Factors Affecting the Global Currency Market - Part 2

Trade and Capital Flow

Countries may be said to be dependent on either trade flow or capital flow.

A country dependent on trade flow brings in the larger part of its income from by its trade or exports with other countries.

Some examples of trade flow dependent economies include:

- Canada - oil exports
- Australia - precious metals exports
- New Zealand - agricultural exports
- Japan - electronics and automotive exports

Each of these countries depend largely on their foreign exports for economic growth. Remember when Japan’s economy was booming due to all the cars and electronics they were exporting across the world?

A country dependent upon capital flow brings in the bulk of its income by attracting outside, foreign investments. The U.S. and Great Britain are primary examples of capital flow dependent countries.

This is because the financial investment markets, on the whole, are very large and highly liquid in these countries. They draw in a steady pool of investors both from within and without, but are particularly reliant on the influx of capital from foreign investors.

Take from this another set of potential Forex signals to watch:

- Any event impacting the flow of trade
- Any event impacting the flow of capital

And keep in mind that these events may be something more than new trade agreements or faltering investor confidence. Natural disasters, for example, can have an impact on trade dependent countries that rely on agriculture for their exports.

Geo-Politics

Unlike stocks, currencies are quite sensitive to events in the political sphere. In a way, currencies are a lot like “flags” - they may represent everything good and bad about the country they serve.

It is not unusual for foreign investors to devalue currencies intentionally as a way of sending a message about a country’s politics. It is also quite common for adversarial governments to take actions towards devaluing the currency of an ‘enemy’ or problem country.

One need look no further than the current controversy surrounding the United States’ war effort. The Dollar has taken a beating along with the U.S. in terms of image.

Many countries are now threatening to denominate their oil exchanges in currencies other than the U.S. Dollar (which has been standard since the 1970s’), as well. If that occurs, the almighty Dollar may crash farther than it ever has at any time in history.

So, pay attention to politics as much as you can!

Any time a major political player does something to indicate a vote of confidence (or lack thereof) in his own country or another, you’re sure to see a corresponding change in currency value.

Conclusion

What you have read here so far truly is the tip-of-the-iceberg concerning Forex. Although the act of currency trading is relatively straight-forward, the actual dynamics and logic behind currency pricing is not.

There is must you’ll still need to learn before you are able to invest successfully on Forex. This includes learning how to perform complex trades (e.g. futures or swaps), how to read signal charting software, and how to create your own investment strategy.

The best thing I can recommend to you now is to proceed with patience. Keep learning as much as you can, and at your own pace. Nothing will help you more than continuing to invest in your own education.

Once you feel you’ve got the basics down, you can open up a demo account with most online brokers in order to test out your skills, pinpoint your weaknesses and adjust strategies as necessary.

Happy trading!