You may be asking yourself why understanding foreign exchange rates and trade relations would impact your investment opportunities. The answer while fairly complex can be broken down into simpler terms. It helps if you know governments watch these rates so that they can intervene if necessary. They may raise or lower interest rates depending on the information on a country’s economy. This also shows up in the exports and imports nation’s trade. If a country has a high currency rate they will have more expensive exports. This in turn makes importing less expensive with foreign markets. If a balance of trade is out of whack it will impact your profits in forex.
Some Differences Reflect Foreign Exchange Rates
Let’s take a look at what some of these differences are: interest rates, inflation, public debt and deficits. A higher inflation rate in a country typically means that their currency is worth less. So, the powers that be want to keep inflation at bay. Interest rates and their influence are also tied to inflation. As you know the governments will jump in and raise or lower interest rates depending on the possibility of inflation. This tampers with the prices of their currency and it can definitely impact foreign exchange rates.
If a country has a deficit they are spending more to import goods than they would be making with exports. They may in fact be borrowing foreign currency to make up for the deficit. To put this in perspective the country with a deficit must wait until their services and goods are lower in cost before they can see a better rate for their currency. If you are unaware of these effects you could jeopardise your profits with currency pairings. A country’s public debt can scare off investors. If it is too high, people and other countries may fear a default thus lowering the trading value of currency pairs.
Stability for Foreign Exchange Rates
It has been said many times, but economic and political stability are crucial to enjoy a good profit in foreign exchange rates. Investors will want to stay out of currency pairings with countries that show weak political governments. It generally means that the currency will fall which in itself might not be bad if you have paired it with a stronger currency. Still, the peril is there for losing money. If you are in such a pairing and the economic news or political field changes for the worst you could lose not just profit, but your investment money as well.
While this is a complex theory with interchanging parts, it can be broken down into simpler parts. If you are a beginner in forex trading expanding your knowledge will be the most important thing you can do. As you grasp more and more of the concepts you will start to feel more comfortable and move on to paper trades. Be sure that you include these above salient points in your education on foreign exchange rates. The important roles that stability, interest rates, deficits, inflation and debts play in trading currency will soon become evident.