The Impact of Global Events on Forex Markets
The forex market can be incredibly volatile and react in unexpected ways to world events, including political upheaval and major central bank decisions – all of which have an effect on the forex market, and therefore define it.
Economic events too were important because they were liable to change the comparative values of one country’s money against another’s, so traders had to be on their guard for any changes in economic policy that would lead to expected reactions in the market and resultant modifications to their strategies.
Natural Disasters
The fx market is naturally affected by world events, like natural disasters. A natural disaster can have a dramatic impact on expectations of the outlook of a nation-state, leading risk-averse investors to seek haven for their capital in safer haven currencies.
Natural disasters can also wreak havoc on the economy by ravaging infrastructure and disrupting supply chains, which might cause investors to start bailing on a country’s commercial goods in favour of more secure products, leading to a decrease in demand for that nation’s goods and services, as well as its currency falling in value on the international market.
For this reason, governments of nations tend to counter the effect of shrinkage of their currency value through lowering interest rates, tax breaks, etc. However, this alone may not be enough to overcome an abrupt decrease in currency value. Thus, traders of the forex markets should be aware of natural disasters that may have an impact on the forex markets, and take preventive measures to limit their losses and, perhaps, to profit from such events; for instance, they can subscribe to a market data vendor supplying them with historical and real-time forex data so that they will be able to anticipate movements before they happen.
War
Historically, exchange rates have often been driven by conflict. In the immediate aftermath of war, the cost to import goods from abroad rises while the value of domestic currency in the market drops – as investors shift towards safer assets abroad – and as expected economic growth tumbles and as inflation soars.
War for Clausewitz in On War was between ‘major interests’, and he regarded it as a legitimate political instrument, including for purposes of honour or survival, bellicose culture, retaliation for incursion or in answer to internal pressure, ambition or opportunism.
The conflict between Russia and Ukraine, meanwhile, has thrown the foreign exchange (forex) markets into turmoil, and as an instrument for pricing commodities that are mainly denominated in the US dollar, geopolitical risks have sucked capital flows and risk sentiment from this asset class, and also placed emerging market economies in a stressful position by training their economies to be caught between balancing monetary stimulus vs inflationary pressures while also avoid a strong US dollar.
Political Upheaval
This is a market that follows political developments, and prices react to geopolitical tension and central bank decisions by making significant leaps at least once every month. Every trader needs to master the finer art of hedging and risk management to survive because several times a month, you wake up in the morning to find your account is significantly different from what it had been just the day before.
In the case of the Covid-19 pandemic, foreign exchange market participants can observe that currencies of countries with a better health response did better than their equivalents in those with a more lackadaisical or nonexistent response. An increase in political tensions between trading partners, such as the US and China, can immediately see trade-sensitive currencies such as US dollars, euros or sterling undergo some significant swings as capital shifts into ‘safe haven’ currencies such as the Japanese yen and Swiss franc.
Trade takes place in the foreign exchange (or forex) market, which is the largest and most connected in the world, with more than $5 trillion traded each day. Events, even in the farthest corners of the world, can suddenly devalue a currency and cause a ripple effect. Stability or lack of stability in the political sphere can have huge knock-on effects on economic relationships, as well as the value of currencies, globally. Traders therefore need to be as up-to-date as possible on world affairs to immediately react to unexpected news.
Central Bank Decisions
Finally, since the forex market is a global, interconnected system in which trillions of dollars trade hands daily, its performance might well be influenced by a variety of geo-political events taking place in different parts of the world, from political turmoil and natural calamities to war.
Because these events have a bearing on the economies of nations involved and the strength of their currencies, traders do well to watch these indicators in order to adjust the trading strategy in tune with the actual trading environment and to take advantage of the trading opportunities available.
Official decisions by central banks – such as raising interest rates or altering policy positions – impact on the value of a currency. To these investors and traders, central banks represent ‘lenders of last resort’ that are in charge of overseeing the activities of commercial banks within the country. Hiking rates tells investors that the economy is advancing and boosts the value of a country’s currency. On the other hand, cutting rates or making negative policy announcements tells the markets that growth might falter or hurt national currencies.
