11 Factors that Influence the Forex Market
Forex market of a country and its performance is an excellent indicator of any nation’s economic health. If a country’s forex rate is moving in favour of the domestic currency, then this means that the country would be able to exchange more of another country’s currency. Confused…? Don’t worry! We would be clearing all your doubts here only.
In this post, we would be covering forex, it’s functioning, and the factors which affect the forex market. These determinants are duly explained and analyzed. Read them carefully and start trading
Forex and its Functioning
As the name suggests, foreign exchange (or forex) is the exchange of currencies between two or more countries.
When a country receives more foreign currency and spends less of the domestic money, then it strengthens the foreign exchange rate of the nation.
Some of the ways to make local currency strong are more exports, fewer imports, encouraging tourism, outsourcing more services, etc. Let’s understand this with the help of an example.
Suppose you want to travel to another country, let’s say Japan. Then, obviously, they would not be accepting your country’s base currency in their local market.
You need to exchange your money with the currency of Japan, i.e. Yen. After only this exchange, you would be able to purchase anything or pay someone there.
Here, you exchanged your currency for Japanese Yen, which would bring more foreign capital to their country and their exchange rate will move upward.
But, this was not the only thing which would influence the foreign exchange rate of a nation. Tourism is just a small fraction. There are a plethora of factors. Below is a fantastic list of those factors.
Have a look at them.
11 Factors which Decides Forex Market Situation
There are several factors which can affect a country’s forex market. If we would be discussing them all, then probably this article wouldn’t be enough.
But, we can discuss some of them which majorly affect forex. We have divided these factors into two broad categories, i.e. short term and long term.
Short Term Factors In Forex Market
The political surrounding is the first and significant factor which affects the forex market of a country. Investors usually prefer politically stable economies as political unrest in a country denotes uncertainty about the future of that nation.
The change in political parties plays a vital role in this. If a pro-fiscal growth party wins, then it attracts FDI and investors.
And vice versa, if an anti-growth party wins. Because it is the government which takes crucial decisions, spends money on the country’s growth, and makes favourable reforms.
A good investor always keeps a watch over the political news, events, and announcements of the forex trading country. For example, UK dollar shifted upwards after the news of BREXIT.
Interest rate decides how much return a lending party would be getting on his investment, i.e. return on capital. The central bank of a country usually decides this interest rate. How it affects the forex market?
An increase in interest rate would strengthen the currency rate as more investors would be willing to invest. It is because a higher interest rate would increase the return on capital. Thus, more and more people will buy that currency.
Market Situation and Factors
The market of a country also plays a crucial role in determining forex trading rates. Stability, demand & supply, prices of commodities, and taxes are some of the market factors.
For instance, if a country relies heavily on beef exports and the cost of beef rises suddenly. Then the currency of those exporting countries would move powerfully against other nations.
For example, gulf country’s primary revenue comes from the oil revenue and Norway is also a significant exporter of non-renewable energies. Thus, the prices of these commodities profoundly affect their forex market.
It is an indirect factor that might affect forex prices. Currency rates are volatile and fluctuate easily by news and events too.
For instance, if there is any speculation that the currency of a particular country would rise, then investors will get attracted towards it.
As a result, people will be buying more of that currency, and thus the value would automatically increase.
And the prices would fall if there are any bad speculations for any currency. Therefore, sometimes pseudo speculations are also created to earn profits.
Long Term Factors in Forex Market
It denotes the rise in the prices of goods and services in a country. Inflation and interest rates both are connected. An increase in interest rate would reduce inflation.
The inflation rate of a country has a massive impact on FDIs and thus on the forex market of that country.
A higher inflation rate is usually not so pleasing to the foreign investors because it reduces the purchasing power of people of that nation.
It means fewer goods would be accessible to the public for a certain amount due to the rise in inflation.
Therefore, a sudden increase in the inflation rate would weaken the exchange rate, and low growth in the same would attract FDI. Eventually, the currency rate would get affected.
For instance, the US had one of the lowest inflation rates in the world and thus attracted foreign capital.
However, it should also be noted that the interest rate is not the only factor affecting inflation. Therefore, only increasing it would not do wonders.
Good Economic growth of a country means more production, higher national income, and more demand and supply.
It is usually measured as GDP. Good growth also indicates lack of any turmoil (stable) in a country, which eventually attracts FDI.
Investors speculate if a country would grow positively or not, based on past indexes and charts. As a result, the currency rate fluctuates, favourably or unfavourably.
Balance of Payment (Deficits/Surplus)
A balance of payment is the difference between the value of a country’s exports and imports.
