The global markets are more integrated than ever before; the health of the economy of a nation may severely impact the worlds markets.
Geopolitical events, announcements, and even down to some bad weather on the other side of the world could affect the financial instruments with significance; explained below are some of the key factors which influence an economy in general, and the financial markets, specifically.
Geopolitical factors define political or geographical events and disasters, which could affect and move the markets. Upcoming elections, war, and civil unrest are only some examples where a country’s politics or state may shock markets; Geographical events include extreme weather conditions or earthquakes and more could affect a country’s power to distribute or distribute goods and services.
Damages from such events would also require unforeseen expenditure, in order to build on the infrastructure; trade may also be impacted by geopolitical events – a politically unstable country may not be considered a good trading partner; changes in political systems may hold a currency back in value, until the situation settles – and fiscal policies are announced; war or catastrophic events (such as tsunamis, storms, etc.) affect the economic growth of the nation and again may cause the currency to depreciate significantly.
The more developed the country is, the quicker it may recover from the events of such stature; the more mature markets have the ability to adapt to these situations, typically; for younger markets, events of this kind can be devastating, and negative effects may be felt for a quite some time.
The value of a good and service is always determined through supply & demand; supply defines how the quantity of a good or service which is readily available on the market; while demand defines the number of buyers which desire the said asset/instrument/etc. or service;
The same goes for currencies, as well as other CFD markets; the law of supply & demand means that the higher the demand, the higher the price. Whereas a higher supply, will see a drop in price; in pair trading, like in forex, the price of one currency is higher than the other, and this defines that it is in greater demand, than it is in supply.
Traders monitor trade report balances, due to being a good indication of both the economic health of a nation and specially their currency. When countries participate in international trade, they exchange services, goods, and money in order to do so;
The activity level of international trading is an important indicator to with regards to the value of a country’s currency, and how much demand there is for it; a nation may import goods from another country, and export their own products back to the country.
If importing is conducted more than exporting, then the trade balance would be in deficit, as more money is spent from their pockets buying the currency of the country that they import from, rather than what they would receive from their exports. This could have effect on the value of the currency, especially against the currency of the counterpart as a pair; however, if the nation is in a surplus, then the currency is in greater demand.
Industrial production reports are important as they provide significant data about the productions coming out of the nations’ mines, factories and more, depending on the nation. Such figure also display to which extent the factories and mines are being utilized; a positive example of this would be for the production, as well as efficiency of usage to be increased; such examples are a good indication to monitor, due to the changes that may lead to market volatility in the country.
The currency of a nation is dictated by the conglomerate health of the economy in question; GDP (gross domestic product) is a necessary indication of the economic health of a nation, mainly because it represents the value of the market for goods and services which are produced by the nation, annually; spending of the nation’s governmental body, consumer spending, and international trade are all components which are measured when discussing GDP; this is conducted and announced quarterly, and annually as a total. A high GDP result defines a strong economy, whereas on the other hand, a low GDP result represents a weak/weakening economy.
Global currencies are integrated with the interest rates of a country. As a common rule, the more a rate rises, the more the currency will rise; Central banks lead the nations monetary policy – a key influencer of the interest rates – and use them as a way to monitor and control the value of the currency, as well as inflation.
A high rate of interest encourages people to invest their cash in the nation, and to do so, conversion of the local currency needs to be done. However, if the inflation becomes too high as a result of such events, it may drive the value of the currency to become lower.
As it is possible already known, central banks define the fiscal policy of a nation, in order to aim for the growth of an economy; the focus is on the supply of money, interest rates, and inflation. Such policies which are set by these banks, impacts the markets significantly – which is why the announcements are necessary for traders to follow.
Retail sales reports display how much people are spending in the said country; traders monitor such reports closely on either an annual, or quarterly basis, as it is an indicator on the overall health of a nations’ economy. Investors don’t just look at the numbers, but at how much difference has occurred – whether positively, or negatively – from the previous reports. Retail sales are precursors to the GDP in terms of importance and may display and indicate what might be seen in the reports. In turn, strong sales mean consumer confidence is present. Positive retail sales may mean an increase in the local currency value.
Such data is released on a frequent, routinely basis, and displays the percentage change of those which have jobs; high rates of employment versus unemployment rates show a strong economy, people are earning more, and have more disposable income to spend. However, on the other hand, high rates of unemployment may see the central banks looking in to cutting the interest rates in order to encourage the flow of money in to the country.
Traders follow financial calendars in order to ensure that they do not miss the release of such important, relevant economic indicators – which may have signaled a market move; such reports are released at set dates and times, and any changes to previous reports may lead to market volatility – some of the most followed indicators, aside from the above-mentioned may include: unemployment rate, Customer Price Index (CPI), Producer Price Index (PPI), Purchasing Managers Index (PMI), and home sales, as well as housing starts.