The Forex market is filled with all kinds of features and tools that tend to be employed by the investor or trader to make the most of their investments. So if you’re a new investor, you need to be aware of the factors that move the market and acknowledge the many aspects that come with the same. Understanding these factors will surely be of great help, and let this article be your first guide towards getting started in the Forex market.
Supply & Demand
The forces of supply and demand require no introduction because they have been governing several markets on a similar note. So the Forex market is no different, and the forces of supply and demand call the shots for good. But then again, there are other related factors that influence supply and demand, such as trade flows and capital flows. Analyzing the same will lead to a great start if the Forex market is your next target.
1. Trade Flows
In simple terms, trade flows are nothing but the measure that looks into net exports and imports of a particular country. Together, these components constitute the current account, and its influence needs to be decoded. To take things forward, countries where exports are greater than imports showcase a positive current account, and thus, their currency is more likely to be depreciated. In the same way, countries, where imports are greater than exports, will have a negative current account, and their currency might appreciate.
2. Capital Flows
Capital flows depict the net quantity of currency traded through capital investments, and it includes two types of aspects. I.e., physical flows and portfolio investments. While physical flows result from foreign entities selling local currency and buying foreign currency for FDI, portfolio investments talk about the investment made on the global market. With both these aspects coming into the picture, capital flows enter the mix and influence various other factors.
The appreciation and depreciation of a nation’s or country’s currency are linked to the inflation rate, and one will have to look at these statistics before investing. For example, if the inflation rate in America is lower compared to Japan, then the U.S Dollar is expected to appreciate in value compared to Yen. Due to that, investors will prefer to purchase the U.S. Dollar over the Yen as inflation rates dictate their decision. As apart from supply and demand, the inflation rate is another factor that one needs to look into.
Understanding these factors will significantly help you make the right decisions, and it is one that you need to explore more. Hence, these are the factors that move the Forex market, and these points need to be understood.