Forex And Other Markets (Part II)
The lower the prices of oil, the lower the inflationary pressures are going to become but this is not always true. The higher the price of oil, the higher the inflation would be and the slower the economic growth is going to become. Take oil as an inflation input and a limiting factor on the overall economic growth.
The global oil reserves are finite. With the rising energy demand in emerging economies like China, India and Brazil, the prices of oil are expected to rise and reach around $200 per barrel in the coming few years. We would like to factor changes in the prices of oil into our inflation and growth expectations and then draw conclusions about the course of US Dollar from them. Above all, oil is just one input among many. However, US Dollar is the currency in which crude oil gets traded in the global markets. When crude oil futures are increasing in value, the U.S. dollar should theoretically be getting more valuable. The more oil prices rise, the more U.S. dollars foreign countries are going to have to buy to purchase their oil. This increase in value of the U.S. dollar is the result of increasing demand in the marketplace. As the demand for U.S. dollars increases, the value of the U.S. dollar increases. This is not the whole story though. It is true that rising oil prices will increase the demand for the U.S. dollar, but rising oil prices also take their toll on the U.S. economy. The question is which is more important in the Forex market. It depends on the currency pair you are watching.
Stocks: You must have invested in stocks sometimes back. Many people invest in stocks. Buy and hold is the best strategy that has been followed over the years by the stock investor. Almost everyone is familiar with stocks and the stock markets. You can take stocks as microeconomic securities rising and falling in response to individual corporate results and prospects. Stocks are units of ownership rights that get traded on the stock exchanges.
You can think of individual countries as companies and their currencies as stocks that get traded in the global financial markets. Currencies are essentially macroeconomic securities fluctuating in response to wider ranging economic and political developments. As such there is no intuitive reason that stock market should be related to the forex market.
There was a boom in the Tokyo Stock Exchange a decade back. Many investors wanted to take part in that boom. But in order to invest in Japanese stocks, they needed Japanese Yen (JPY). Heavy buying pressure on JPY made it appreciate. So sometimes a relationship develops between a stock market and a currency. If you have all your money invested in the stock market, you are completely at the mercy of the movements of the stock market. If you diversify your investments a little bit, however, and put the majority of your money in the stock market and a portion of it in the Forex market, you can retain more control of your financial future. Diversifying your money enables you to react to the movements of the market, regardless of its direction. However, long term correlation studies bear this out that there is no major relationship between stocks and currencies. Major USD currency pairs and the US equity markets over the last five years have almost zero correlation coefficients. However, the two markets occasionally intersect as the above example shows.
The US stock market may drop on an unexpected hike in the US interest rates while USD may rally on the surprise move. For example, when equity market volatility reaches extraordinary levels like when S&P 500 Index loses 2% in a single day, USD may experience more pressure than it otherwise would have. But there is no guarantee of that.
Bonds: When interest rates are on the rise, at some point, doing business becomes difficult, and when interest rates fall, eventually economic growth is energized. The bond market rules the world. Everything that anyone does in the financial markets anymore is built upon interest-rate analysis.
That relationship between rising and falling interest rates makes the markets in interest rate futures, Eurodollars, and Treasuries (bills, notes, and bonds) important for all consumers, speculators, economists, bureaucrats, and politicians.
Both the bond market as well as the forex market reacts to interest rate changes. Bond or fixed income markets have a more intuitive relationship with the forex markets as both are heavily influenced by the interest rate expectations. However, the short term supply and demand fluctuations interrupt most attempts to establish a viable link between the two markets on a short term basis.
Sometimes, the forex markets react first and fastest to the shifts in the interest rate expectations. At other times, the bond markets more accurately reflect the changes in interest rate expectations with the forex market doing the catch up.
