerable daily gain. The Q2 2009 GDP change value was expected to be negatively revised today but since the revision didn’t happen, traders react on a positive signal for the U.S. (and global) economy. EUR/USD is currently trading near 1.4269.
U.S. real GDP decreased at an annual rate of 1.0% in the second quarter of 2009 according the latest estimate report. Previous estimate report also showed a -1.0% change. Traders expected a revision of the estimate to a drop by 1.5%. The GDP fell by 6.4% in the first quarter of 2009.
Initial jobless claims declined to 570k last week, down from 580k a week before (revised from 576k). A decline to 565k was expected from this report.
Tags: GDP, initial jobless claimsNo Comments »
EUR/USD Down on Good U.S. NewsAugust 26th, 2009
After posting a clear doji candlestick yesterday, EUR/USD is now falling down despite the good fundamental reports from U.S. accompanied by the stock market growth there today. It’s a rather uncommon case for the dollar to gain with the good macroeconomic reports, but it looks like the traders are interpreting these positive factors as the signals that the U.S. interest rate will be raised soon. EUR/USD is now trading near 1.4238.
Durable goods orders increased by 4.9% in July after falling by 1.3% in June. Median forecasts by the market analysts pointed at 3% gain for the report.
Seasonally adjusted annual rate of the new home sales in U.S. went up from 395k to 433k in July. A further drop to 390k was expected by the traders.
Crude oil inventories increased by 0.2 million barrels last week, which is quite a insignificant change. Total motor gasoline inventories dropped by 0.7 million barrels during the same time.

Consumer Confidence Above 50 Boosts EUR/USD Up

The dollar is currently losing against the euro on the Forex arena after falling slightly yesterday. The European currency gains from the improved outlook for the global economy on positive consumer confidence and home price index in U.S. EUR/USD currency pair is now trading near 1.4324.
S&P/Case-Shiller home price index for 20 U.S. states reached a seasonally adjusted rate of 141.31 in June — that’s a 15.45% drop compared to June 2008 but at the same time it’s the first gain in the index in more than two years. This indicator was expected to be reported at -16.4% year-to-year change.
Richmond Fed manufacturing activity index for August was reported at the same unchanged level as in July — 14, while it was expected to grow up to 16.
Consumer confidence went up from 47.4 in July to 54.1 in August, signaling generally positive expectations of the consumers in the United States. A decline to 45 was forecasted by the economic analysts.
Tags: consumer confidence, Richmond Fed manufacturing index, S&P/Case-Shiller home price indexNo Comments »
How Long Have You Been Trading Forex?August 24th, 2009
I had begun to trade Forex back in August 2005 when I first heard about the company (Marketiva) that offers free $5 bonus to start trading Forex with them. It was interesting for me to try and at that time free $5 sounded like a lot to me, so I’ve opened an account. Since then I’ve been losing and wining and I have also changed my broker a lot of times but Forex trading has been a great part of my life since my first opened position. I believe that experience is one of the greatest teachers in Forex and that new traders rarely can start to win consistently without years of real on-line trading. So, in this new poll I’d like to know how long have you been in Forex.
How long have you been trading Forex?
Just started.
Several weeks.
Up to 1 year.
More than a year.
2+ years.
3+ years.
4+ years.
5 years or more.

BMFN — Regulated Forex Broker

BMFN (Boston Merchant Financial) is a Forex broker with a rather strict regulation over it, because it’s registered with NFA, FINRA, PolyReg and Russian FFMS. It’s a MetaTrader broker, but it offers several other trading platform, one of which is Currenex — a rather advanced and powerful trading tool. BMFN is quite a new on-line broker but they are already becoming popular. Other highlights of this broker include:
Gold, oil, CFD and futures trading
No-interest accounts on request
Payments via WebMoney, credit cards and wire transfer
$100 minim account size, 0.01 lot minim position and 2 pip spread on EUR/USD
Tags: Currenex, Forex broker, gold, MetaTrader, oilNo Comments »
EUR/USD Floats Near Open After Small Rise in Jobless ClaimsAugust 20th, 2009
The euro is trading slightly below its open level against the greenback after the initial jobless claims report showed a small rise today. EUR/USD is currently floating near 1.4219 after opening at 1.4233.
Initial jobless claims went up from 561k to 576k during the last week, while they were expected to go down to 550k.
Philadelphia Fed index increased from -7.5 to 4.2 in August. A rise to -2 was expected by the market analysts. Positive value of the indicator suggests that the business conditions in the region are improving.
Leading economic indicators index rose by 0.6% in United States in July. That wasn’t much of a surprise to the Forex traders as this indicator is based on already known values.
Tags: initial jobless claims, leading indicators, Philadelphia FedNo Comments »

Forex Justice - The Fair Forex Trading Forum

Don’t Get Eaten Alive

Foreign exchange currency trading is a risky business with much to lose and much to gain. As a professional forex broker and personal trader, I have realized the fast profits this market can reap, while witnessing the dog-eat-dog nature of the beast, in which buyers lose their shirts every minute.

Whether you are a forex trader or just curious about forex currency trading, you owe it to yourself to separate the wheat from the chafe. The Internet is awash in foreign exchange currency trading websites whose sole existences are dependent upon ignorant forex investors. From get-rich-quick forex software schemes to free forex training, forex educational seminars, free forex signals, forex forums, and more, the fraudulence that surrounds the fx trading market is frightening.

Forex trading is very different from the U.S. stock market. The major differences include:

• Forex has no central exchange
• Forex trading can be done around the clock
• Forex has no overseeing regulatory commission, such as the SEC

The forex market is a wild, open arena without rules, laws, or a governing body. No one cares if your money is taken. No one will lose any sleep if you’ve been lied to. There are no repercussions if you’re treated unfairly. Investors trade at their own risk and have no legal recourse to enforce justice.

I know. I’ve been there. The scammers have burned me more than once. In an attempt to further my own knowledge, I fell for the magical software sales pitches and followed the crooked paths to the stolen treasures, only to be let down ad nauseam.

I served my time as a forex broker, which was an eye-opening experience. I heard and saw the manipulation of client profits that was business as usual. It quickly shifted my interest in trading and brokering forex to that of protecting forex traders. I redirected my efforts from studying daily forex signals to researching forex websites. I was determined to devise a resource on which forex investors could rely for honest, fair information exchange.