As one of the most examined Financial Markets in the World, Foreign Exchange continues to be a persuading topic among investors and beneficiaries. Due to the number of participants in the Foreign Exchange market place, many inquire about factors and trends that affect Exchange Rates; what are the determining ingredients and reasons why, within split seconds, the rates are hiked or lowered? What are the underlying components? The simple answer to these questions is the Law of Supply and Demand. As an illustration, if there is a consistent request for British products, Pound Sterling will increase, while, with a consistent decrease in demand of British Products the Pound may nosedive. Likewise, if there is fear of any currency’s appreciation due to events happening in the host country, people tend to sell the currency of such country, yielding a decrease in the demand and currency Exchange Rate.
Worth mentioning is that, Forex affects all and sundry. From the shopaholic, to the house wife, the business man and the investor taking calculated and non-calculated risks, everyone feels the impact of foreign exchange even though not everyone trades in the Forex market. However, to further give an in-depth explanation of events that significantly affects Foreign Exchange Rates all over the world, listed below are 25 political, global and economic occurrences to keep at your fingertips. When you follow these through, you will no longer be perplexed when rates take a plummet or have a sudden increase. With this information, currency trading will be done at right time as it will act as a guiding tool to prevent wrongful investments.
The past few years in Europe and America have been quiet eventful. The uncertain political events that becloud the region resulted in financial market fluctuating Foreign Exchange rates. Almost all political happenings (agreements and elections, among others) impact the currency of the Country. As two sides of a coin, both good and bad occurrences have a directly proportional impact on a country’s currency. Starting with one of the most recent, market players hold on to the hope that the effect will continue to be a boom and not a doom as recently experienced.
UK/ EU Brexit
The decision made by the UK to leave the EU met with an opposite response from the global market. As soon as news broke out, the Pound took a plunge. As of now, it is yet to recover fully to mirror its states before the referendum was finalized. The continuous fluctuation since October 2016 isn’t the usual condition of the Pound Sterling an in the History of Great Britain. Albeit, every cloud has a silver lining. The pound is gradually returning to its previous state as investors promise to remain steadfast. Generally, Brexit could cause a global recession, with continued negotiations and court hearings, the aftermath of the agreement between the UK and EU will determine many things. It is noteworthy to mention that despite Brexit’s uncertainty, the UK’s Finance industry still had up to 99 new FDI projects in 2016.
The Trump Era (United States)
With Promises from Trump’s Election manifesto, the Market had a positive turn. However, after few months of his administration, hos words on improving infrastructures seemed to be taking slower than expected. For these reasons, investors took a pause and the Dollar was said to have experienced its worst during the January that followed his election. In reality, Trumps agenda of putting America First may mean, the Dollar gets more competitive against other currencies, especially if the decision to have trade barriers between countries takes place. Furthermore, the travel ban imposed on people from Islamic dominated countries added to the Dollar Currency decline. In a nutshell, with the precariousness following many of trumps policies, investors are hesitant to rely on trading with America as they used to and with him controlling the driver’s seat, the Dollar’s fate is clearly unsure as the world watches on.
3. France Elections
Unlike the currency move that trailed US election and Brexit, Emmanuel Macron’s Victory in France had a minor impact on Foreign Exchange Rates. The following weeks after the Election, Foreign Exchange markets progressed greatly, especially in the Asia region.
4. Election in Italy
With the next presidential election set to take place in May 2018, the referendum in Italy to leave the Euro may mean one of the biggest risks for the EU says Ms Ramakrishna, an EU Analyst. If there is a ‘No Vote’, it will be highly detrimental to the EU and probably the Italy as a whole, still yet, a Yes Vote, means the single currency gets a breakthrough. The extent to which Foreign Exchange Rates will be affected is yet to be determined but there are postulations towards the notion that the Euro may decline immensely.
Election in the Netherlands
Anticipations for the election in Netherlands gave rise to an unstable Financial Market. Nonetheless, as Mark Rutte emerged winner, there was stability in Foreign Exchange Rates; it maintained the status quo.
6. Election in Germany
The expectation that Merkel will remain Germany’s chancellor after the coming election is considered an optimistic movement. The Country’ membership in the EU and the Euro currency will go untouched. If however, the populist movement wins, there is a likely-hood that come October, Germany may consider exiting the EU, a step that may further affect the Euro.
The value of a nation’s currency can be affected negatively by natural disasters such as floods, earthquakes, tornadoes, hurricanes and tsunamis etc. As with infrastructure destruction so also the currency can be affected; depending on the extent of its effect. Sometimes, there may be loss of employees, destruction of investor plants, manufacturing industries, and factories. Furthermore, when the government spends on repairs rather than invest into economic build up, such acts can affect the country negatively for a long time and consumers’ spending decrease as they try to put their lives back together. Examples of catastrophic disasters which affected the global economy and Forex rates were the Earthquakes in Japan in New Zealand. Although help was sent from other parts of the world, the repair actions their central banks took in a bid to reduce interest rates affected their currencies negatively.
The effect of Wars on a country’s currency has never been a good one. Just as the damage from natural disasters, the corresponding effect of any War remains for a long period. An effort to rebuild after a war tends to eat more into a country’s economy than other incidents. The aftermath of wars gives a massive blow to any nation’s economic outlook; a phenomenon that affects the currency, thereby having a ripple effect on its foreign exchange. Nevertheless, on the bright side, acts in preparation for war (ammunitions manufacture) could inflict a positive outcome on the economy. An example is the United State and the economic boom after World War II.