If the imports are comparatively higher than exports than that country’s balance of payment would be at a surplus.
If exports are higher, then the opposite situation happens; and thus the country would be in a deficit
BOP is a significant contributor to forex market price fluctuations. Surplus means a country is bringing more foreign capital by selling its goods to other countries.
Now, everybody starts to think, then why doesn’t the government provide maximum subsidies on exports and bulky taxes on imports.
Then, that country has to face retaliation from other countries for doing so, and in the long term, it ends up giving negative consequences.
Nobody lends money to an organization which is already debt-full. This happens with countries too. The more debt a nation is taking, the more it is becoming less attractive to investors.
Many would also argue that the debt from international organizations accelerates a country’s growth rate. But, when an investor is spending money on forex trading for an extended period, then the country with debt can’t be trusted.
Why can’t be trusted? Because, when the same debt would be returned, there would be an outflow of foreign capital borrowings, which would make the country’s currency weaker.
Unemployment of a country decides how a country is performing relative to its population.
Higher unemployment means more people have no or fewer income sources, which eventually reduces consumer expenditure. As a result, interest rates take a downturn and thus losing investor’s confidence in a nation.
Therefore, higher unemployment means a decrease in the exchange rate and vice versa.
National Policies: You must be wondering how any country’s national policies would be affecting the currency prices! But, here’s a chain you need to understand.
The national policy includes rules, regulations, and taxation policies, which then is directly related to FDI (foreign direct investment). And if a nation is attracting more FDI, then its currency is going to be healthy.
Also, if a strong country like the USA makes a policy against any particular nation, then the other country’s forex market might also get affected. Therefore, the policies are made after so much scrutiny.
Apart from the above-mentioned factors, there are many other factors too. Happening of a catastrophe suddenly, the situation of the capital market, unethical practices, etc. are some of them. These factors also indirectly affect the currency rate of a country
So, these were the factors that affect the foreign exchange rate of a country. If we try to observe and analyze the above factors, it is noticeable that all the game is of FDI.
If a country gets more foreign currency, then its currency bulks up. Consumer spending, export, import, ease of doing business, PPP (purchasing power parity), etc. play a significant role in this.
Now let’s just wrap this up!
The Bottom Line
Many people say that forex is an uncertain market and totally runs on predictions and speculations. However, it is not entirely true. These factors are the proofs.
Before entering into the trading, make sure you re-read this article. Also, have a proper forex market strategy in your mind, which would help you move up in this forex trading game.
Remember, understanding these factors would help you trade better. Keep an eagle watch over the country’s news, events and surroundings that, in whose currency you have invested.
But From our side,
Best of Luck!
Forex practice accounts are a free service that gets a divided vote: some like it while some are sick of it. Why? A freebie is always good news and a free practice account to help you acquire money-making skills can’t be bad.A practice account gives what it claims to give, which is free forex trading practice that is welcome news for neophyte traders. These Free practice Forex accounts are created by brokers with the idea of attracting people to forex, which is fine as they could increase the number of traders in their platform as well as the market. It also helps the new trader learn the ropes so the advantage works both ways.There is more to currency trading than using a simple click and go. While a lot of brokers create accounts requiring the lowest minimum deposits to start the trading experience for newbie traders, some have now made a practice account where ‘fake’ money is used to begin trading. The reason behind this is to get people interested in trading, find out how it works, and, by constant practice, gain confidence without having to burn cash. The practice account to instill knowledge and confidence are pretty good, but trading without risking anything may not work well in the long run.The introduction of fabulous amounts of ‘fake’ money will make the risk almost non-existent that will more likely encourage taking on more risks even on poor investments, which in reality you wouldn’t dare to do. This could give a false sense of security and overconfidence, which is not a good attitude to have in the trading business.Another scenario would be taking big risks and pulling them off, which gives you false confidence to pull another big one. When you pull that off too, you gain overconfidence that can encourage you to start real-time trading using your hard earned cash and taking big risks.Taking it slow and with great care are trademarks of successful traders, tempered with a good level of self-discipline. Practice trading is fine as long as trading is done as if you are handling real money.The best way for you to learn the ropes to become a successful trader would be to use the free practice for two weeks and opening a minimum account after that. This will teach you more about awareness, patience, discipline, and money management skills.
