Forex Markets
Forex Economic Factors
A number of global, European and British economic
factors affect the FX market. Here are some examples of those that will
most likely affect you.
Floating Exchange Rates - Technical Analysis
Floating exchange rates are affected by the flow
of imports and exports in Britain and other nations.
This includes the flow of capital, relative inflation
rates and other factors. To control fluctuations and
negative repercussions, many nations will place limits
on exchange rate fluctuations according to their government
policies.
Trade Balance
The merchandise trade balance is particularly affected by the exchange rate
between global currencies. The merchandise trade balance is the net difference
between the value of merchandise being exported and imported into a particular
country. For example, the merchandise trade balance between Britain and the US
is the net difference between the British demand for US dollars to buy American
merchandise, and the supply of US dollars affected by the British purchase of
US merchandise.
The Flow of Funds from Stocks and Bonds Purchases
The flow of funds between countries for stocks and bonds purchases also affects
the currency exchange rates. In the near term, capital flows are greatly influenced
by currency yield differentials.
Yield Differentials and their Affect on Currency
Values.
The difference between interest rates in various
countries and how it affects currency values is the
yield differential. As an example, let's use British
and American securities to illustrate how interest
rates affect exchange rates.
All else being equal, it stands to reason that a
higher yield on British securities (compared to American
securities) would make British securities more attractive.
What is more, an increase in British yields would
raise the flow of U.S. dollars into British securities,
and decrease the outflow of Pounds to American securities.
This increased flow of funds into Britain would lower
the value of the U.S. dollar and increase the value
of the British pound. Hence, the British
Pound to U.S.
dollar ratio, as it is represented in the foreign
exchange market, would potentially decrease.
Rate of inflation
British consumers try to avoid the eroding effect inflation has on their
purchasing power. Consequently, goods imported from countries with a low inflation
rate become
more attractive than the goods from countries with higher inflation rates. In
turn, the currency from the lower inflation country rises in value, while the
currency from the higher inflation country falls in value. Both the inflation
factor and the purchasing power of the currencies involved directly impact
currency
exchange rates. For example, if the United States is experiencing lower inflation
than its trading partner Germany, the DM/USD ratio would rise to reflect the growing
price level in Germany relative to the United States. This factor is rooted in
the concept of purchasing power parity. It holds that, over the long run, the
exchange of a particular currency will adjust to reflect the difference in the
price levels between countries.
Fundamental and Technical Analysis
Price movement in the currency market can be understood
better by analyzing the economic factors that can
affect the price of
a particular financial instrument. Fundamental Analysis
focuses on interest rates, trade balance, government
policies, market supply and demand, and a myriad
of other factors that can affect the intrinsic value
of a currency against another currency.
Technical Analysis, on the other hand, is based on the assumption that all
the economic, political factors, or even the effect of weather on the value (or
price) of a currency affects the 'market price' of a currency. It is therefore
only necessary to study the technical charts, which show all the effects, and
all the causes that a "fundamentalist" would study. Thus the study of
price movement is of primary importance to a "Technician" in order for
them to determine where the markets are headed.
In reality, both factors are important in calculating the value of buying and
selling global currencies. Whichever school of thought you respect, it is important
to realize that if the perceived value of a currency is over-priced it will be
sold, if the perceived value is under-priced it will be bought. If there are more
'sellers' in the currency marketplace, the price will go down. If there are more
'buyers' than 'sellers' the currency price will go up.
Cambridge Mercantile's British and Spanish forex
experts work hard to keep you informed. We are continually
performing technical analysis of currency factors,
while ensuring we keep on top of all current, relevant
forex market and news events. Rely on us for low foreign
exchange rates and excellent service.
Cambridge Mercantile UK offers
low foreign
exchange rates. Our foreign exchange services
include money
transfers, currency monitoring and currency quotes.
If you are purchasing properties
in Spain and need fast, secure transfer of your
money from Britain to Spain, Cambridge Mercantile's
UK or Spanish traders will be happy to assist you.
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