Exports and imports
the higher prices and production costs within the country in comparison with overseas, the more imports than exports. Therefore the high level of prices inside the country and a low level of prices abroad usually means high rates for foreign currency. This factor, which in the 20s of XX century, was the most important, was called "purchasing power parity" exchange rates. According to the concept of purchasing power parity, a change in the ratio of exchange rates of the two countries under other equal terms in proportion to the ratio between the domestic prices and foreign prices.
the stronger the desire to have foreign goods and use foreign service, the higher the price have to offer for the foreign currency. With the growth of national income increases and the demand for imported goods. It causes the tendency to the depreciation of the national currency. On the other hand, high national income abroad reduces the price of the foreign currency. All this is due to the "country's propensity to import the": the growth of national income leads to the expansion of import almost to the same extent that domestic consumption increases.
If investors seek to get more foreign debt obligations, shares, bonds, Bank deposits or cash, they bid up the foreign currency. In contrast, payments of other countries to a certain state strengthen its national currency.
This factor determining the movement of capital, closely related to the currency speculation. If we were talking about export or payments on current operations, the rate of foreign currency is likely to be sluggish and fluctuate insignificantly. However, when the Euro falls from 1.04 to $ 0.97 per Euro, many are beginning to fear that he will fall even more. So they try to get rid of it. Increase the sales of the single currency and the reduction of demand for it as a result of short-term speculative capital movements contribute to the greater reduction in its rate.
So small fluctuations of the exchange rate often spontaneously worsen due to the movement of "hot money", which is transferred from one country to another at any hearing of the impending problems, change of political direction or the fluctuation of the exchange rate. When such "capital flight" starts on a large scale in one direction, it can lead to sudden movements exchange rates and even financial crisis
What causes the movement of the exchange rate
data release and waiting for the data release
To the concept of "data" may include the occurrence of the following events: publication of economic indicators of the countries-owners of the trading currency, information about the changes of interest rates in these countries, reviews of the state of economies and other events having a significant impact on the currency market (for example, fiscal year-end in Japan on March 31, the presentation of the Minister of Finance to the Parliament the draft state budget and other).
Waiting for some event and occurrence of this event are strong driving force in currency exchange rates. It is difficult to say, which has a stronger impact on the market, the event itself, or waiting for, but we can say with confidence that the output of serious data can lead to significant and long-term price fluctuations. Such important data include: Nonfarm payrolls, GDP, Industrial production, CPI, PPI and some others.
the date and time of an exit of one or another indicator are known in advance. There are so-called calendars economic indicators and the most important events in the life of individual States (with the indication of concrete dates or approximate time of release). Market expects these events. Appear expectations and forecasts of the value of the indicator can go and how it can be interpreted.
the Output data can lead to the sharp fluctuations in exchange rates. Depending on how market participants will interpret one or another indicator, the rate can go one way and the other side. This price movement can lead to the strengthening of existing trend, its correction or the beginning of a new trend. The result depends on several factors: the situation on the market, economic status of the host countries considered currencies, preliminary expectations and, finally, the value of a particular indicator.
for Example, after the release of upgoing indicators: GDP, Nonfarm payrolls, CPI, PPI may appear on the market talk of a possible increase in U.S. interest rates. Even if this change will happen in a few months now actively begin to buy US dollars against other currencies. Thus begins the up-trend for the dollar is a steady tendency of strengthening of the dollar against other currencies. After the publication about the change of rate correction can begin this movement.
With the release of those or other data (or any information, affecting the market) have the following saying: "sell at the exit to the good" (sell good news), and "buy the rumor, sell the fact" (buy on rumor, sell on fact). These Proverbs apply to situations where the market is waiting for some event.
before the information about this event occurs, the rate movement in a certain direction (the direction of the interpretation of a future event), i.e. market "mortgaged". So often after the data (if the information is consistent with expectations) price moves in the opposite direction. This is because the expectations were open position and when there was something waiting for, to close these positions. Does the so-called "profit taking" profit). The situation, when such events occur, characterized by the expression "priced in" (i.e. occurrence of this event has already priced in a rate of one currency to another).
the Activity of the funds
the First place by the impact on long-term trends in the movement of exchange rates occupy funds (hedge funds, investment, insurance, pension). One of directions of their activity is to invest in some currencies. Possessing huge resources, they can make some rate to move in a particular direction. Money management funds managers staff of the Foundation (fund managers). They are real professionals.
depending on The operating principles they can open long-term, medium-term and short-term positions. Fund managers make decisions on the basis of a serious analysis of the financial markets. They are armed with various types of analysis: fundamental, technical, computer, psychological, analysis of related markets. Fund managers on the basis of processed data are trying to foresee the consequences of the events in time to open positions in the right direction. Thus, one of the tasks of their activity is the game ahead of the curve.
