The determinants of the exchange rate are based on basic supply and demand, but there are some theories and rules of thumb. Fundamental factors of the economy, such as the economy, interest rates, and balance of payments, have a great influence on the relationship between supply and demand. There are various elements that form the basis of the economy, and these elements are called “fundamentals.” In other words, the movement of the exchange rate changes depending on various fundamental factors that are the basic conditions of the economy. However, the exchange rate is not determined solely by fundamental factors. Let us see what factors affect the exchange rate.
- Economic trends:
When determining economic trends, the currencies of countries experiencing a boom often tend to be bought due to strong expectations of rising stock prices and interest rates. Conversely, capital and assets escape from countries with poor economic conditions, making them easier to sell. Therefore, the announcement of economic indicators related to economic trends will be a factor to move the exchange rate. In particular, important indicators such as US employment statistics and GDP (gross domestic product) are attracting a lot of attention and have a great impact on the market.
- Interest rate/price trends:
Money tends to flow to countries with high-interest rates, and currencies in countries with high-interest rates tend to be bought and rise. Interest rates are closely related to the domestic economy and prices. For example, when the economy improves and prices rise stronger and inflation tends to emerge, the central bank raises interest rates. In addition, the statements and minutes of the FOMC (Federal Open Market Committee), which determines the monetary policy of the United States, which is the center of the world economy, are of particular interest.
As a method of predicting the exchange rate level from the interest rate difference, there is a method of simply looking at the interest rate difference and a portfolio approach in which the supply and demand relationship of the exchange rate is estimated from the holdings of financial assets between the two countries. Recently, reports that predict the supply-demand relationship from the shape of the yield curve are often seen.
- Purchasing power parity:
Let’s assume a world with no trade barriers, in theory, the price of the same product follows the “law of one price” in that it is one, even if the countries are different. The bilateral exchange rate when this law hold is called is purchasing power parity.
- Foreign exchange intervention:
Financial authorities may intervene in the foreign exchange market to curb sudden fluctuations in exchange rates or to correct excessive currency appreciation and currency depreciation. In the US, the National bank of the United States places orders with the Ministry of Finance, and the quantum is several trillion dollars, which is a major factor in moving the exchange rate. Coordinated interventions by several countries can also significantly change the flow of exchange rates.
Speculation of market participants
Investors participating in the forex market trade by looking at the charts in most cases. Since many investors buy and sell using similar charts, trading may be carried out while guessing the speculation of market participants on the chart.
In the foreign exchange market, support lines and resistance lines are attracting the attention of many market participants. Therefore, breaking through the line may accelerate the market price in the short term.
- Speculative factors:
“Speculators” made up of hedge funds and institutional investors repeat transactions that invest huge amounts of money and earn margins in the short term. It is said that the investment amount is large and the ratio of the transaction volume in the foreign exchange market is large, but the actual transaction volume is smaller than that of banks. However, it is said that speculators have a great influence on the short-term exchange rate, as it often enters the market where stop orders are easy to enter and where it is important for technical analysis.
- Political factors:
The exchange rate may fluctuate significantly due to political statements about trade conflicts among government officials.
- Geopolitical risk:
When political instability is caused by war or terrorism, there is concern that investment activities and consumption will be adversely affected, and the currency of the country tends to be sold. In the past, the dollar, which is a key currency, was often bought as it is called “emergency dollar buying”, as a result, the Swiss franc belonging to Switzerland, a permanent neutral country, is often bought as a refuge for assets.
- Beauty contest theory:
The behavior depends on whether the market participants who actually trade forex are focusing on trade or investment factors. For example, if you compare the movements of the US dollar and the Canadian dollar Stock Average on a graph, you can see that there are times when the movements are similar, times when they are moving in the opposite direction, and times when they are completely unrelated.
- Spot and Futures Markets:
The spot market is the market that applies to foreign exchange transactions between banks and customers when receiving and paying them on the same day, and banks announce TTB (telegraphic buying market) and TTS (telegraphic selling market). doing. On the other hand, the futures exchange rate is an exchange rate when a certain date or period in the future is set as the execution date or period of the reservation and the rate for settlement of foreign currency with the bank is decided in advance.