fundamentals of forex financial literacy
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Xe Currency Converter. These are the highest points the exchange rate has been at in the last 30 and day periods. These are the lowest points the exchange rate has been at in the last 30 and day periods. These are the average exchange rates of these two currencies for the last 30 and 90 days.

Fundamentals of forex financial literacy technical indicator index forex

Fundamentals of forex financial literacy

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Let us see how carry trades work. It is obvious that, having an opportunity to receive funding in pounds at lower interest rates, an international investor will exchange the pounds for the dollars and place them in the USA at a higher interest rate. The yield of this operation of one million GBP will be 1. Based on the supply and demand law, when converting the pounds into the US dollars, the investor will reduce the pound rate and set the higher price for the dollar.

That is how it looks in theory. The matter is that when receiving funding in the pounds and buying the US dollars for the GBP, the investor acquires an undesirable short position in pounds, that is, it has an uninsurable currency risk, which can lead to significant losses, exceeding investor's profit. In order to avoid the risk of currency fluctuations, covered interest rate parity should be applied.

It means that the investor must acquire the British pounds in the forward or futures market with a delivery term of one year, that is, make a reverse conversion, thus insuring the short position. In this case, the investor will buy the pound in the futures market, increasing its value in future and sell the dollar lowering its rate on the delivery date.

It is a very important condition allowing one to identify the direction of the money flows. Carry trades involve a kind of influence on the money flows. If the currency forward rate is higher than its spot rate, the money flow is directed to the advantage of the quote currency.

If the forward rate is lower than the spot rate, the money is invested in the base currency. Let us study our example taking into account the difference in the spot and forward rates. The return on the investment is 2. We convert this amount back into the pounds and there will be , GBP.

As you see the riskless arbitrage in Forex by means of Treasury bonds is really impossible. However, for other instruments, for example, corporate or municipal bonds, as well as growing in price shares with dividend payments, such arbitration becomes quite real, the main thing is that the return on investment should cover possible risks of the simultaneous buying and selling. A traditional currency in which international investors receive funding is the Japanese yen.

Facing a recession in the mids, the Bank of Japan had to lower its interest rate to the minimal values, which allowed investors and speculators to receive funding in the yen at a low interest rate and reinvest into other markets, primarily in the US market. This resulted in a remarkable phenomenon that is employed in foreign exchange markets by traders and hedge fund all over the world. Receiving funding in the yen, during the growth of the stock market, investors and speculators take loans for a short period, usually from one to six months, in order to reduce costs in the form of higher interest rates.

As the stock market grows and assets rise in price, investors can easily extend financing for the next period. However, when the stock market is falling, investors have to close their positions for foreign currencies and buy the yen to cover the received funding. Since most financial transactions are carried out in the US dollar, when the stock markets fall, the dollar also grows against most currencies, except for the Japanese yen.

Based on the relationship between the Japanese yen and the stock markets, traders should consider in their trading strategies that, when the stock market is rising, the yen may go both up and down in value. It seems to be easy, you just need to monitor the interest rate differential and make money on it, however, there is no rule without an exception, especially when central banks take up the case. Having completed the third Quantitative Easing program, the US Federal Reserve, after an eight-year break, began a cycle of tightening its monetary policy, starting to raise the target range for its benchmark interest rate.

In early , the interest rate differential between the euro and the dollar was 0. By the summer of , the difference between the rates in the dollar and the euro was already 1. In February , the euro was testing the level of 1. Traders and investors did not manage to get a clear answer why this had happened.

However, the most likely version is that, in the context of changes in monetary policy, the Fed and the ECB, as well as the Bank of Japan, took joint actions to weaken the US dollar against the European currency. This version is confirmed by the fact that the euro futures exchange rate exceeded the cash rate, i.

As we already know, in this case, according to the law of supply and demand, the euro was supposed to become cheaper, rather than grow in price. Furthermore, at this time, it became possible to conduct operations on risk-free arbitration with the US Treasury securities, which, as we know, was theoretically impossible earlier.

This also nicely demonstrates the key difference between fundamental and technical analysis. While forex technical analysis barely pays attention to anything but the current price, fundamental analysis researches everything but the current price. Whilst it is true that fundamental analysis may not be the best tool for a short-term trader in day-to-day markets, it is the fundamental Forex factors and how they are analysed that answer what happens in the long-term.

