Forward Diary

Forex - What drives currencies?

Forex brokers will provide you with a range of tools to help you trade, in addition to the trading software, including a list of currency pairs, graphs and technical indicators. However, fundamental information can be just as influential on your trading as technical analysis. When you understand the information behind the news regarding your chosen currencies, you will be able to trade more confidently when news and politics move the market. Some currencies are closely tied to commodity prices, mainly gold and oil. The four major currencies that are usually mentioned in conjunction with commodity prices are the AUD, CAD, NZD and CHF. Watching and learning how your chosen currency pair reacts to commodity market movements can be valuable, offering you a fairly reliable predictor of price movement. As mentioned, politics can play a strong role in the value of a currency. As a general rule, the more volatile a country’s politics, the more volatile is its currency. Because of Switzerland’s political neutrality and the substantial gold backing of its currency reserves, the CHF tends to be seen as a safe haven during periods of uncertainty and CHF/USD has a strong positive correlation with gold prices. Watching the news is important for forex traders and the fact that announcements can lead to market volatility provides opportunities for traders to make money. The major economic announcements, particularly those from the US, are all available as soon as they happen from websites such as Moneyam.com, along with a forward diary showing what’s coming up. Among the key figures reported are gross domestic product, retail sales, consumer price indices, US non-farm payrolls and industrial production. These are all classed as important to ‘fundamental analysis’ of currencies as opposed to technical analysis using charts. However, trading around news times can be difficult to get right, as the market reacts rap- idly: a safer option at first is to use your acquired knowledge to understand trends so that you can aim for small daily profits. One benefit forex offers, which is not always appreciated, is that currencies can be used to hedge against adverse movements in other assets held, such as equities and bonds, including funds. This type of asset diversification in a portfolio is more relevant to longer-term investing than trading but is still worth exploring as a protection against sharp corrections.  This ‘How to’ guide is produced by Shares Magazine and is only for general information and use, and is not intended to address particular requirements. The value of investments and the income derived from them can go down as well as up. Past performance is not necessarily a guide to future performance. You should get professional financial advice before making any investment decisions