GLOBAL EVENTS THAT SHAPE THE FOREX MARKET
Foreign exchange market is the largest and most active financial market worldwide. In 2013, trading in the forex market averaged 5.3 trillion a day, according to Bank for International Settlement. Having said that, events from around the globe may immediately affect the market in one way or another. The following are some of the global events that can influence the currency market.
Political Events. Election is one of the most common events that occur in almost every country, which can influence a nation’s currency. For some traders and analysts, elections can bring potential political instability and uncertainty, possibly resulting to higher volatility in the value of a country’s currency. Most of the time, traders and analysts monitor pre-election surveys to have a glimpse of the likely outcome, particularly if there will be any changes at the top.
In the event the government changes the leadership, it normally implies a change in ideology for the nation’s citizens, meaning the new government may take a different approach to the country’s monetary or fiscal policy, or both, both drivers of a currency’s value. Also, political individuals or parties promoting economic growth tend bolster a currency’s relative value.
Another case: snap election. Sudden elections can cause chaos or trouble on the currency, regardless if it comes through a non-confidence vote, scandals, or from a government is being challenged in order to achieve a new, more democratic and economically open-minded government. Nevertheless, currency traders do not like uncertainty from politics because in most situations, political instability will outmatch any optimistic outcomes from a new government, and related currencies will typically sustain losses in the short run. But in the long run, currencies will settle more or less within the country’s economic growth projections.
Natural Disasters. A natural disaster such as earthquakes, floods, hurricanes, and tornados harm the country’s citizens and its currency. Aside from dubiety from natural disasters, damage to major factories and distribution, and loss of life negatively impact a currency.
Since the basic infrastructure is the backbone of an economy, damage to infrastructure is a major concern and can enormously constrict the economic output of a region. Moreover, any additional expenses, which could be used for economic progression, will be used for cleaning up and rebuilding following a disaster. Not to mention the consumer spending might decline because of potential economic uncertainty and loss of consumer confidence.
War. Similar to a natural disaster, the extent of a war - physical war - is brutal and expansive. Rebuilding efforts pertaining to war must often be funded with cheap capital resulting from lower interest rates, which declines the value of a currency. Volatility of currencies actively war are normally greater than those not involved.
But some economists have pointed out the possible economic advantage of war: There are some cases it can jump-start an economy, specifically manufacturing, when forced to channel its efforts on production during a war. Take the United States in World War II for instance. Following the attacks on Pearl Harbor, the country almost found it difficult to overcome the Great Depression. But America did, anyway. While this viewpoint is true, most economists agree countries should not improve an economy at the expense of human lives.
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