In today’s modern connected world, any development often comes with an impact on other situations. For the financial world, the rise and fall of a country’s economy or a particular type of commodity may influence the value of currencies. Considering the fact that forex trading is all about the value of currencies, it is imperative that we keep ourselves informed on the possibilities of this dynamic relationship. This will help us understand the undertones of the market better.
This article will show you 3 ways how an economic situation may affect the respective currency. Having this knowledge will no doubt add to your appreciation of forex trading.
1) General State Of A Country’s Economy
A country’s economy is one of the important underlying basis of value for it’s currency. When the economy is doing well, investors are confident that the promise of value represented by the currency is stable and hence demand increases. On the other hand, an economy in recession may ignite doubts about it’s currency. This leads to a reduction in demand and thus increase bearish pressure.
In our forecasts, we consider factors such as Gross Domestic Product or Retail Sales. These are vital indicators of the state of an economy.
An economy when broken down into it’s constituent parts, is all about demand and supply. To be able to demand, one needs to have something to give in return. In our modern world, that something is money. Employment is the major source of currencies for almost everyone. When the job market is doing well, salaries are attractive and unemployment is low. This equip consumers with money to spend and results in a positive feedback loop upstream as businesses gain revenue and expand. When the employment vitals are showing signs of distress such as rising unemployment, many investors and analysts view it as an early indicator of possible economic hardship. This may then result in downside pressure for the respective currency.
A great example for this dynamic relationship is the US Non-Farm Payroll. Increased volatility are often observed during the data release, especially when the results are of an unexpected nature. This sentimental knee jerk reaction suggests that investors place much importance on the state of employment in relationship to it’s respective currency.
3) Demand For Commodities
Commodities that are crucial for the modern way of life yield great influence on economies and currencies. This is specially so for countries that are major producers of the commodities as their economies are built around the business of production and exportation of the commodities.
If the price of a commodity crashes, the affected country may see a reduction of demand. This triggers an upstream flow of economic complications. For example, if the price of oil drops significantly, businesses providing oil transportation, extraction, survey, etc will see their revenues drop or they may even incur losses. Investors may then have doubts about the robustness of the economy and then reduce their holdings of the respective currency. Many analysts see a notable correlation between the Canadian Dollar and the price of oil. It comes with no surprise that Canada is a major producer of oil.
In our regular forex forecasts and premium analysis, we keep an eye on a number of crucial commodities such as gold and oil. Over the last decade, the correlations provided much useful insights.
The Bottom Line
Now that you are familiar with these 3 ways on how the economy may affect your forex trading, be sure to consider them as you formulate your trading plans. Often they may provide some clues as to the possibilities of momentum and price action.
You can tune in to our regular forex forecasts where we explore the fundamental, sentimental and technical considerations of the currency pair or subscribe to our premium analysis where you can access vital information such as the analysis of interest rates, unemployment, sentiment and more.