Forex & Other Markets (Part II)
Take oil as an inflation input and a limiting factor on the overall economic growth. The higher the price of oil, the higher the inflation would be and the slower the economic growth is going to become. The lower the prices of oil, the lower the inflationary pressures are going to become but this is not always true.
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: 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 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. Warren Buffet is the famous example who became the second riches man in the world by investing in good stocks over the years.
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.
Long term correlation studies bear this out. 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.
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: The bond market rules the world. Everything that anyone does in the financial markets anymore is built upon interest-rate analysis. When interest rates are on the rise, at some point, doing business becomes difficult, and when interest rates fall, eventually economic growth is energized.
Financial markets in interest rate futures, Eurodollars, and Treasuries (bills, notes, and bonds) important for all consumers, speculators, economists, bureaucrats, and politicians due to the relationship between rising and falling interest rates.
How can you anticipate the interest rate changes in the market? By following the bonds market! Ten-year T-note yields are the key for setting long-term mortgage rates. By watching this interest rate, you can pinpoint the best entry times for re-mortgaging, relocating, or buying rental property, and you can keep tabs on whether your broker is quoting you a good rate. Both the bond market as well as the forex market reacts to interest rate changes and inflation. 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.
Just about every country in the world with a convertible currency has some kind of bond or bond futures contract that trades on an exchange somewhere around the world. Sometimes, the bond markets more accurately reflect the changes in interest rate expectations with the forex market doing the catch up. At other times, the forex markets react first and fastest to the shifts in the interest rate expectations.
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. - 23311
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: 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 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. Warren Buffet is the famous example who became the second riches man in the world by investing in good stocks over the years.
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.
Long term correlation studies bear this out. 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.
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: The bond market rules the world. Everything that anyone does in the financial markets anymore is built upon interest-rate analysis. When interest rates are on the rise, at some point, doing business becomes difficult, and when interest rates fall, eventually economic growth is energized.
Financial markets in interest rate futures, Eurodollars, and Treasuries (bills, notes, and bonds) important for all consumers, speculators, economists, bureaucrats, and politicians due to the relationship between rising and falling interest rates.
How can you anticipate the interest rate changes in the market? By following the bonds market! Ten-year T-note yields are the key for setting long-term mortgage rates. By watching this interest rate, you can pinpoint the best entry times for re-mortgaging, relocating, or buying rental property, and you can keep tabs on whether your broker is quoting you a good rate. Both the bond market as well as the forex market reacts to interest rate changes and inflation. 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.
Just about every country in the world with a convertible currency has some kind of bond or bond futures contract that trades on an exchange somewhere around the world. Sometimes, the bond markets more accurately reflect the changes in interest rate expectations with the forex market doing the catch up. At other times, the forex markets react first and fastest to the shifts in the interest rate expectations.
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. - 23311
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 Mr. Forex at
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