Changes in the relative interest rates exert a major influence on forex markets. As a forex trader, you definitely need to keep an eye on the yields of the benchmark government bonds of the major currency countries to better monitor the expectations of the interest rate market. You can keep an eye on the US interest rates by following the yield curves of the treasury bonds. Similarly, you can watch the flow of money between the US and EU economies by watching the differential between the US Treasury Bonds and the German Bunds. - 23199
The global oil reserves are finite. With the rising energy demand in emerging economies like China, India and Brazil, the prices of oil are expected to rise and reach around $200 per barrel in the coming few years. We would like to factor changes in the prices of oil into our inflation and growth expectations and then draw conclusions about the course of US Dollar from them. Above all, oil is just one input among many. However, US Dollar is the currency in which crude oil gets traded in the global markets. When crude oil futures are increasing in value, the U.S. dollar should theoretically be getting more valuable. The more oil prices rise, the more U.S. dollars foreign countries are going to have to buy to purchase their oil. This increase in value of the U.S. dollar is the result of increasing demand in the marketplace. As the demand for U.S. dollars increases, the value of the U.S. dollar increases. This is not the whole story though. It is true that rising oil prices will increase the demand for the U.S. dollar, but rising oil prices also take their toll on the U.S. economy. The question is which is more important in the Forex market. It depends on the currency pair you are watching.
Stocks: You must have invested in stocks sometimes back. Many people invest in stocks. Buy and hold is the best strategy that has been followed over the years by the stock investor. Almost everyone is familiar with stocks and the stock markets. You can take stocks as microeconomic securities rising and falling in response to individual corporate results and prospects. Stocks are units of ownership rights that get traded on the stock exchanges.
You can think of individual countries as companies and their currencies as stocks that get traded in the global financial markets. Currencies are essentially macroeconomic securities fluctuating in response to wider ranging economic and political developments. As such there is no intuitive reason that stock market should be related to the forex market.
There was a boom in the Tokyo Stock Exchange a decade back. Many investors wanted to take part in that boom. But in order to invest in Japanese stocks, they needed Japanese Yen (JPY). Heavy buying pressure on JPY made it appreciate. So sometimes a relationship develops between a stock market and a currency. If you have all your money invested in the stock market, you are completely at the mercy of the movements of the stock market. If you diversify your investments a little bit, however, and put the majority of your money in the stock market and a portion of it in the Forex market, you can retain more control of your financial future. Diversifying your money enables you to react to the movements of the market, regardless of its direction. However, long term correlation studies bear this out that there is no major relationship between stocks and currencies. Major USD currency pairs and the US equity markets over the last five years have almost zero correlation coefficients. However, the two markets occasionally intersect as the above example shows.
The US stock market may drop on an unexpected hike in the US interest rates while USD may rally on the surprise move. For example, when equity market volatility reaches extraordinary levels like when S&P 500 Index loses 2% in a single day, USD may experience more pressure than it otherwise would have. But there is no guarantee of that.
Bonds: When interest rates are on the rise, at some point, doing business becomes difficult, and when interest rates fall, eventually economic growth is energized. The bond market rules the world. Everything that anyone does in the financial markets anymore is built upon interest-rate analysis.
That relationship between rising and falling interest rates makes the markets in interest rate futures, Eurodollars, and Treasuries (bills, notes, and bonds) important for all consumers, speculators, economists, bureaucrats, and politicians.
Both the bond market as well as the forex market reacts to interest rate changes. Bond or fixed income markets have a more intuitive relationship with the forex markets as both are heavily influenced by the interest rate expectations. However, the short term supply and demand fluctuations interrupt most attempts to establish a viable link between the two markets on a short term basis.
Sometimes, the forex markets react first and fastest to the shifts in the interest rate expectations. At other times, the bond markets more accurately reflect the changes in interest rate expectations with the forex market doing the catch up.
Changes in the relative interest rates exert a major influence on forex markets. As a forex trader, you definitely need to keep an eye on the yields of the benchmark government bonds of the major currency countries to better monitor the expectations of the interest rate market. You can keep an eye on the US interest rates by following the yield curves of the treasury bonds. Similarly, you can watch the flow of money between the US and EU economies by watching the differential between the US Treasury Bonds and the German Bunds. - 23199
About the Author:
Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading stocks and currencies. Try These 1500 Pips A Day Forex Signals From Heaven. Develop Your Own Forex Trading System!
posted by X - Men @ 5:28 AM
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