The sale of securities between countries can indicate if a country is stressed for a short or long term period, while a change in treasuries is tantamount to a direct effect on currency values. The higher the securities worth, the better for the country’s currency and Forex rates.
10. International Trade
International trade is the total measure of imports and exports between two or more countries. There can be an overboard of export and import, that is, where there is no balance of trade or a trade deficit (more imports than exports), the currency weakens. The sale of local currency to purchase imported goods will usually lower the currency’s Exchange rate. Sometime in 2002, the United States experienced a deficit due to massive trade with other countries and the dollar dropped by over 9%.
Balance of Payments
Balance of Payments follows International Trade. Where there are more imports than exports, the country may need to borrow foreign funds to patch up the deficit, resulting in lack of capital to finance the local current accounts which will definitely lead to a devaluation of the currency. On the other hand, if the value of export is higher than imports, then the currency will be in demand by beneficiaries of the export thereby, increasing the value of the currency with high export rates.
12. Government Policies
Policies made by a government can have either a detrimental or booming effect on the currency. Many of Trumps policies have made investors take a step backward in a bid to see how America unravels in the coming years. The more investors take interest in a country the better for the country and its currency but where policies are made to deter investors and locals from some trade agreements or extreme taxes are levied, it affects the currency and also the exchange rate.
13. Economic Releases
Information given by the economic department of a country can have an impact on the Exchange Rate. Details such as GDP, inflation, Employment and Unemployment rates etc. When investors or potential investors get a hold of these information, they are either enthusiastic to invest more or drawn back from investing. Whatever action follows the information released from time to time affects the currency and Forex rates.
14. Government Debt
The debt rate of any country is a deterring tool that largely affects the exchange rate. Owing in anyway shows lack of liquidity and ability to fund large projects. Government may have to print more money to pay off debts which results in inflation and investor disinterest. All these happening acts as factors for the decrease or increase of exchange rate.
When there is a hike in government debt, inflation is inevitable as investors propose to sell government bonds and foreign capital is beyond reach. For example, if inflation reduces in the UK, goods and services bought with the Pound will increase from other countries as export rates become competitive, giving rise to an increase in demand for Pound Sterling, a rise in exchange rate and vice versa.
16. Interest Rates
The average interest rate (assets and liabilities)Financial Institutions, Central Banks and other investment companies offer investors will encourage more investments in the country. A better interest rate will incite a demand for the currency of the country alongside the exchange rate, while a decrease or an overall low sum of interest rate may yield a revert from the currency to another currency with better rates.
World Analyst and speculators may postulate a fall or rise in a certain currency. Where there is a negative speculation, such currency will be sold to get the one with a higher value and vice versa. Speculators have a great impact on exchange rate as their words are believed over some other major events affecting Exchange Rate.
When Unemployment prevails in a country, the money spent by citizens reduces as those without job have less money to spend. Likewise, the employed ones are apprehensive of a job loss and also spend less. This process slows down the economy and creates a high possibility for currency devaluation, a situation that equally affects the country’s Foreign Exchange Rate.
19. Growth Expectancy
Yearly, economic growth is expected for every nation by a margin of 2%. However, if there is a sudden growth above the norm, the workers spending power decreases which lead to an inflation. The Central banks increases borrowing rate in a bid to lower consumer spending which may result to change in currency and Exchange Rates.
20. Gross Domestic Product
The overall GDP of a country is a pointer to how good the country’s economy is fairing. Factors such as inflation, interest rates and balance of trade all culminate in the overall GDP. When this is known to foreign investors, it indicates a time for investment or otherwise. When the GDP is high, it serves as a signal for investments and a boost in the country’s economy, giving rise to increase in demand for the currency and a favorable Exchange Rate.
As the name implies, recession depicts a downturn in the economic substance of a country. During these periods, foreign investors are uncertain on how the economy will turn out to be. This makes investors preempt more investments and either hold-off for some time or if the recession continues for a long duration, they pull out totally, especially where it results in a loss.
Sales of Retail Products
The amount of recorded sales in the retail sector is usually a reflection of the country’s yearly consumption. If the sales increased more than the previous year, it gives market participants an inclination of the economy’s strength. A weak indication discourages continuous participation and can prompt a decrease in demand for the currency and reduction in Exchange Rate.
Generally, continuous tourist activities improve the economy of a country, as there will be a continuous increase in demand for the country’s currency. An example of a country with tourist activities is the United Arab Emirates. Without taxation, the economy of the country seems to be faring well. Since anyone visiting the country must spend the currency, exchange rates will be in their favor as their currency is always in demand. Except for global recession, a country which focuses on tourism will continue to attract investors and impact Exchange Rates positively.
This list cannot be completed without having recourse to historical events that at one time or another affected Foreign Exchange Rates. The World War II was a period when every country felt the impact of currency decline and fluctuations in general. From the Euro establishment to the Plaza Accord, Free Floating System and more, Exchange Rates were profoundly impacted. It is however hoped that such occurrences have been laid to rest in our world and will no longer be a determinant of Foreign Exchange Rates.
Although it may be difficult to always preempt the Forex market, with the above information handy, traders will be able to make an informed choice while money senders and receivers will take proactive steps to ensure there is little or no loss with transactions.