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Economic Factors That Affect The Forex Market

With buyers and sellers from all corners of the globe participating in trillions of dollars of trades each day, forex is a true global marketplace. The fact that foreign exchange trading has become such a globalized activity means that macroeconomic events play an even greater role in forex than ever before. Here some economic trends and events that those new to forex should be aware of. (For more information, see Guide To Forex Currencies.)

The Role of Macroeconomics in Forex

The forex market is primarily driven by overarching macroeconomic factors that influence the decisions of the traders who ultimately decide the value of a currency at any given point in time. The economic health of a nation's economy is an important factor in the value of its currency. Overall economic health, however, is shaped by numerous economic events and information that may change on a daily basis, contributing to the 24/7 nature of the international foreign exchange market. Let's take a closer look at some of the factors that influence an economy's standing and drive changes in the value of its currency.



Capital Markets

The global capital markets are perhaps the most visible indicators of an economy's health, while stock and bond markets are the most noticeable markets in the world. With constant media coverage and up-to-the-second information on the dealings of corporations, institutions and government entities, there is not much public information that the capital markets miss. A wide rally or sell-off of securities originating from one country or another should be a clear signal that the future outlook (short term or long term) for that economy has changed in investors' eyes.

Similarly, many economies are sector driven, such as Canada's heavily commodity-based market. In this case, the Canadian dollar is heavily correlated to the movements of commodities such as crude oil and metals. A rally in oil prices would likely lead to the appreciation of the loonie relative to other currencies. Commodity traders, like forex traders, rely heavily on economic data for their trades, so in many cases the same economic data will have a direct affect on both markets. (For more on this correlation, see How To Trade Currency And Commodity Correlations.)

Moreover, the bond markets are critical to what is happening in the forex market, since both fixed income securities and currencies rely heavily on interest rates. Movements in Treasuries are a first level factor in movements in currencies, meaning that a change in yields will directly affect currency values. Because of how closely tied the two markets are, it is important to understand how bonds - government bonds especially - are valued in order to excel as a forex trader.

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