Foreign exchange is a challenging market to be a novice in, and one of the first things you’ll need to learn about are the fundamental factors which have the potential to affect the currency markets. In essence, fundamental factors are the socioeconomic and geopolitical paradigms which affect currencies microscopically and macroscopically. So although they might be out of your personal control, they’re essential to be aware of and to understand if you want to make the most of the forex markets.
Politics
The policies set by a territory’s government have a significant impact on the inherent price of its currency. If a country is fiscally strict and only spends conservatively, it might find that in the wrong global circumstances, the price of its currency might fall. However, in other circumstances, a lack of public spending may force the public to spend, and this might kick-start the economy, driving the price of the currency up. With this happening around the globe with all of the world’s currencies, it’s easy to see how politics can have a major effect on the currency markets.
Trade
National and international trade is intrinsically tied to politics in that politics has a large effect on which goods and services nations trade with themselves and with other territories. When the trade relates to an asset which is in high demand but has little supply, its price may be high, and this leads to the exporting nation’s currency becoming more valuable as a result of GDP hikes. Conversely, if demand is weak, trade decreases and the GDP falls, resulting in a weak currency. This could be viewed as a simple factor to keep track of if you’re only looking at the trade of two nations. However, if you multiply this out for every country in the world and all the currencies they use, the situation becomes much more complex.
Inflation
Nations with high inflation rates tend to have low purchasing power, and this naturally leads to a decrease in the worth of its currency. Take a nation like Zimbabwe which – in 2009 – took the decision to allow its citizens to use foreign currencies natively instead of the Zimbabwean dollar. This resulted in an inflation rate of 5 billion perfect, and a horrific crash of the Z$.
Wars
Wars – whether civil or international – can have a large effect on the value of a currency. They make a region unstable, and as a result, the people of the nations involved are likely to alter their purchasing behaviours. This can result in unpredictable changes in a currency, where certain commodities fall in value, but others – which may have use during a war – might rise in value. Therefore, during a war, the currency markets are likely to fluctuate chaotically, making them a very dangerous, yet potentially lucrative time to trade.
Ultimately, none of these fundamental factors exist in a vacuum, and the effect of multiple factors operating in tandem has nonlinear effects. Therefore, if you’re looking to invest in forex, it would be wise to keep up to date with the fundamental factors which could affect your investments using an economic calendar.
