Forex Trading – Fundamental Market Forces

Your success or failure as a Forex Trader – Fundamental Market Forces will directly relate to several variables contributing to the main currencies’ long-term strengths or weaknesses.

Economic Growth and Outlook

• Foreign investors are attracted to countries with high economic development, which strengthens the local currency’s value. Low unemployment rates and rising salaries are the results of a thriving economy. In addition, increased purchasing power due to increased income indicates greater consumption of products and services. Thus, this contributes to the country’s economic development, and there is a rise in the currency’s value.
• But a high unemployment rate indicates poor economic development and prospects. This demonstrates that customers need more financial resources to support a thriving corporate sector. As a result, only the government (the central bank) makes purchases. The value of the currency drops as a result.
• Because of this, the currency markets will react positively and negatively to changes in economic forecasts.

Capital Flows

• Due to globalization and technological advancements, market participants now have the freedom to invest or spend nearly anywhere in the world.
• “Capital flows” refers to the inflows and outflows as investors move money into and out of a country’s economy.
• By examining the capital flow balance, which may be positive or negative, we can see how many foreign investors have put money into our nation.
• When the balance of a nation’s capital flows is positive, more money is being invested inside the country than is leaving it. However, if the balance is negative, foreign investment is outstripping domestic investment.
• Capital inflows indicate a rise in demand for a currency, which drives up its value due to increased investment from overseas purchasers. (because investors want to sell their currencies in order to purchase yours and buy yours).
• Take the USDINR exchange rate as an example; if cash flows in that direction at an unusually high rate in a given month, it’s a clear sign that overseas buyers are interested in investing in our nation. But, of course, this can only be done using the country’s currency. Therefore, there will be greater demand for INR and an excellent supply of foreign money (USD or Euro). Therefore, the decline in USDINR value is proportional to the size of the capital surplus or deficit.
• If more people are willing to sell a currency than want to buy it, the money will lose value. (Buyers are fewer.)
• Investors from other countries are more likely to put money into a nation that has
• elevated interest rates
• the rapid expansion of the economy
• an optimistic financial market

Trade Flows and Trade Balance

• Merchandise exchange between nations is a never-ending cycle. Some nations produce items for export, and some countries purchase those commodities from producers abroad. When a nation that exports goods becomes a buyer of goods from another country, it simultaneously transforms into an importing country.
• The amount of money flowing in and out of the economy is affected by the value of the items exported and imported. (value).
• A country’s trade balance is a ratio of exports to imports.
• A trade surplus occurs when a country’s export bills exceed import costs.
• A positive trade balance occurs when export receipts exceed import receipts.
• A negative trade balance, or trade deficit, occurs when a country’s import costs exceed its export costs.
• As the saying goes, a negative (-) trade balance occurs when import costs exceed export revenues.
• When a country’s trade surplus exceeds its deficit, it may expect its currency’s value to rise relative to other countries’ currencies.
• Generally speaking, the currencies of nations with a trade surplus are in higher demand and, hence, worth more than those of countries with a trade deficit.

The socio-political environment of a country

It’s far more appealing to foreign investors to put their money into a country with a reliable government and predictable business regulations. The present administration’s capacity to stabilize the economy is directly tied to its ability to maintain a favorable business climate, which may be negatively impacted by political instability or dramatic changes in the current administration. A country’s currency rate will react in kind to any change in the economy, favorable or not.