Currencies are bought and sold, just like other commodities, in markets called foreign exchange markets. The world's three most common. and economic growth and its volatility in our sample of EMEs? Second, what are the implications of exchange rate flexibility for financial market. The foreign exchange market is the market in which foreign currency—such as the yen or euro or pound—is traded for domestic currency—for example, the U.S. SHACOLAS TOWER NICOSIA BETTING

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Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy.

For example, trade deficits may have a negative impact on a nation's currency. Inflation levels and trends: Typically a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power , thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation.

Economic growth and health: Reports such as GDP, employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be. Productivity of an economy: Increasing productivity in an economy should positively influence the value of its currency.

Its effects are more prominent if the increase is in the traded sector. All exchange rates are susceptible to political instability and anticipations about the new ruling party. Political upheaval and instability can have a negative impact on a nation's economy. For example, destabilization of coalition governments in Pakistan and Thailand can negatively affect the value of their currencies.

Similarly, in a country experiencing financial difficulties, the rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Market psychology Market psychology and trader perceptions influence the foreign exchange market in a variety of ways: Flights to quality: Unsettling international events can lead to a " flight-to-quality ", a type of capital flight whereby investors move their assets to a perceived " safe haven ".

There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts. The US dollar, Swiss franc and gold have been traditional safe havens during times of political or economic uncertainty. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends.

It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought".

Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.

Many traders study price charts in order to identify such patterns. Spot trading is one of the most common types of forex trading. Often, a forex broker will charge a small fee to the client to roll-over the expiring transaction into a new identical transaction for a continuation of the trade. This roll-over fee is known as the "swap" fee.

Forward See also: Forward contract One way to deal with the foreign exchange risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be one day, a few days, months or years.

Usually the date is decided by both parties. Then the forward contract is negotiated and agreed upon by both parties. NDFs are popular for currencies with restrictions such as the Argentinian peso. In fact, a forex hedger can only hedge such risks with NDFs, as currencies such as the Argentinian peso cannot be traded on open markets like major currencies.

In a swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not standardized contracts and are not traded through an exchange. A rally or sell-off of securities originating from one country or another should be a clear signal that the future outlook for that economy has changed.

Similarly, many economies are sector-driven, such as Canada's commodity-based market. The Canadian dollar is heavily correlated with commodities, such as crude oil and metals. Commodity traders, like forex traders, rely heavily on economic data for their trades. In many cases, the same data will have a direct impact on both markets. Trading currency and commodity correlations is a fascinating topic. The bond markets are similarly critical to what is happening in the forex market since both fixed-income securities and currencies rely heavily on interest rates.

Treasury price fluctuations are a factor in the movements of exchange rates, which means that a change in yields will directly affect currency values. Therefore, it is essential to understand bonds , and especially government bonds , to excel as a forex trader. International Trade and Forex Another critical factor is the balance of trade between nations. The trade balance serves as a proxy for the relative demand for goods from a country. A nation with products or services that are in high demand internationally will typically see an appreciation of its currency.

For example, buyers must convert their money into Australian dollars if they want to purchase goods from Australia. The increased demand for the Australian dollar will put upward pressure on its value. On the other hand, countries with large trade deficits are net buyers of international goods. More of their currency is sold to purchase the currency of other nations to pay for foreign goods.

This type of situation is likely to have a negative impact on the value of an importing country's currency. Political News and Forex Markets The political landscape plays a vital role in the overall outlook for a country and, consequently, the perceived value of its currency.

Forex traders are constantly monitoring political news and events to anticipate changes in the economic policies of national governments. These can include shifts in government spending and adjustments in regulations imposed on particular sectors or industries.

Changes in rules regarding margin or leverage available to traders often have a dramatic impact on markets. Elections with uncertain outcomes are always significant events for currency markets. Exchange rates often react favorably to wins by pro-growth or fiscally responsible parties. A referendum can also have a substantial impact on exchange rates.

A good example is the Brexit vote, which had a dramatic effect on the British pound when the U. The fiscal and monetary policies of any government are the most critical factors in its economic decision making. Central bank decisions that impact interest rates are keenly watched by the forex market for any changes in key rates or the future outlook of policymakers. Economic Statistics and Forex Economic reports are the backbone of a forex trader's playbook.

Maintaining an economic report calendar is crucial to staying current in this fast-paced marketplace. Gross domestic product GDP may be the most visible economic statistic, as it is the baseline of a country's economic performance and strength. GDP measures the total output of goods and services produced within an economy. However, it is crucial to remember that GDP is a lagging indicator. That means it reports on events and trends that have already occurred.

Inflation is also a significant indicator, as it sends a signal of increasing price levels and falling purchasing power.

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