Currency
prices reflect the balance of supply and demand
for currencies. Two primary factors affecting
supply and demand are interest rates and the
overall strength of the economy. Economic indicators
such as GDP, foreign investment, and the trade
balance reflect the general health of an economy
and are, therefore, responsible for the underlying
shifts in supply and demand for that currency.
There is a tremendous amount of data released
at regular intervals, some of which is more
important than others. Data related to interest
rates and international trade is looked at the
closest.
Interest
Rates
If the market has uncertainty
regarding interest rates, then any bit of news
regarding interest rates can directly affect
the currency markets. Traditionally, if a country
raises its interest rates, the currency of that
country will strengthen in relation to other
countries, as investors shift assets to that
country to gain a higher return. Hikes in interest
rates, however, are generally bad news for stock
markets. Some investors will transfer money
out of a country's stock market when interest
rates are hiked, believing that higher borrowing
costs will affect ballance sheet negatively
and result in devalued stock, causing the country's
currency to weaken. Which effect dominates can
be tricky, but generally there is a consensus
beforehand as to what the interest rate move
will do. Indicators that have the biggest impact
on interest rates are PPI, CPI, and GDP. Generally
the timing of interest rate moves are known
in advance. They take place after regularly
scheduled meetings by the BOE, FED, ECB, BOJ,
and other central banks.
International
Trade
The trade balance shows the net
difference over a period of time between a nation’s
exports and imports. When a country imports
more than it exports, the trade balance will
show a deficit, which is generally considered
unfavorable. For example, if US consumers wanted
Japanese products, major automobile dealers
might sell US dollars to pay for the import
of Japanese vehicles with yen. The flow of dollars
outside the US would then lead to a depreciation
in the value of the US dollar. Similarly if
trade figures show an increase in exports, dollars
will flow into the United States due to inreased
confidence in the economy and then the value
of the US dollar would increase. From the standpoint
of a national economy, a deficit in and of itself
is not necessarily a bad thing. However, if
the deficit is greater than market expectations
then it will trigger a negative price movement.
