Forex Trading Market Drivers
There are 3 major contributing factors that can drive foreign currencies. These are interest rate increases, the rise in cost of gold per troy ounce and also the ever increasing cost of oil per barrel.
Driving Currency Prices Through Interest Rate Increases
Raising interest rates on borrowings means you and I will have to pay more for mortgages and other type of loans, but will be receiving more on our money market placements, bonds, treasury bills and other debt instruments. Raising interest rates plays a good part in increasing the cost of currency. Currency traders would think of this as another opportunity to make a profit in their investments by adjusting their trading position to be long on the currency whose government had just increased its interest rate on borrowings.
The reason why traders will anticipate an increase in the cost of currency of a country whose interest rate for borrowings had been increased by its government will be that foreign investors will opt to buy debt instruments of subject country, as they will be earning higher interest for their investments. As an example, if the US Fed decided to raise interest on its borrowings, foreign investors like the Japanese will likely buy more US treasury bills, Bonds and other government debt instruments because of higher rates. In doing so, they will be selling Japanese Yen and buy US Dollars to purchase them. This obtaining situation in effect, will strengthen the cost of US Dollar against the Japanese Yen.
Rising Gold Prices
Historically, financial analyst and economist alike would tend to say that there is an inverse relationship between the cost of US dollar and gold. Many would find gold as a country-neutral alternative to the US dollar. This inverse relationship between gold and dollar pricing in indicative that indeed gold is a forex market driver. This kind of a relationship would mean that any negative news or scenarios in the United States would translate to a positive adjustment in the price of gold. What is happening today is that because of inflation and political tension, the price of gold is getting higher while price of the US Dollar is sinking.
Traders in the currency market can look upon the price of gold as some sort of a measuring device with regards to the health of the US dollar, since the price of gold is indicative of the strength of the US currency. If you are a trader and has a long position on US dollar, what you have to do is changed your position by being short on US dollar and long on other currencies once you come to learn that the price of gold is going up, since this is a clear sign of a weakening US dollar.
Rising prices of gold will tend to drive higher the Canadian and Australian dollar because these two countries are in the top 5 gold producers of the world. One alternative when the price goes up is to be short in US dollar and go long in either Canadian or Australian dollar.
Rising Cost Of Oil
Oil dependent countries like the US and Japan will surely suffer financial set backs in case of another round of oil increases. This will impact on their economy and also on the strength of their individual currencies. Because of its effect, the increase in the cost of oil can be considered as one of the forex market drivers.
