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ZxPortal (Lesson 11)

The document discusses factors that influence exchange rates between currencies. Central banks aim to maintain exchange rates that benefit all participants in an economy. Specifically, it discusses how exporters and importers are affected when a currency appreciates or depreciates in value relative to other currencies. For example, a stronger British pound makes UK exports more expensive and hurts British tourism. The document also outlines how currency markets react to economic data reports, moving based on expectations prior to an actual report and amplifying movements if the real data is better or worse than expected forecasts.

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28 views6 pages

ZxPortal (Lesson 11)

The document discusses factors that influence exchange rates between currencies. Central banks aim to maintain exchange rates that benefit all participants in an economy. Specifically, it discusses how exporters and importers are affected when a currency appreciates or depreciates in value relative to other currencies. For example, a stronger British pound makes UK exports more expensive and hurts British tourism. The document also outlines how currency markets react to economic data reports, moving based on expectations prior to an actual report and amplifying movements if the real data is better or worse than expected forecasts.

Uploaded by

akramkasaga09
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Lesson 11 Fx

What Influences Exchange Rates


Before we look at the factors and players that
influence the exchange rates, we must
understand how these rates affect economies.

First of all, exchange rates influence the trading


relationship between countries, which is a major
concern for central banks.

Let’s look at EUR/GBP currency pair.

If the British pound increases in value against the


euro, it makes British exports more expensive for
European buyers.
For example, when the British pound appreciates,
it becomes more expensive for a car dealer from
France to buy Land Rovers built in the UK as it
would require more euros to buy the same
amount of pounds. Consequently, the
manufacturer of Land Rover could get fewer sales
and the UK exports would decrease as there are
many UK manufactures who export overseas.

A higher pound would also negatively affect


British tourism, as almost everything would
become relatively more expensive in Britain. The
overall balance of trade would decrease if the
currency value is higher.

On the other hand, if the value of the British


pound would decrease, it would make the British
exporters more competitive and the overall
exports would increase.

Therefore, countries are constantly trying to


sustain a healthy currency exchange rate in order
to help their exporters.
It's a very challenging task because a low currency
rate can be good for exporters, but it is usually
not so good for businesses that import goods
because those goods will become more expensive
for them.

As you see, central banks are in a constant


struggle to achieve and maintain an exchange rate
that would be good for all participants of their
economy.

The golden rule of economic data reports

Forex traders closely follow economic calendars.


Forecasts and reports about such data as inflation
numbers, unemployment rate, GPD, etc - can
significantly influence currency prices.

And here is the fun part:

Markets don't wait for the actual reports to come


out. They start reacting and moving based on
expectations and forecasts alone.
If the forecast promises positive growth and the
actual data comes out even better than
forecasted, it amplifies the rise of the currency
even more.

However, if the actual data comes out worse than


expected, it can create strong downward pressure
on the currency.

Here is the rule to remember with financial


reports:

To illustrate this rule, let’s look at an economic


calendar and compare the GDP growth indicators
(month-to-month) of the U.S. and Canada and see
how these indicators would influence the
USD/CAD exchange rate.
For the sake of an example, let’s assume that all
other economic indicators for both countries are
the same.

Can you guess, by looking at the illustration


above, which currency will rise in value against
the other?

As you can see, both the U.S. and Canada have


the same actual GDP growth rates of +0.4%, but
that doesn’t mean that the USD/CAD currency
rate will stay the same after the release of this
data!

The winner, in this case, is the country that


surpasses the forecasts — which is the U.S.
Canada’s actual numbers were worse than
expected so market participants will take this as a
bad sign for the Canadian economy and the CAD
will decrease against the USD.

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