Forex Economics

The most important thing to remember in Forex Economics is that capital desires returns. Capital will flow into equity and bond markets that give profitable returns and out of markets which do not. Capital will buy into currencies that are likely to increase in value and sell out of currencies that do not.

Buying an investment in a specific financial market requires transacting in that market’s main currency. If bond yields are rising and stock market values are strong, the currency must be purchased to investment. This raises the value of the currency. If bond yields are falling and stock market returns are weak, investors will leave the market. Retrieving their returns from the market requires selling the currency for their own domestic currency, or the currency of another nation whose investments they want to buy.

Look at economic indicators to find economies with strengthening productivity, exports, and financial markets. These economies will see an increase in currency values since others must their currency. Indicator changes tied to strength over time see currency values rise relative to others who are weaker in gains or weakening absolutely. Indicator changes tied to weakness will over time see currency values decrease, since demand will fall or supply will rise.

This is relative to supply of the currency. Assuming supply and demand from other players remain the same, if the central bank prints too much currency supply will exceed demand and value will fall. If the central bank does not print too much and demand rises while supply stays the same, the currency will gain value. If imports rise the nation will sell its currency to buy currency from nations its importing from. This increases supply and reduces value. Inflation is a decrease in currency values, while deflation is an increase in value.

General Impact of Economic Indicators on Currencies

Note that all of these are general, and not always constant. The market will occasionally focus more on single ones of these and ignore others. The combined economic situation is also more important than any individual metric.

Demand Up shows the situation that causes a rise in demand (encourages buying) for the currency. Demand Down shows the situation that causes a fall in demand (discourages buying). Supply Up shows a situation that causes an increase in supply for the currency (encourages selling). Supply Down shows a situation that causes a decrease in supply for the currency (discourages selling).

These are relative to the other currency in the pair when all factors are combined together in an economy. When paired, the relatively inflationary (future value loss) should be sold, while the relatively deflationary (future value gain) purchased. The value loss occurs due to a lowering of demand, increase of supply, or both. The value gain occurs due to an increase of demand, lowering of supply, or both. The removal of any potential political or social hindrance to buying will also increase demand and potentially decrease supply. Introduction of instability or potential causes of instability will decrease demand and increase supply.

The combination of a currency expected to gain value with a currency expected to lose value creates a pair bias. This requires tracking the trend of economic indicators for an economy, while remembering there’s a delay in correlation. You may not see the trend in economic indicators appear in the economy for weeks, months, or in extreme cases years. Sometimes people need longer term convincing to move money into a foreign economy, even with large access to existing data points.