February 5, 2009 - 9:30am
All the parts of the economy are interconnected and have a mutual impact on each other. Currency is one of the most important instruments of the economic processes that at the same time influences them and falls under their influence. Changes in the economy environment have an effect on the currency rate while on the other hand currency rate can underlie many business decisions and economy trends. Our task in this post is to define the essence of the currency move and what impacts and stimulates this move.
As long as the world is divided into different countries that have their own monetary systems and inasmuch as all the countries though staying independent tend to integrate into the world community when trading with each other they have to make allowance for the fact that every state has its own currency. Hence, if they want to conduct a foreign business they need to exchange one currency for another that is accepted at a certain territory.
When both an individual or a company in one country, say U.S., decides to purchase some goods in another country, say France, they will have to pay the French for the item purchased in euros. Thus the Americans will have to exchange the equivalent value of U.S. dollars into euros. The same situation is with the traveling. If a German tourist comes to London they will need to exchange their euros into pounds if they want to move across the country and make some souvenir purchases.
These models illustrate the demand of the currency. Among main factors that drive the currency to move from one edge to another are demand and supply, interest rates, economic indicators, political stability and future performance of one currency against another.
Yet the examples described above are just general cases while there are particular places where the demand and supply strictly influence the currency movement. These are foreign exchange markets where investors make high profits or on the contrary suffer high losses at the expense of currency trading.
There are two main factors that impact the demand and supply at the foreign exchange market:
1. The Commitment of Traders Report
The report is published by the U.S. government every fortnight and reflects the three groups participating in the market:
Commercial hedgers – These are savvy traders who are hedging, not speculating - and they are unaffected by the emotions of greed and fear.
Large speculators – These are mostly funds, who are trend following - and always get caught at turning points.
Small speculators – This represents small individual traders - and they are the worst traders of all, as they are mainly motivated by the emotions of greed and fear
In case prices are traversing the fair value too far the commercials start moving actively the other way and a buying excitement begins. When they have gone too far the buying price collapses.
While greed and fear stimulate large and small investors to make their decisions commercials are just studying the facts. And when there is an aggressive price move while commercials go the opposite way to the trend and the positions of large and small speculators then the trend will inevitably change.
2. Percent Bullish
This is a poll of investors; brokers, fund managers, etc. - Percent bullish expresses their bullishness as a percentage.
A figure below 20% indicates too bearish market while a figure above 80% demonstrates a market is too bullish. When these numbers are achieved commercials turn on their activity and if their selling and buying lines up a change of the trend is imminent again.
Such factors as interest rates and economic indicators that impact currency move are usually related to the activity of the government and state financial institutions. Figures reflecting sales, housing, employment or industry conditions are indicative of the state of the economy. Thus retail sales data in a country reflect consumers’ spending level. The higher is the level the more there is a possibility of inflation which means general price levels rising. In this case the inflation is opposed by the raise of interest rates which lead to spending reduction.
In case there is data that show the decline of mortgages approved or house prices the central bank of a country may cut the interest rates to stimulate the housing market. If base rates are cut it means borrowing will be less expensive, encouraging spending.
In the UK, for instance, the body responsible for setting the interest rate is the Bank of England Monetary Policy Committee (MPC). There are 9 members in the committee. Every first full week of every month on the first Thursday the MPC members are gathered. On their meetings they discuss the condition of the country economy and vote on interest rate decision. As one source notes “They can vote to either; hike, hold or cut rates depending on their views on the economy.”
Thus, if the committee votes in favor of a hike, or an interest rate increase, the Pound as a result will ‘strengthen’. This in turn allows Britons to buy more foreign currency per Pound as long as foreign currency becomes less expensive. And on the other hand, cutting the rates will lead to opposite effect.
As long as the world is divided into different countries that have their own monetary systems and inasmuch as all the countries though staying independent tend to integrate into the world community when trading with each other they have to make allowance for the fact that every state has its own currency. Hence, if they want to conduct a foreign business they need to exchange one currency for another that is accepted at a certain territory.
When both an individual or a company in one country, say U.S., decides to purchase some goods in another country, say France, they will have to pay the French for the item purchased in euros. Thus the Americans will have to exchange the equivalent value of U.S. dollars into euros. The same situation is with the traveling. If a German tourist comes to London they will need to exchange their euros into pounds if they want to move across the country and make some souvenir purchases.
These models illustrate the demand of the currency. Among main factors that drive the currency to move from one edge to another are demand and supply, interest rates, economic indicators, political stability and future performance of one currency against another.
Yet the examples described above are just general cases while there are particular places where the demand and supply strictly influence the currency movement. These are foreign exchange markets where investors make high profits or on the contrary suffer high losses at the expense of currency trading.
There are two main factors that impact the demand and supply at the foreign exchange market:
1. The Commitment of Traders Report
The report is published by the U.S. government every fortnight and reflects the three groups participating in the market:
Commercial hedgers – These are savvy traders who are hedging, not speculating - and they are unaffected by the emotions of greed and fear.
Large speculators – These are mostly funds, who are trend following - and always get caught at turning points.
Small speculators – This represents small individual traders - and they are the worst traders of all, as they are mainly motivated by the emotions of greed and fear
In case prices are traversing the fair value too far the commercials start moving actively the other way and a buying excitement begins. When they have gone too far the buying price collapses.
While greed and fear stimulate large and small investors to make their decisions commercials are just studying the facts. And when there is an aggressive price move while commercials go the opposite way to the trend and the positions of large and small speculators then the trend will inevitably change.
2. Percent Bullish
This is a poll of investors; brokers, fund managers, etc. - Percent bullish expresses their bullishness as a percentage.
A figure below 20% indicates too bearish market while a figure above 80% demonstrates a market is too bullish. When these numbers are achieved commercials turn on their activity and if their selling and buying lines up a change of the trend is imminent again.
Such factors as interest rates and economic indicators that impact currency move are usually related to the activity of the government and state financial institutions. Figures reflecting sales, housing, employment or industry conditions are indicative of the state of the economy. Thus retail sales data in a country reflect consumers’ spending level. The higher is the level the more there is a possibility of inflation which means general price levels rising. In this case the inflation is opposed by the raise of interest rates which lead to spending reduction.
In case there is data that show the decline of mortgages approved or house prices the central bank of a country may cut the interest rates to stimulate the housing market. If base rates are cut it means borrowing will be less expensive, encouraging spending.
In the UK, for instance, the body responsible for setting the interest rate is the Bank of England Monetary Policy Committee (MPC). There are 9 members in the committee. Every first full week of every month on the first Thursday the MPC members are gathered. On their meetings they discuss the condition of the country economy and vote on interest rate decision. As one source notes “They can vote to either; hike, hold or cut rates depending on their views on the economy.”
Thus, if the committee votes in favor of a hike, or an interest rate increase, the Pound as a result will ‘strengthen’. This in turn allows Britons to buy more foreign currency per Pound as long as foreign currency becomes less expensive. And on the other hand, cutting the rates will lead to opposite effect.