The exchange rate expresses the national currency's quotation in respect to foreign ones. For example, if one US dollar is worth 10 000 Japanese Yen, then the exchange rate of dollar is 10 000 Yen. If something costs 30 000 Yen, it automatically costs 3 US dollars as a matter of accountancy. Going on with fictitious numbers, a Japan GDP of 8 million Yen would then be worth 800 Dollars.
Thus, the exchange rate is a conversion factor, a multiplier or a ratio, depending on the direction of conversion.
In a slightly different perspective, the exchange rate is a price. If the exchange rate can freely move, the exchange rate may turn out to be the fastest moving price in the economy, bringing together all the foreign goods with it.
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Wednesday, May 12, 2010
Tuesday, May 4, 2010
Interest Rates On Treasury Bonds
Interest rates on Treasury bonds should influence the decision of foreigners to purchase currency in order to buy them. In this case, higher interest rates attracts capital from abroad and the currency should appreciate. Decisive would be the difference between domestic and foreign interest rates, thus a reduction in interest rates abroad would have the same effects.
Similarly other fixed-interest financial instruments could be object of the same dynamics. Accordingly, an increase of domestic interest rates by the central bank is usually consider a way to "defend" the currency.
Nonetheless, it may happen that foregners rather buy shares instead of Treasury bonds. If this were the strongest component of currency demand, then an increase of interest rate may even provoke the opposite results, since an increase of interest rate quite often depresses the stock market, favouring a tide of share sales by foreigners.
In the same "inversal" direction might foreign direct investments work. A restrictive monetary policy usually depresses the growth perspective of the economy. If FDI are mainly attracted by sales perspectives and they constitute a large component of capital flows, then FDI inflow might stop and the currency weaken.
Needless to say, those conditions are quite restrictive and not so usually met.
As a temporary conclusion, interest rates should have an important impact on exchange rate but one has to be careful to check additional conditions.
Similarly other fixed-interest financial instruments could be object of the same dynamics. Accordingly, an increase of domestic interest rates by the central bank is usually consider a way to "defend" the currency.
Nonetheless, it may happen that foregners rather buy shares instead of Treasury bonds. If this were the strongest component of currency demand, then an increase of interest rate may even provoke the opposite results, since an increase of interest rate quite often depresses the stock market, favouring a tide of share sales by foreigners.
In the same "inversal" direction might foreign direct investments work. A restrictive monetary policy usually depresses the growth perspective of the economy. If FDI are mainly attracted by sales perspectives and they constitute a large component of capital flows, then FDI inflow might stop and the currency weaken.
Needless to say, those conditions are quite restrictive and not so usually met.
As a temporary conclusion, interest rates should have an important impact on exchange rate but one has to be careful to check additional conditions.
Friday, April 9, 2010
Devaluation and Depreciation
A devaluation or depreciation should work in the opposite direction, improving the trade balance thanks to soaring exports and falling imports.
If, however, imports have an elasticity to price less than 1, their values in local currency will grow instead of falling.
"International comparisons of current values converted to a common currency are "distorted" by wide exchange rate fluctuations."
Hosting different industries, regions usually exhibit a differenciated degree of international openness: exchange rate fluctuations will have a uneven impact on them. Similarly, the number of job places and the working conditions may be influenced by the degree of international competition and exchange rates levels.
Exchange rate influences also the external purchasing power of residents abroad, for example in term of purchasing real estate and other assets (e.g. firm equity as a foreign direct investment), so by different channels, also the balance of payments.
Exchange rate devaluation or depreciation give rise to inflationary pressures: imported good become more expensive both to the direct consumer and to domestic producer using them for further processing.
Symmetrically, the central bank may use a fixed exchange rate as a nominal anchor for the economy to keep inflation under control, compelling domestic producer to face tougher competition as soon as they decide to increase prices or accept to pay higher wages.
If, however, imports have an elasticity to price less than 1, their values in local currency will grow instead of falling.
"International comparisons of current values converted to a common currency are "distorted" by wide exchange rate fluctuations."
Exchange rate influences also the external purchasing power of residents abroad, for example in term of purchasing real estate and other assets (e.g. firm equity as a foreign direct investment), so by different channels, also the balance of payments.
Exchange rate devaluation or depreciation give rise to inflationary pressures: imported good become more expensive both to the direct consumer and to domestic producer using them for further processing.
Symmetrically, the central bank may use a fixed exchange rate as a nominal anchor for the economy to keep inflation under control, compelling domestic producer to face tougher competition as soon as they decide to increase prices or accept to pay higher wages.
Tuesday, April 6, 2010
The Balance of Payments
Can highlight pressures for devaluation or revaluation, reflected in large and systematic trend of foreing currency reserves at the central bank. In particular, large inflows, due for instance to a rise in the world price of main exports tend to revaluate the exchange rate. Conversely, a collapse in the trust of government to manage the economic conditions might provoke a flight of capital, the exhaustion of foreign currency reserves and force a devaluation / depreciation.