Managers try to imagine the world currency market as a whole (so to speak from the height of his flight) and when the situation is clear, there is a choice of instruments and direction of trade. Of course, none of the analyses can give the ideal result. However, using proven (and совершенствующуюся) trading system and having considerable funds, funds are able to start, strengthen and correct the strongest trends.
the Activity of exporters and importers
Exporters and importers are users of the foreign exchange market (market users in their pure form. Exporters have a constant interest to sell foreign currency, while importers to buy it. Firms of repute engaged in export-import operations, there are analytical departments specialized in forecasting exchange rates to more or less profitable to sell or buy foreign currency.
the Significant impact of exporters and importers in the market is observed in the Japanese market, the dollar against the yen. If in the market there are not strong trends, exporters do not allow the rate to jump up and importers - deep down. Thus, they are able for some time to keep the rate within a certain range of levels (create "range trading"). From time to time in the analytical reviews of the market of the dollar against the yen indicating levels of possible market entry exporters (resistance level) and importers (support level).
For exporters and importers also important to track the trends in terms of currency risk hedging. By opening a position opposite to the future operation occurs minimize this type of risk (hedging of currency risks).
Impact of exporters and importers on the market is short-term and not the cause of global trends because the volumes of foreign trade transactions are insignificant compared to the total volume of operations on the currency market. Their activity often creates market rollbacks (corrections), because reaching certain levels becomes profitable to sell or buy foreign currency.
Statements of political leaders
pronouncements which affect the movement of currency exchange rates, appear in the reports, summits, meetings, press-conferences etc. (for example, the meeting of leaders of the countries of the Big Seven or press-conference after the discussion of interest rates).
the Journalists of information agencies Reuters, Bloomberg and others) are closely monitoring such speeches and in real time insert the hottest remarks in the column of the news (so-called "hot lines" or "hot news"). The influence of these utterances can be compared with the economic indicators.
most Often, the date and time of such performances are known. Market expects these events, so shortly before appear forecasts or rumors about what might be said and how it can be interpreted. However there are situations when this happens unexpectedly for the market. Then the market may start strong price fluctuations, which are not always predictable.
So, after the sensational resignation of the German Finance Minister Oskar Lafontaine (Oskar Lafontaine), the European single currency (the Euro) has risen relative to the us dollar by almost 400 points for only two hours.
If some pronouncements carry long-term consequences (for example, the possibility of changes in interest rates, the principles of formation of the state budget and other), then such movements may develop into long-term trends.
for Example, twice a year (winter and summer) all markets are closely watching the performances of the head of the Federal reserve Alan Greenspan before the two banking committees of the Congress (Humphrey Hawkins testimony). In the course of these interventions, market participants try to find in his words, at least a little hint for the future direction of changes in interest rates in the United States. Depending on how market participants words will be interpreted Greenspan, may establish one or another trend for the US dollar.
In relation to the political figures there is such concept, as "заговаривание course". This means that at certain moments of time when the national currency rate reaches levels, adverse to a particular state, they begin to say that, in their opinion, the course will not move further, that they will not allow its movement, that intervention is possible, etc., and because these people are trusted (they already have established credibility and they have specific powers), then their words begin to have a direct impact on the market.
it Often occurs after the strong and long-term trend in one direction. So after such speeches traders can decide to not tempt fate and start сквериться" (close existing positions). And this, in turn, leads to correction of this trend.
When the rate is really at the critical level, the following statements can be followed and interventions by Central banks. And it has very strong impact on the market - price can move one hundred points to the direction of intervention for a short time (sometimes for a few minutes). Moreover, intervention can make market participants to be afraid of opening positions in the old direction. This, in turn, can lead to price slumps.
the Activity of the Central banks
Its influence on the currency market of the state by the Central banks. If the Central Bank of a state absolutely not intervene in foreign exchange transactions by purchase and sale of foreign exchange on the foreign exchange market, the national currency is in the "free floating". In practice this is extremely rare. Countries with floating rates, from time to time try to influence the exchange rate through currency transactions. Such condition of the exchange is called a "dirty floating".
for production development and growth of consumption governments should regulate the exchange rate. Usually uses direct and indirect regulation. Indirectly control in circulation of money, inflation etc. Direct can be attributed discount policy and currency interventions in the foreign exchange markets.
Currency interventions are connected with a sharp discharge or as sharp withdrawal of significant amounts of funds from the international market. Output of the Central Bank on the currency exchange market through commercial banks. Because the volumes are very large (billions of dollars), then the currency interventions lead to significant movements of currency rates.
for Example, in 1998 the Central Bank of Japan the Bank of Japan held several interventions, the aim of which was to prevent the Japanese yen from further cheapening against the US dollar. Were thrown into the market of several billion dollars, which led to a significant decline in the dollar against the yen.
the Central banks of different countries can also execute joint interventions on the currency market. During one of the interventions on the market of the dollar against the yen in 1998 took part in it the Federal reserve system of the USA).
If at a certain stage of economic development it is necessary to devaluate the national currency, the government increases the supply of their currency on the international market. This is often done at the expense of additional issue of banknotes. If we need to raise the currency, the Central Bank buys on the international currency market its own currency. Such purchase exchange occurs at the expense of the existing Bank foreign exchange.
for Example, the Swiss national Bank (SNB) has followed the policy of cheap Swiss franc. So when it significant price increase, the national Bank of Switzerland "went" to the market and added liquidity (i.e. raise the supply of francs on the market at a lower rate) and the lowered rate of the national currency.
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