Books about Forex as well as forex trading itself are very popular nowadays. A great variety of Forex literature is available nowadays for those who are interested in trading. Every author takes on a teaching role and tries to teach a beginner-trader forex market wisdom, share experience and give advice. Traders, in their turn, spend hours searching for one book which will help them to achieve their goals in the forex market among this rich stream of publications. Many new books which are written by very experienced people become bestsellers and bring significant profit. It should be mentioned that there are a lot of books where negative experience is described; the authors share their questionable knowledge and as strange though it might sound they also managed to get a piece of the pie. How not to get lost in this numberless flow of publications, how to find a proper book? Is it worth to spend time on professional literature reading at all? Let’s try to figure this out. There are books where the writer shares ideas and indicators. But these indicators are not anymore up-to-date for the modern forex market and as a result don’t work. It’s safe to read about common terms, like forex market, but when the writer gives recommendations to the reader, some caution should be taken. In general, don’t pay too much attention to the technical advice given by the author. It’s much better to learn about trading psychology which is usually described in colors, with lots of details as the writer tells about his own experience. It should be mentioned that not only educational forex literature but also fine literature is available. However, only few books were published. One of the most popular books is Reminiscences of a Stock Operator. It may be considered an Aladdin's lamp not only for newbies but also for experienced traders. It can be even fascinating for those readers who have no idea what is the stock market. Among traders certainly there are people who will say: Do I actually need books? I can learn everything from my own experience. This position is fundamentally wrong. You will be able to learn everything by yourself with time, but Forex may disappoint you by the time you received this knowledge. There is a succinct and informative saying: Look before you leap. So, it is well suited to this situation; it is better to read about other people's mistakes than to make your own. Even traders with great experience read books about Forex from time to time. Let’s say they read these books for idle curiosity, but in the end they learn something new and improve their trading strategy. The foreign exchange market is a rather difficult environment; it definitely carries the risk of losing the invested money. It’s impossible to go on without basic knowledge. Studying specialized literature, one can get some idea about forex, its principles, major policies, and pros and cons. It is important to remember that no matter how good you are at theory you can’t succeed without practice; this experience can be gained only trading live. Mere knowledge does not guarantee that you will make a trader career and become a wealthy person. But this knowledge will help you to avoid many mistakes and it is important for the forex market player.
Those who do not know about commodity trading it would be a little weird to understand. People might not have thought that someone can earn profits just by speculating over the prices of essential daily life goods. Did you ever think about it? Don’t worry; you’ll be crystal clear after finishing up this fantastic post. In this article, we would be covering a significant query, i.e. how to trade commodities? But wait, we would not be just jumping into the steps. First, we would make you understand what commodity trading is? How it works, and what are the different types of commodities trading? Let’s begin now!!! Understanding Commodity Trading Commodity A commodity is just an essential good required in day-to-day lives. It could be oranges, gold, wheat, pulses, oil, metals etc. These are interchangeable assets which get transferred from one place to another. Also, these are raw (comes from earth); and further divided into two categories, i.e. soft commodities (wheat, sugar, and coffee) and hard commodities (metals and gas). Commodity Trading Just like forex market trades in currencies and shares are traded in the stock market. The commodity market is an exchange where investors can speculate over the prices of different commodities. It is a digital space where anybody can buy or sell the goods at a special rate. One can do this at current and future prices both. There is no need to own a commodity since the speculations are over a fixed agreed-on rate for a particular date. Different factors influence the costs of each good. Metals and agricultural products are popular trading commodities in this regard. Also, this is not a new concept. It dates back to 1530, even before forex and stock market came into existence, in America. How it works The commodity market is quite easy to understand. First, you choose a commodity to start. You have to trade at the current price of the asset. You do not need to own the underlying asset. Now, if the price of the good (which you chose) moves upward, then you’ll be getting the difference. And vice versa if the price moves downwards. Let’s understand this thing with the help of an example. Example: Suppose you want to trade wheat, and it is trading at €10,000 today, and you paid margin money at this price. If the rate of the wheat at the end of the day goes up, let’s say €12000. Now you bought the wheat at a lower price (10000) and can sell it at a higher rate (12000), because of the fluctuations. Thus, the difference would be your gain. Therefore it is said the factors play a significant role in this. You have to bear the losses in the same way if the price goes down. In this, you are trading at an agreed-upon price, and speculating about the price fluctuations. Now that you understand a commodity market, and how it works, its time to study different kinds of commodities, which can trade. Let’s start. Kinds of Commodity Trading 1) Agriculture Trading: Agricultural goods are the most popular trading assets in the commodity market. They are significantly volatile, and their profit potential is one of the best in the