Forex is an international marketplace that has participants from different parts of the world who carry out trades worth trillions of dollars of trades daily. Foreign exchange trading has turned into an international activity which implies that macroeconomic events all around have become much more important in the world of forex. Traders don’t need to side with the prominent currencies but they can offer a great starting point. Visit multibank group
Role of Macroeconomics in Forex
The forex market is largely steered by macroeconomic factors. These aspects affect a trader’s decision-making and help in establishing a currency’s value at a certain time. A country’s economic health plays a major role in a currency’s exchange rate. Economic health could keep changing on the basis of present events and with new information coming into the picture. Yet, a majority of the finest forex traders practice proper discipline and adhere to particular rules of trading. Let’s now look at the different aspects which can affect an economy and currency value:
Capital Markets and Forex
International capital markets could probably be the most obvious indicators of an economy’s health. One cannot easily ignore the information about capital markets that is made public. There is considerable media coverage along with by-the-minute updates on corporate dealings, institutions, as well as government entities. A rally or sell-off of securities stemming from a country could send out a clear message that the economy’s future move has changed its course.
In a similar way, several economies could be driven by different market sectors, for instance, Canada has a commodity-based market. The Canadian dollar is closely linked to commodities, like crude oil and metals.
If oil prices increase, the Canadian dollar would turn out to be stronger with respect to other currencies. Commodity traders also depend a lot on economic data for their trades. In multiple scenarios, the same data could affect forex as well as commodity markets.
International Trade and Forex
Yet another crucial aspect is the trade balance among nations. When there’s relative demand for products in a country, the trade balance serves as a proxy. A nation that is home to many goods and services that are in demand globally will witness an increase in its currency value.
On the other hand, if a country is dealing with a massive amount of trade deficit, they are most likely to be the top buyer of international products. A majority of their currency is used up in the purchase of currencies of other nations so they can pay for the items imported. This is detrimental to the currency value of the country that is importing goods.
Political News and Forex Markets
The political landscape is a major factor in how a country and its currency is perceived. Forex traders keep a track of political news and events to predict if any changes in economic policies are likely. These could take into account a switch in government spending and tweaking of regulations imposed on certain sectors or industries. Any updates in margin rules of available leverage for traders could drastically affect the markets.
Elections, where the results are not certain, are also important for the currency markets. Exchange rates tend to work in favour of pro-growth wins. A referendum could also play a key role in exchange rates.
The fiscal and monetary policies of a government are among the central aspects of its economic decisions. Central bank decisions which could affect interest rates are monitored closely by the forex market for any updates in the rates or the future approach of policymakers.
Economic Statistics and Forex
Economic reports are at the heart of a forex trader’s rulebook. It is important to keep an economic report calendar to stay on top of the ever-changing marketplace. Gross domestic product (GDP) could be the most prominent statistic since it is at the centre of a nation’s economic health and strength. GDP calculates the overall output of goods and services that are produced in an economy. Yet, it is important to note that GDP is a lagging indicator, which implies that it takes into account the trends and events which have already taken place over a course of time.
Inflation is yet another key indicator since it indicates that the prices are rising and the buying capacity is falling. But remember that inflation is a double-edged sword. Some see it as a factor that places downward pressure on a currency as it cuts down buying capacity but it is also something that can steer currency appreciation. This happens when central bankers are forced to hike currency rates to keep a check on rising inflation levels. Employment levels, retail sales, manufacturing indexes, and capacity utilization could also hold key details about the present and anticipated strength of an economy and its currency.
Public debt
This is the sum a government owes to international lenders outside of the country who could be well-to-do individuals, businesses, or other governments. It’s typically what politicians would choose instead of increasing taxes.
Public debt could turn out to be a way in which countries could get funds to boost their economic growth, since it could be helpful in improving their living standard by encouraging citizens to spend more.
But, it is something that should be used wisely. Should the government be under a lot of debt, interest rates could go up and be detrimental to economic growth.
Terms of trade
Terms of trade (TOT) indicate the relationship between export and import prices. It is depicted in a form of a percentage. To calculate the TOT, divide the price of exports by the price of imports, and then multiply the figure by 100. Know more horario del mercado de divisas
If the TOT turns out to be lower than 100%, it shows that the amount of money leaving the country is more than what the country earns. The opposite is true if the TOT turns out to be more than 100%. The TOT is an indicator that shows how a country’s economy is doing and to assess the reasons behind an increase in import and export rates.