What are the political and economic factors associated with forex trading?

Forex Trading | by ForexCycle.com | Thursday, 24 October 2013 12:32 UTC
For people seeking to engage in forex trading, whether by directly buying currencies or by spreadbetting via a company like IG, the array of political and economic indicators that can move the currency markets can be bewildering.

The popular trading currencies are influenced by factors including interest rates, commodity prices, employment data, business confidence and many others. An announcement of a change in one economic indicator may push different currencies in different directions and to different extents. It pays to get to grips with this complexity and acquire an understanding of how the various indicators affect the currency markets.

The most obvious factor affecting forex trading are the various monetary policies operated by governments and central banks around the world. A common example of traders profiting from monetary policy decisions is when they take advantage of differing interest rates between countries via the carry trade. This involves borrowing the currency of a country with a low interest rate, using it to buy the currency of a country with a higher interest rate and then investing the money in that country. The trader thereby captures the difference in the two interest rates.

If the low interest rate currency appreciates against the high interest rate currency then any gains from the carry trade could be wiped out. This makes it important to pay attention to other factors affecting the comparative values of currencies.

A key factor for some currencies are commodity prices. Oil is strongly correlated with both the Canadian Dollar and the Japanese Yen. Canada has the second largest oil reserves in the world and is the largest supplier of oil to the US. As such, when the price of oil goes up, the Canadian Dollar tends to appreciate against other currencies. Conversely, Japan has next to no oil reserves of its own and is the world's third largest importer of oil. As a result the Yen tends to depreciate against other currencies when the oil price increases.

There are many other economic variables that can have an impact on currency values. News releases will emerge relating to these at different times each day. US releases have the most effect on markets on account of the fact that the US Dollar forms one side in 90% of traded currency pairs. It's vital to know when relevant news will be released and how it's likely to affect the market.

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