Forex fundamental analysis is not just about comparing the current data of single economic indicators to previous data. There are a great number of economic theories which surround fundamental Forex analysis, attempting to put various pieces of economic data in context, to make it comparable.

The most popular economic theories of currency fundamental analysis babysit the notion of parity - a condition of price at which currencies should be exchanged when adjusted, according to their local economic factors, such as inflation and interest rates. The following video explains for beginners how Forex fundamental analysis is used to monitor major news releases, and what traders can expect to happen in the financial markets when certain data has been released.

You may have noticed that, from the very practical standpoint of an average Forex trader, it is news reports that produce movements on the markets. There are several economic indicators that financial experts observe because they can provide guidance on the overall health of an economy. These indicators are found in news reports and news outlets. Some are released weekly, most are released monthly and a few quarterly.

The best way to keep track of such news events is with a Forex calendar , an essential tool for fundamental analysis, which provides a daily schedule of planned economic announcements. With Forex technical analysis, new data arrives every second in the form of a price quote , whereas, fundamental indicators are only published once a week at the most. Capital flows gradually from countries where it accumulates at a potentially slower rate, compared to the countries where it could accumulate at a potentially faster rate.

That has everything to do with the strength of an economy. If an economy is forecast to hold strong, it will appear as an attractive place for foreign investment, because it is more likely to produce higher returns in the financial markets. Following that thought, in order to invest, investors will first have to convert their capital into the currency of the country in question.

Buying more of that currency will push the demand, and force the currency to appreciate. Unfortunately, economics is not always so simple, which is why examples of healthy economies showing weakening currencies are not unknown. Currencies are not like a company's stock, they do not directly reflect the health of the economy. Currencies are also tools that can be manipulated by the policy makers, such as central banks, and even private traders like George Soros.

When economic reports are released, traders and investors will look for signs of strengths or weaknesses in different economies. If prior to the news releases, the market sentiment leans in one direction, changing the price before the release is known as a 'priced in market'. It often causes a little commotion upon the actual data release. Conversely, when the market is unsure - or the data results vary from what was anticipated - severe market volatility may occur.

That is why beginner Forex traders are generally advised to stay away from trading around the news when practising fundamental analysis. If you're a new to trading and looking for a place to learn the ins and outs of Forex trading, our Forex Online Trading Course is the perfect place for you! Learn how to trade in just 9 lessons, guided by a professional trading expert.

Click the banner below to register for FREE! Changes in economic data may hint towards shifts in the economic situation of a respective country, which may in turn influence the value of an economy's currency. Interest rates are a major Forex fundamental analysis indicator. There are many kinds of interest rates, but here we will focus on the nominal or base interest rates set by an economy's central bank. Central banks create money, that money is then borrowed by private banks.

The percentage or the principle that private banks pay central banks for borrowing currencies is called a base or a nominal interest rate. Whenever you hear the phrase 'interest rates', people are usually referring to that concept. Manipulating interest rates, a big part of the national monetary or fiscal policy, is one of the primary functions of central banks.

This is because interest rates are a great leveller of the economy. Interest rates are perhaps stronger than any other factor and they influence currency values. They can have an impact on inflation, investment, trade, production and unemployment.

The central banks generally wish to boost the economy and reach a government-set inflation level, so they decrease interest rates accordingly. This stimulates borrowing by both private banks and individuals, as well as stimulating consumption, production and the economy in general. Low interest rates can be a good tactic, but a poor strategy. In the long-term, low interest rates can over-inflate the economy with cash, and can create economic bubbles, which as we know, sooner or later will set a toppling chain reaction across the economy, if not entire economies.

To avoid this, central banks can also increase interest rates, thus decreasing the amount of borrowing and leaving less money for banks, businesses and individuals to play around with. From a Forex fundamental analysis standpoint, the best place to start looking for trading opportunities is in the changing interest rates. News releases on the level of inflation report on the fluctuations in the cost of goods over a period of time. Over a long period of time, as the economy grows, so should the amount of money in circulation, which is the definition of inflation.

The trick is for governments and central banks to balance themselves at that self-set level. Too much inflation tips the balance of supply and demand in favour of supply, and the currency depreciates because there is simply more of it than demanded. The converse side of the inflation coin is deflation. During deflation, the value of money increases, whilst goods and services become cheaper. In the short run it may be a positive thing, but for the economy in the long run, it can be a negative thing.