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Analyse Currencies
US Stock Market Rally = Good for the US dollar, Bad for the Euro
Almost everyone has an opinion about where the US stock market is heading but what about the euro? You may know more than you think. Currency traders closely follow the US equity markets to predict how the US dollar will perform against the euro. There is a high correlation between the performance of the US stock market and the USD (against the Euro). A rallying stock market in any part of the world provides an ideal investment opportunity for individuals regardless of geographic location and as a result there is a strong correlation between a countrys equity market and its currency. If the equity market is rising, investment dollars will flow in to seize the opportunity. Alternatively, falling equity will have domestic investors selling their shares to seize investment opportunities abroad.
Although seemingly a mystery to many, analysing currency movement relies on macroeconomic factors- or big picture events. Once traders have an understanding of the big picture pertaining to an economic region, they can place trades in the currency market in an effort to profit from their analysis.
Interest Rates
If the market has uncertainty regarding interest rates, then any bit of news regarding interest rates can directly affect the currency markets. Traditionally, if a country raises its interest rates, the currency of that country will strengthen in relation to other countries, as investors shift assets to that country to gain a higher return. Hikes in interest rates, however, are generally bad news for stock markets. Some investors will transfer money out of a country's stock market when interest rates are hiked, believing that higher borrowing costs will affect balance sheets negatively and result in devalued stock, causing the country's currency to weaken. Which effect dominates can be tricky, but generally there is a consensus beforehand as to what the interest rate move will do.
Unemployment Rate
The unemployment rate is a strong indicator of a countrys economic strength. When unemployment is high, the economy may be weak and hence its currency may fall in value.
Geopolitical Events
Like all markets, the currency market is affected by what is going on in the world. Key political events around the world can have a big impact on an economy and the value of its respective currency.
Below is a sample trade of how a trader could have profited in the currency market using the three aforementioned factors.
Sample Trade: Profiting on the EUR/USD
To see how a trader could have earned a rather substantial profit relying solely on the macroeconomic factors, lets look at a sample trade pertaining to the EUR/USD.
On July 6 of 2001, the euro was valued at approximately .8350 US dollars. At its peak value in the last week of May, the euro could be converted at a rate of circa 1.1940 US dollars an increase of nearly 43%.
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Think You
are Clueless about
the Currency Market? |
 If the US stock market rallies the
US dollar SHOULD |
 If the US trade deficit widens due to Japanese sell off of US treasuries, the
US dollar SHOULD |
 In a surprise decision, the FED raises interest rates by 50 bp. The US dollar SHOULD |
 If oil prices surge to record highs, what affect will this have on the US dollar? |
 An increase in unemployment numbers in the US will have what affect on the US dollar? |
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