Levels and Fluctuations
Impact on other variables
Levels and fluctuations in the exchange rate exert a powerful impact on exports, imports and the trade balance. A high and rising exchange rate tends to depress exports, to boost import and to deteriorate the trade balance, as far as these variables respond to price stimuli. Consumers find foreign goods cheaper so the consumption composition will change. Similarly, firms will reduce their costs by purchasing intermediate goods abroad.
In extreme cases, local firms producing for the domestic market might go bankrupt. If the reason of appreciation was a soaring world price of main exports (e.g. energy carriers, like oil for many oil producing countries), the composition of the industrial texture would be starkly simplified and concentrated to those exports, in the opposite direction of the diversification of the economy that is often the stated goal of public strategies in countries depending on too few productions (high export concentration).
Levels and fluctuations in the exchange rate exert a powerful impact on exports, imports and the trade balance. A high and rising exchange rate tends to depress exports, to boost import and to deteriorate the trade balance, as far as these variables respond to price stimuli. Consumers find foreign goods cheaper so the consumption composition will change. Similarly, firms will reduce their costs by purchasing intermediate goods abroad.
In extreme cases, local firms producing for the domestic market might go bankrupt. If the reason of appreciation was a soaring world price of main exports (e.g. energy carriers, like oil for many oil producing countries), the composition of the industrial texture would be starkly simplified and concentrated to those exports, in the opposite direction of the diversification of the economy that is often the stated goal of public strategies in countries depending on too few productions (high export concentration).
Exchange Rates Behaviour
Business cycle behaviour
Too many elements are at work for the exchange rate possessing a clearly-defined business cycle behaviour. To the extent that the exchange rate is determined by the trade balance, the exchange rate is counter-cyclical as the latter. At peaks, the trade deficit would depress the exchange rate, forcing it to depreciate.
If it is rather the interest rate that turns out to the main driver of the exchange rate, a possible pro-cyclicity of the interest rate would imply a pro-cyclical exchange rate.
In this scenario, recovery and boom are accompanied by rising interest rates and exchange rates. At peaks, we would see very strong currency. Together with domestic demand pressures, this would be the source of a high trade deficit.
If autonomous dynamics in the forex market are the main determinants of the exchange rate, then intense micro-fluctuations and long term tides would ride the exchange rate, possibly with central bank significant interventions.
Too many elements are at work for the exchange rate possessing a clearly-defined business cycle behaviour. To the extent that the exchange rate is determined by the trade balance, the exchange rate is counter-cyclical as the latter. At peaks, the trade deficit would depress the exchange rate, forcing it to depreciate.
If it is rather the interest rate that turns out to the main driver of the exchange rate, a possible pro-cyclicity of the interest rate would imply a pro-cyclical exchange rate.
In this scenario, recovery and boom are accompanied by rising interest rates and exchange rates. At peaks, we would see very strong currency. Together with domestic demand pressures, this would be the source of a high trade deficit.
If autonomous dynamics in the forex market are the main determinants of the exchange rate, then intense micro-fluctuations and long term tides would ride the exchange rate, possibly with central bank significant interventions.
Sunday, March 28, 2010
Inflation Rate
Inflation rate is often considered as a determinant of the exchange rate as well. A high inflation should be accompanied by depreciation. The more so if other countries enjoy lower inflation rates, since it should be the difference between domestic and foreing inflation rates to determine the direction and the scale of exchange rate movements.
All this would be implied by a weak version of "one price law" stating that price dinamics of a good are the same worldwide, after taking into account nominal exchange rates. Thus, here the absolute level is not requested to be equalized but just the percentage differences in price.
If an hamburger costs in Japan 5% more than a year ago, while in USA it costs 8% more, then the dollar should have been depreciated this year by about 8-5=3%.
But in order to equalize the price dynamics of different goods, more than one exchange rate change may turn out to be "necessary".
In reference to the overall price level of the economy, if exchange rates would move exactly counterbalancing inflation dynamics, then real exchange rates should be constant. On the contrary, this is not true as a strict universal rule.
Still, even if this weak version of the "law" does not always hold, high inflation usually give rise to depreciation, whose exact dimension need not match the inflation itself or its difference with foreign inflation rates.
All this would be implied by a weak version of "one price law" stating that price dinamics of a good are the same worldwide, after taking into account nominal exchange rates. Thus, here the absolute level is not requested to be equalized but just the percentage differences in price.
If an hamburger costs in Japan 5% more than a year ago, while in USA it costs 8% more, then the dollar should have been depreciated this year by about 8-5=3%.
But in order to equalize the price dynamics of different goods, more than one exchange rate change may turn out to be "necessary".
In reference to the overall price level of the economy, if exchange rates would move exactly counterbalancing inflation dynamics, then real exchange rates should be constant. On the contrary, this is not true as a strict universal rule.
Still, even if this weak version of the "law" does not always hold, high inflation usually give rise to depreciation, whose exact dimension need not match the inflation itself or its difference with foreign inflation rates.
Autonomous dynamics on the forex market
Past and expected values of the exchange rate itself may impact on current values of it. The activities of forex specialists and investors may turn out to be extremely relevant to the detemination of market exchange rate also thanks to their complex interaction with central banks. Sophisticated financial instruments like futures on exchange rates may play an important role. Imitation and positive feedbacks give rise to herd behaviour and financial fashions.
