Biggest Forex Market Movers
Inflation
An economy’s inflation rate is one of the main determinants of a country’s exchange rate, defined as the general price level of goods and services. A higher than expected inflation rate is generally neg-ative for the associated currency since the price level is relatively higher than inflation in other countries, diluting its value.
An economy’s inflation rate and the purchas-ing power of its currency are inversely relat-ed, where a lower rate of inflation translates to an improvement in purchasing power.
The difference between two currency’s infla-tion rates is known as the inflation differen-tial and if it begins to widen, you would want to buy the lower inflation currency and sell the higher inflation currency.
The major data release for inflation is the consumer price index (CPI), one of the strongest indicators of an economy’s health. A high inflation rate discourages investment, reduces the purchasing power of consum-ers and makes planning for the future more difficult.
Conversely, a low and stable inflation rate encourages investment, increases the pur-chasing power of consumers and business-es can plan for the future more easily.
Employment
Similarly, the employment situation in an economy is another determinant of a coun-try’s exchange rate, since economic activity can be framed in terms of employment and unemployment.
Since people possess skills, knowledge and experience, this human capital can be used to produce more goods and services and improve productivity. The more people that are employed, the higher economic output should be. Therefore, employment data releases have a substantial effect on ex-change rates.
A higher than expected employment rate should boost the currency in ques-tion, whereas a lower than expected em-ployment rate should depress the value of that currency.
For unemployment rates, this relationship is reversed where a higher than anticipated unemployment rate should act to depress the currency in question.
The most important employment data re-lease in foreign exchange markets is the US Non-Farm Payroll figures. Some other important data releases are the unemploy-ment rate, participation rate and other labour market statistics, all of which have a moder-ate to high impact on exchange rates.
Trade balance
Trade with other countries is a major part of most economies and therefore the trade balance can affect the value of a currency.
If a country exports more and more goods and services, this will increase the demand for that currency and hence its price. However, if an economy in-creases its imports over time, this in-creases the selling pressure on that currency and it should depreciate over time.
The trade balance is simply the ratio of exports to imports for a given country. If exports are higher than imports, then the country is said to have a trade surplus - in-dicating that the demand for the economy’s goods and services, as well as its currency, is strong.
However, if imports are higher than exports, then the country has a trade deficit - in-dicating demand for the country’s goods, services, and currency is not so strong.
As with other indicators, trade balance data is usually released monthly and has a moderate effect on exchange rates. A better than anticipated trade balance could be viewed positively for the currency and result in appreciation whereas a worse than expected trade balance will have the oppo-site effect.
Quantitative easing
Quantitative easing is an unconventional monetary policy tool that is used to expand a central bank’s balance sheet. It is often com-pared to printing more money, as it expands the base money supply.
Money supply and inflation are linked, where a higher money supply should translate into higher inflation and lower purchasing pow-er. The USA, Eurozone, Japan and the UK have all engaged in quantitative easing, with the Eurozone being the most aggressive. Also, the timing of their quantitative easing programs has differed.
Therefore, you can use these poli-cies to make trades on the forex market. For instance, once the US started to wind down quantitative easing, the Eurozone geared up for more quantitative easing. You could have sold EUR-USD over the long term to take advantage of this devel-opment.
Also, the US Federal Reserve has recently indicated that further quantitative easing may be necessary. If this materializes, then it would be a good time to short a currency pair such as USD-ZAR or USD-MYR, since South Africa and Malaysia are two fast-grow-ing economies that have not needed to implement quantitative easing.
Country politics
The political situation of a country can have a significant effect on its economy. A new presi-dent or prime minister might make radical changes to the economy. There’s no better example than Donald Trump in the US, who has been increasing protectionist measures by raising tariffs against other countries and introducing more obstacles for trade.
Similarly, a revolution or coup can severely affect a country’s currency as exchange rates are often based on the perception of an economy. If people do not feel like their money is safe in a coun-try, they will sell that currency and seek a safe haven in a different currency.
Politics is also important for a country’s sta-bility. For instance, China has a one hundred year plan in place as it is a communist state, whereas many Western countries change their leaders every four or five years.
The relative instability could have an adverse effect on the economy, as problems from the last administration are addressed but a whole new set of problems are introduced, leaving the next leading political party to pick them up once they are in power.
Interest rates
Interest rates are the most important tool central banks have and they are used to in-fluence lending and savings and borrowing or consumption.
A higher interest rate incentivizes investment and saving, since people will get more interest on their deposits and receive more in interest payments when borrowing to others.
However, a lower rate of interest incentivizes borrowing and consumption, since it is cheap - er to borrow money for that new car or house someone has always wanted.
The rate of interest also affects the flow of money across borders. For ex-ample, suppose interest rates in the UK are 2 percent while in Germany they are 5 percent. People with savings in the bank would move their money into German banks to get a higher rate of interest, in effect, selling their Pounds and buying euros. Therefore, changes in the interest rate are high impact events for exchange rates.
Also, monetary policy announcements are made regularly by the major central banks and if you think the interest rate will be lower or higher than expected, then you can trade that currency and take advantage of the vola-tility following these announcements.