What impacts Currency rates?
The same thing that affects the stock market! It is a combination of fundamental, political and technical factors along with the behavioral finance aspect which includes investor sentiment, psychology and supply demand components.
Fundamental and economic components include economic policies that pertain to central bank monetary policy regarding interest rates, inflation controls, various economic health reports and checks and balances in the system
Economic Policy consists of the following monetary policy and fiscal policy, which is the spending and budget practices.
Economic factors might include:
1. Inflation trends
2. Economic GDP to debt ratios
3. Government surpluses or budget deficits – negative sentiment when the government is expanding budget deficits and in a positive trends when budget deficits narrow.
4. Balance of trade levels – there is a balance between the trade flow and the demand of service and goods of the nation’s currency.
Political Conditions include:
1. The market can be affected by international political actions and events. Negative trends can develop when there is unstable leadership and questions that surround control.
Behavioral Economics and Psychology- This is sometimes hard to quantify but still a huge influence on the direction of any asset class
1. If the news is widely known, it might already be discounted into the market pricing
2. Flight to quality to flight to safe havens. Many times the recipient could be in big trouble too but is better off from where they are fleeing
3. Long-term trends like business cycles so for example, countries like Canada that are rich in natural resources are well thought of based on investors looking for hard asset themes
4. Economic releases like employment, money, supply, inflation and trade balance figures.