commodities market. It is because agro-based goods are used everywhere in the world. It includes products such as corn, wheat, soybean, cotton, sugar, and coffee. The prices of agricultural commodity trading get influenced by several environmental, legal, and political factors. Change in the taxation system, the weather condition in a particular year, agreements between international trade bodies, international customs duties, and customer’s taste are some of the factors. For example, if the European government decides to impose import taxes on wheat, it might impact its prices in the commodity market. The agricultural commodities are so vast in number that any regulatory body, national or international, can impact its chart. Fun Fact: Coffee is the second most traded commodity in the world, just after oil. 2) Metal Trading: One might not need to think much about what will come in this section. Gold, silver, platinum, etc. are some of its components. You don’t need to own a commodity to trade. Instead, you can speculate over prices from anywhere, anytime. The essential factors influencing metal trading are the supply and demand of any metal. But, changes in reserve policy, technology usage, and market conditions are also some significant factors. Metal trading is beneficial for those investors who do not want risk in their investment portfolio. It is much safer than other forms of trading because of its stability for decades. 3) Energy Trading: It includes both renewable and non-renewable forms of energy. Crude oil, coal, natural gas, and gasoline are some of the energy commodities. There’s no comparison when it comes to their importance in the world. We all need oil; to run factories, to fly planes, to run our cars, to make tires, and many more. Even many countries like the Gulf and Russia have a significant chunk of their revenues from oil trade. Yes, you guessed it right! OPEC* countries meeting would affect their prices significantly. Other factors include changes in policy or rules of significant economies, taxation, trade relationships between nations, political crisis, etc. OPEC: Stands for the organization of petroleum exporting countries. It includes 14 nations who are the world’s largest oil exporters. 4) Livestock Trading: It consists of the live and feeder cattle. With the standard of living increasing day-by-day among the people, the demand for protein is also on an upward side. It can also be a lucrative investment as the livestock industry has a share of trillions of dollars around the world. The significant factors influencing the livestock prices are demand, cattle quality, and cost of cattle feeding food. So, broadly these were the types of commodities which traded in the commodity market. One can select any asset from them (or choose a combination) based on their preferences and requirements. But, one should also not forget about the pros and cons of every commodity. Thus, as we said, homework is mandatory. Now, let’s just quickly move to the section for which you have come this far, i.e. how to trade commodities? Below are some astounding steps for the same. These steps are simple to understand and just require a read up. 3 Steps Guide to Trade Commodities 1) Know the market: Knowing the commodity market is the best thing you can do to start. There are so many factors and terminologies involved in the commodities market. One needs to understand them to trade efficiently. Yes, it is purchased just like any other market but, the price fluctuations vary from market to market. So, do your homework first before getting into it. 2) Find a Broker: After understanding the market, you need to find the person who’ll be your better half in commodity trading, a.k.a broker. The role of a broker is not just limited to making your trades, as per your demand. Instead, he should be helping you understand the market, helping you make the right financial decisions (without any personal bias), and suggesting best courses of action. A trustworthy and reliable broker is also needed because he will be holding your accounts and implementing your trades. Thus, safety and security are required. The broker will then perform all the paperwork and would verify all your details. It includes personal and financial information. 3)Placing the Order: After finding a reliable broker, it’s time to start your work. Consult with him and make your first purchase. The good thing about commodity trading is there are a plethora of assets to trade. Make sure to do proper fundamental and technical analysis of the commodity you’re choosing. The broker will make sure that your bank account has enough money to trade. You at least need to deposit 5-10% of margin money (depending on the trader) in your account before starting your trade. How will you earn? After you place your first order, now comes the real thing, which differentiates commodity trading from other forms of trading. Now the day you traded, the market will close, and a settlement price determined by the factors we discussed. And the difference between settlement price and price, which you placed an order, get debited or credited in your account. The contract is then terminated. You have the option of getting the commodity or getting paid in cash, according to the current price. Isn’t this guide short, sweet, and useful??? Now, what’s remaining in our pot? One last thing for you! One tip which might help you, when you’ll start trading. Give it a read. Best Commodity Market Tip before Starting Trade Make sure to read and analyze the news coming related to your commodity. And if you’re a beginner, it would be better for you to hire an adviser. Just make sure he has enough knowledge and experience to help you make sound decisions. The Bottom Line In the end, we would say that there is a commodity for everyone in the market. Whether you’re a beginner or experienced day trader or long term investor; there would be something for you. We would suggest you reread this article for better understanding because a single-point miss might become costly. If you want to play safe with the commodities, then metals trading would be a good option. However, if you are craving for profits, then shift towards agricultural products. Remember, your portfolio might get risky as prices get affected by anything like disasters, weather, politics, etc.