There are some fundamental factors that determine the long-term trend profile of a currency pair. Listed below are the most important of these factors:
Foreign Exchange Fundamental Analysis-Long-term Determinants of Foreign Exchange Market Price Trends-Yuhui International
Economic growth and its prospects
Let’s start with the simple factor of the economy and the economic prospects held by consumers, businesses, and governments. It is easy to understand that when consumers anticipate a strong economic performance, they will be happy and their lives will be safe. The company is more willing to spend money and says, “We are making good profits, which is great! How can we use these funds?”
Rich companies will choose to spend money. Moreover, the good profitability of enterprises will also increase the government’s tax revenue. The enterprise is rich, and the vast number of consumers as employees are naturally pursuing their wallets. Enterprises, governments and individuals are willing to expand spending, which will have a positive impact on the economy.
On the other hand, the weak economic performance is accompanied by consumers’ unwillingness to consume, companies unable to make money and reluctance to invest. In this case, the government becomes the only party still spending money. You should now know that both positive and negative economic prospects will have a direct impact on the currency market.
Globalization, technological progress, and the rise of the Internet have made the flow of capital worldwide a reality. You only need to click the mouse to choose to invest in the New York or London stock market, or open a foreign exchange trading account to trade dollars, euros, yen and other currencies.
Large sums of money flow from country to country in search of higher rates of return and better investment opportunities. It is important to maintain a balance of capital flows. For a country, capital can be a net inflow or a net outflow.
When a country’s net capital inflows, the size of the foreign investor’s investment in the country is greater than the size of the funds drawn from the country. A country’s net capital outflow is just the opposite.
As more investment flows into the country, the demand for the country’s currency will rise, and overseas investors will sell the currency they hold and exchange it for the local currency of the investment country. This demand will cause the country’s currency to appreciate.
If the supply of a currency is strong and the demand is weak, the currency tends to depreciate. When both overseas and domestic investors intend to withdraw capital from the country, if you hold a large amount of the country’s currency on hand, then you have to be vigilant. You better consider whether you need to buy overseas and domestic investors. Invest in the currency of the country or economy because almost everyone is doing it.
Foreign capital loves investing in countries with high interest rates and strong economic growth. If a country’s domestic financial market is also booming, it is even better. The booming stock market and higher interest rates are no better for international capital. These factors will promote the influx of international capital, which in turn will increase the country’s currency demand, and the result will be the appreciation of the country’s currency.
Trade Flow & Trade Balance
The market we are in is a global market. A parliament sells the country’s commodities to countries that need them (exports), and at the same time, a country also buys the commodities they need (imports) from other countries. Looking at the items in our house, we know that most of the daily necessities, such as household appliances, clothing, toys, etc. are imported from abroad.
Every time you buy an item, you need to let you spend your hard-earned banknotes.
When American importers buy goods from Chinese exporters, they will convert US dollars into Renminbi, and when Chinese exporters buy goods from European exporters, they will convert Renminbi into Euros.
All these buying and selling activities are accompanied by currency transactions, which in turn affect the amount of money flowing into or out of a country.
Trade balance or net export measures the proportional relationship between exports and imports of a particular economy. It shows us the demand for goods and services in the country, and finally shows the demand for currency in the country. If exports are greater than imports, the country has a trade surplus and net exports are positive. If imports are greater than exports, the country has a trade deficit and net exports are negative.
We intuitively express this relationship as a formula:
⊙ Export>Import=Trade Surplus=Net Export is Positive
⊙ Import>Export=Trade deficit=Net export is negative
A trade deficit may cause a country’s currency to fall compared to other currencies. The net importing country needs to exchange the country’s currency for foreign currency to purchase local goods. When there is a trade deficit, the local currency is continuously sold to buy foreign products. In view of this, the currency demand of trade deficit countries is lower than that of trade surplus countries.
In contrast, the currency demand of the trade surplus countries is stronger, which will promote the currency appreciation of the country. The currency value of a currency is affected to a large extent by the external demand for the country’s currency. A currency with high demand has a higher value than a currency with lower demand.
Let’s use popular stars as an example, which will deepen your understanding. Because Lady Gaga’s market demand is higher than that of Britney Spears, she received a higher performance fee than Britney’s.
Current and future government
Since 2009, more focus of the market has turned to the governments of some countries, especially the governments of the euro zone countries. Since the outbreak of the European debt crisis, more and more euro area countries have fallen into debt quagmire and cannot extricate themselves. Investors hope that the authorities will take responsible fiscal measures to ease market concerns. The political instability in various countries has accelerated the spread of the crisis.
The instability of the current government, or the replacement of a head of state, may directly adversely affect the economy of the country, and even its neighbors are inevitable. The impact of political instability on the economy is likely to affect the currency exchange rate of the country.
News and market data
If you search for “foreign exchange + news” on Baidu, you will find millions of related search results, and if you search for “foreign exchange + data”, this result is more than 6 million.
Yes, that’s all. No wonder you need to come here to learn related courses. In the field of foreign exchange, there is indeed too much information to be processed, and there are too many things that will trouble newcomers. Of course, there is a lot of outdated information that we have seen today in so much information.
However, to become a successful trader, we need to uphold the belief that “information is king”.
Prices will change due to the publication of all the following information: economic reports, central bank officials’ speeches, interest rate changes, etc.
Your goal is to succeed in trading, and when you understand why prices are trending, success will be easier for you. Successful traders are not born, they need to receive relevant education or continuous self-learning.
Successful traders have no mysterious power over them, nor can they see the future.
What they can do is to select the key and important data for analysis from the numerous foreign exchange news and data, and then make the right trading decision.