Factors Affecting The Global Forex Market

Many people find the 'predictions game' the most enjoyable aspect of Forex trading. In order to develop solid mid-rang and long-range trading strategies, you have to acquire a fairly sophisticated knowledge of economics.

There are 5 key areas you need to pay attention to in order to become a top-notch Forex investor:

	Interest Rates
	Economic Growth
	Mergers and Acquisitions
	Trade and Capital Flow
	Geo-Politics

Interest Rates

The Forex market allows you to profit from differences between the interest rates of different countries. Interest rates on a currency from a given country are set by that country's central bank.

In general, you want to purchase low interest rate currencies first, and use these to finance your purchase of high interest currencies or other instruments. This tactic is known as generating interest income.

A second tactic involves generating income from capital appreciation. It has been observed that a rise in a country's interest rate usually triggers a corresponding rise in currency value.

The main thing to understand about interest income and capital appreciation is that any shift in interest rates presents you with an opportunity to play interest rate differentials against each other.

The corresponding rise and fall in currency values means that interest rates make for powerful and generally very reliable Forex indicators.

Economic Growth

Positive economic growth is strongly tied to a rise in currency value. Why?

When an economy is in a growth period, inflation tends to follow. What do the central banks do when the threat of inflation is looming ahead? Typically, they raise interest rates in order to slow down the economic boom just a bit.

Now, when interest rates go up, investors - especially foreign investors - start putting more money into the economy. More investors means more demand for the currency. So, the value of the currency goes up.

Likewise, a slow in growth or even a significant downturn will cause the reverse of this chain reaction to take place. Central banks tend to cut interest rates to give sluggish economies a shot in the arm.

However, lower interest rates mean lower returns for investors. They respond by pulling out of the market. This results in less demand for the currency, followed by a drop in currency value.

Mergers and Acquisitions

Mergers and acquisitions are relevant indicators, though perhaps not as strong as the others discussed here.

However, mergers and acquisitions between large, multinational companies can and do have an impact on currency values for the short-term. The reason should be fairly clear when you think about it.

In order to complete an acquisition, for example, the corporation that is attempting to purchase a corporation based in another country must enter the Forex market to purchase the corresponding currency.

During the window of time that the acquisition is pending, it is not unusual to see a spike in currency value on both sides.

Trade and Capital Flow

Countries may be said to be dependent on either trade flow or capital flow.

A country dependent on trade flow brings in the larger part of its income from by its trade or exports with other countries.

Some examples of trade flow dependent economies include:

• Canada - oil exports
• Australia - precious metals exports
• New Zealand - agricultural exports
• Japan - electronics and automotive exports

Each of these countries depend largely on their foreign exports for economic growth. Remember when Japan's economy was booming due to all the cars and electronics they were exporting across the world?

A country dependent upon capital flow brings in the bulk of its income by attracting outside, foreign investments. The U.S. and Great Britain are primary examples of capital flow dependent countries.

This is because the financial investment markets, on the whole, are very large and highly liquid in these countries. They draw in a steady pool of investors both from within and without, but are particularly reliant on the influx of capital from foreign investors.

Take from this another set of potential Forex signals to watch:

• Any event impacting the flow of trade
• Any event impacting the flow of capital

And keep in mind that these events may be something more than new trade agreements or faltering investor confidence. Natural disasters, for example, can have an impact on trade dependent countries that rely on agriculture for their exports.

Geo-Politics

Unlike stocks, currencies are quite sensitive to events in the political sphere. In a way, currencies are a lot like “flags” - they may represent everything good and bad about the country they serve.

It is not unusual for foreign investors to devalue currencies intentionally as a way of sending a message about a country's politics. It is also quite common for adversarial governments to take actions towards devaluing the currency of an 'enemy' or problem country.

One need look no further than the current controversy surrounding the United States' war effort. The Dollar has taken a beating along with the U.S. in terms of image.

Many countries are now threatening to denominate their oil exchanges in currencies other than the U.S. Dollar (which has been standard since the 1970s'), as well. If that occurs, the almighty Dollar may crash farther than it ever has at any time in history.

So, pay attention to politics as much as you can!

Any time a major political player does something to indicate a vote of confidence (or lack thereof) in his own country or another, you're sure to see a corresponding change in currency value.

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