NoaFX Tutorial

1.2 Forex Market Components

Factors that cause the movement of the Forex Market

There are various factors that affect the Forex Market. Primarily, they are driven by the movement of currencies and this therefore links back to the age-old theory of Supply and Demand. We will discuss more in detail about this in our next session.

From a macro perspective, though the underlying practices are driven by Supply and Demand, the actual vehicles or practices that account for the implementation of market forces can be broadly classified as:

  • Economical policies/conditions
  • Buying/Purchasing Power
    When one economy's currency is perceived to be of higher purchasing power, mostly due to its internal economical indicators such as inflation (CPI), employment rate, GDP and so on, than of its counterpart, it naturally assumes higher relative value.

  • Interest Rate decisions
    Interest rate decisions drive asset class characterization and significant differences in interest rate decisions can drive funds in/out of a country which will determine its overall perceived demand value.

    (For reference, see interest rate revisions by the Federal Government which caused USD demand to fall from 2008-2009)

  • Trading Agreements; Free Trade Agreements(FTAs), Lateral, Protectionist policies
    Most such trade binding agreements affect large flows of capital and may/will affect capital appreciation/depreciation.
  • Political Conditions
    Often, investor's confidence is linked back to the stability of government policies, foreign deposit security, crime rate and other "fear" driven sentiments that will push foreign investments away if not governed properly. This is therefore an intangible index (determinant) but it heavily influences capital flow and rise/fall in a country's economic standing.

    (For reference, see political instability/decisions that caused countries to fail/succeed such as Russia, Sri Lanka, Cambodia and China)

  • Market Forces/Mentality
  • Risk yielding/averting Market goes into states of high risk aggression, often seen in bullish markets, where lower profit yielding assets are used to fuel purchase/fund higher profit yielding assets.
    Whereas, in a risk aversion state, the market will often liquidate all such higher bearing assets and return back to the lower yielding assets, or those of "safe-haven" instruments
    (For reference, see bull/bear market cycle spanning from 1997-2009)

  • Economic Numbers – News Releases These are realized performance numbers and are the results which will in turn become the drivers for future results. Think of earnings reports on a corporate level. Analogous to those, these numbers reflect the country's performance for that period being reported. Often reports that exceed expectations drive the currency's demand higher whereas weaker results perform the inverse.

    In a later section, we will cover the market forces that traders react to.