Monday, March 22, 2010
How Do I Monitor My FOREX Currency Trading?
A foreign exchange software is great in monitoring foreign exchange currency
Most of these FOREX prediction software can help you lessen losses and increase income.
You can monitor your foreign exchange trading online, from anywhere, anytime.
You have full control to monitor status, confirm scenarios, modify some rules in the trade, or close it.
It is further important to stay abreast with most recent daily FOREX market news so you are aware of what is happening at all times.
The rules can consist of instructions with regard to the position of say moving averages, oscillators, or some other technical indicator, or maybe specific price patterns, or a markets proximity to certain key price levels, Etc. Most often several of the above are combines in order to create a full set of rules.
As a simple example, if a 20 period moving average crosses over a 50 period moving average and the stochastic indicator is less than 20, then buy.
Once your list of rules are coded into a full system, you instruct your trading platform to trade the system on an automated basis.The system will from this point on, automatically place all of the buy / sell orders into the markets.
Most of these FOREX prediction software can help you lessen losses and increase income.
You can monitor your foreign exchange trading online, from anywhere, anytime.
You have full control to monitor status, confirm scenarios, modify some rules in the trade, or close it.
It is further important to stay abreast with most recent daily FOREX market news so you are aware of what is happening at all times.
The rules can consist of instructions with regard to the position of say moving averages, oscillators, or some other technical indicator, or maybe specific price patterns, or a markets proximity to certain key price levels, Etc. Most often several of the above are combines in order to create a full set of rules.
As a simple example, if a 20 period moving average crosses over a 50 period moving average and the stochastic indicator is less than 20, then buy.
Once your list of rules are coded into a full system, you instruct your trading platform to trade the system on an automated basis.The system will from this point on, automatically place all of the buy / sell orders into the markets.
How Do I Begin Trading?
There are a few individuals you can rely on just in case you are still learning the ropes of foreign exchange trading.
First, there will always be a professional FOREX broker who can do the trading for you.
A regulated FOREX broker can just conduct business on your behalf.Learning FOREX glossary definitions can also assist you a lot.
You can even participate in a FOREX Trading lesson so you can learn from the veterans.
If you think like you can already take on the challenge of foreign exchange, then by all means, simply do what you have to do.
A credit card is used to create your first foreign exchange transaction.
First, there will always be a professional FOREX broker who can do the trading for you.
A regulated FOREX broker can just conduct business on your behalf.Learning FOREX glossary definitions can also assist you a lot.
You can even participate in a FOREX Trading lesson so you can learn from the veterans.
If you think like you can already take on the challenge of foreign exchange, then by all means, simply do what you have to do.
A credit card is used to create your first foreign exchange transaction.
Sunday, March 14, 2010
Buying Price and a Selling Price
There is a Buying Price and a Selling Price In the foreign exchange market there are always two prices for every currency—one price at which sellers of that currency want to sell, and another price at which buyers want to buy.
A market maker is expected to quote simultaneously for his customers both a price at which he is willing to sell and a price at which he is willing to buy standard amounts of any currency for which he is making a market.
A market maker is expected to quote simultaneously for his customers both a price at which he is willing to sell and a price at which he is willing to buy standard amounts of any currency for which he is making a market.
Sunday, March 7, 2010
On-line FOREX Brokers
On-line FOREX brokers offer the investor hi-technology trading software and systems including information, delivery options, signal services and other on-line trading services that enable the on-line investor to buy and sell automatically.
When you sign up with an on-line broker, they will provide you with an internet based trading platform where you will deal with all on-line transactions.This trading platform comes in the form of a FOREX software.Once you sign up with a trading broker, you should thoroughly examine the software.
If tutorials are available, it is advisable that you make full use of them.The smallest error could be costly.It is crucial for success to study all the tools and applications that come with an on-line FOREX system, making extra sure the workings are understood, all the ins and outs, all the hows and whys.
And you mustn't forget, if you have signed on to a good on-line broker they will be more than happy to put you on the right track as to how to use their FOREX software.
One of the first things that an on-line investor should do is to get as much information about FOREX trading as is possible.
When it comes to investing never leap before you look.Be open for instruction and enthusiastic to learn, your success depends on it.Check out as many websites as you can and read tutorials, free e-books are made available by some brokers.
When you sign up with an on-line broker, they will provide you with an internet based trading platform where you will deal with all on-line transactions.This trading platform comes in the form of a FOREX software.Once you sign up with a trading broker, you should thoroughly examine the software.
If tutorials are available, it is advisable that you make full use of them.The smallest error could be costly.It is crucial for success to study all the tools and applications that come with an on-line FOREX system, making extra sure the workings are understood, all the ins and outs, all the hows and whys.
And you mustn't forget, if you have signed on to a good on-line broker they will be more than happy to put you on the right track as to how to use their FOREX software.
One of the first things that an on-line investor should do is to get as much information about FOREX trading as is possible.
When it comes to investing never leap before you look.Be open for instruction and enthusiastic to learn, your success depends on it.Check out as many websites as you can and read tutorials, free e-books are made available by some brokers.
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