Forex 102: Factors Affecting the Global Currency Market

Many people find the 'predictions game' the most enjoyable aspect of Forex trading. In order

to develop solid mid-range and long-range trading strategies, you have to acquire a fairly

sophisticated knowledge of economics.

So, you ask, which factors most influence the global currency market?

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



We'll take a look at each area now, and how you can take advantage of these factors.

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

A second tactic involves generating income from

observed that a rise in a country's interest rate usually triggers a corresponding rise in

currency value.

The main thing to understand about

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.

interest income.capital appreciation. It has beeninterest income and capital appreciation is that any

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 mean 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

or exports with other countriestrade flow brings in the larger part of its income from by its trade

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