free download links about online stock trading, forex, futures, stock investing, market, trading systems
GEOPOLITICAL EVENTS, Monetary and Fiscal Policy, Inflation
Back to contents page

Like all markets, the currency market is affected by what is going on in the world. Key political events around the world can have a big impact on a country's economy and on the value of its respective currency. Turmoil, caused by labor strikes and terrorist attacks, as we have witnessed in this new millennium, can cause short-term price shocks in the currency mar kets. Terrorist attacks seem to have played more havoc on the energy markets than on the currency markets in 2006, but we need to be aware of any lasting economic impact these heinous acts have before we react by form ing an opinion and placing a trade. We have heard the term flight to safety, indicating that traders are moving money from one country to another, thereby causing shifts in currency values. These events need to be moni tored by forex traders as well.

Monetary and Fiscal Policy

When central banks act, it is called monetary policy. Other factors controlled by government decisions are referred to as fiscal policy changes, which are controlled by political concerns. Such changes can be linked to a change in specific laws, the changing of the guard, so to speak, such as how a new leader can and certainly does influence currency values. If a new leader is voted into office and does not have the confidence to run a country effectively, then we can see money leaving a country, which causes a decline in value of that currency. Therefore, these two points are major concerns for which forex traders should watch.

1. Economic conditions, including outlook on interest rates and inflation.

2. Fiscal policy changes and political leadership.

These factors have a long-term impact, which makes forex attractive to trade due to the long-term trending conditions established by central bank decisions based on these factors. Forex also offers investors some diversi fication, necessary as protection against adverse movements in the equity and bond markets.

Let's go over what you and I will see on a day-to-day basis through re ports and news events and apply what is otherwise known as fundamental analysis—the study of tangible information in order to anticipate supply and demand flows. Several events can directly affect the outcome of sup ply. For example, changes in interest rates from country A would make its currency less valuable compared to the currency of country B where one would receive a higher rate of return on money invested. This would certainly reduce the demand for country A's currency. That is a prime exam ple of a supply/demand-driven event.

How about trying to decide or to anticipate if there is a change in the strength or the weakness of an economy? This is where we really need to pay close attention to specific reports. For starters, a report showing a country's employment rate might reveal what the potential for future household disposable income is. It would give analysts and economists an idea of how much spending could occur due to the number of people working. Another aspect of fundamental analysis may be the ability to fol low and understand the political scene on both an international and a do mestic level.

If the European Central Bank meets and announces that it will raise in terest rates in a surprise move, this will have an immediate impact on the value of the euro and, inversely, the U.S. dollar. If values of these currencies shift abruptly and severely, then products that are imported and exported would be priced differently. Ultimately, this could cause a ripple effect on the prices of goods and services. It is important to understand and to inter pret what the potential outcome might be in the markets you are trading when these special reports are released. For a fundamental trader not to know what day or time a report is released could be hazardous to his fi nancial health. At the very least, even if you are a veteran trader or a be ginner, it cannot hurt to be aware of the main fundamental factors that might affect the markets you are trading. You should be aware of what could happen before most reports are released. That is why news services put out what time current events and special reports are coming out. Pub lications like Barron's Weekly, Investor's Business Daily, or the Wall Street Journal will most likely show you what you will need to know to stay in tune with the markets. Most forex dealers also provide special calendars that include the date and times that most major economic and agricultural reports are released. A calendar of events is also available free of charge. Trading is not an easy venture, and there is one bit of advice that I wish you would follow: Be aware of the day's current events if you are in the markets. Knowing about a major report before it is released is sometimes better only because you have a chance to eliminate a surpris ing adverse market move. You could always make an adjustment to your position before a report is released.

Another reason you want to follow the developments on the economy is because it usually dictates how various equity markets and financial products will perform. The stock market likes to see healthy economic growth because that equates to better or substantially larger corporate profits. The bond market prefers a slower sustainable growth rate that will not lead to inflationary pressures. By watching and tracking economic data, analysts and investors will be better able to stay in tune with the markets and their investments. Moreover, foreign capital flows may increase if U.S instruments are higher-yielding than those abroad. We want to track the value of these instruments because that can give us a clue that there will be a shift in currency values.

Understanding what fundamental events dictate the markets at a given time may give you better insight to trade a currency based on the price di rection of these financial products. The terms yield maturity, rates, and prices are all relevant in forex trading.

Smarter trading The art of day trading Trading Chaos Sane Investing In An Insane World
Beat The Odds In Forex Trading Robert Kiyosaki - Rich Dad, Poor Dad
The Five Rules For Successful Stock Investing Joe DiNapoli - Trading with DiNapoli Levels
Alexander Elder - Trading for a living