Introduction
· Looking at the market from the angle of supply and demand, focusing on the forces that drive them (economic, political factors)
· Currency is a gauge of how well an economy is doing. Strong economy equals strong currency and vice-versa
· Whose economy is doing well? Whose economy is doing poorly?
· Can give insight to market conditions, not necessarily market prices.
Effects
· Interest Rate Effect
As country's interest rate goes up, strength of that country's currency will go up.
Reason: higher interest rate in a country entices foreign investors to put their money into that country. The higher interest rate will give the investor a return of that interest rate percentage before the currency even moves.
· Gold Effect
Inverse Relationship between gold price and USD, so as gold's price goes up, USD will go down or as gold goes down then USD will go up
Reason: This inverse relationship is due to gold being seen as a solid, safe commodity. If there is instability in another commodity or currency, the amount of gold purchased will rise because it is a strong commodity to have in times of instability. Also, the change in the price of gold can be an indicator of the direction of change in the currencies whose countries are large producers and exporters of gold (South Africa, Australia).
· Oil Effect
As oil prices go up, the value of oil-dependent country currency is more likely to go down. Otherwise, if oil prices rally, price of currency of oil-exporter country is likely to rally in near term. (Canada, Norway, Russia, Mexico).
Reason: due to the sensitivity of the country's economy to oil (i.e. JPY, USD)
Economic Indicators
· Major economic indicators normally are:
The Gross Domestic Product (GDP), Industrial Production, Purchasing Managers Index (PMI), Producer Price Index (PPI), Consumer Price Index (CPI), Durable Goods, Unemployment Rate, Non-Farm Payrolls, Retail Sales, Housing Starts
· Information on the economy published by governmental agencies or the private sector
· Many people follow these indicators, so they have the ability to move prices and volume in huge amounts