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Question no 1:What are the reasons behind the strength of selected currencies which are dollar, euro

and pound?

Answer:

The U.S. dollar is strong for a number of reasons, all of them good things.

Relatively strong U.S. economy. Our economy has been outperforming most international economies in
recent years-especially the developed economies that are our biggest trading partners in Europe and
Japan. A relatively good (even if not great) economy has helped boost U.S. financial markets and made
the U.S. a more attractive destination for foreign capital.

Improving trade balance. The U.S. trade balance has improved dramatically, thanks in large part to the
boom in U.S. energy production and resulting drop in oil prices that has reduced U.S. imports and
increased exports. By keeping more dollars here at home, a smaller trade gap is bullish for the dollar.

Improving budget deficit. The measures that the United States has taken-in some cases painfully-to
reduce the deficit by cutting spending (remember the sequester) and increasing taxes (remember the
fiscal cliff) have reduced the U.S. federal deficit from as high as 11% of gross domestic product (GDP) in
2010 to about 3% as of the end of 2014. By strengthening the U.S. balance sheet, a shrinking budget
deficit is bullish for the dollar.

Higher interest rates relative to developed alternatives. The 10-year U.S. Treasury yield, at 1.80% as of
January 23, 2014, has been more than cut in half over the past five years. Still, it is much higher than the
equivalent yields in Europe, where the German 10-year bund yield stands at 0.36%, and Japan, where
the 10-year Japanese government bond (JGB) yields 0.22%. Higher interest rates in the United States
have made U.S. bonds more attractive to foreign investors and enhanced the attractiveness of the dollar.

IMPLICATIONS OF A STRONG U.S. DOLLAR

A strong dollar has important investment implications for inflation, commodity prices, earnings, and
foreign exporters.

Downward pressure on inflation. The U.S. imports a lot of goods from trading partners overseas, which it
pays for with foreign currencies. A stronger U.S. dollar makes those goods cheaper, putting downward
pressure on inflation and providing support for consumer spending on imported goods. Less inflation
means the Federal Reserve (Fed) can keep interest rates lower for longer, which may help mitigate
potential losses in the high-quality bonds this year by slowing the rise in yields while also supporting
further gains for U.S. stocks.

Downward pressure on commodity prices. The world generally buys commodities in U.S. dollars, so a
strong dollar makes these commodities more expensive. There is no better example right now of the
dollar's impact on commodities than oil.

Euro:

In recent months, European inflation has fallen to 0.5%. In several countries within the Eurozone,
countries are now experiencing actual deflation. In the past year, the Euro has appreciated against a
basket of currencies, such as the Dollar, the Pound and also other Emerging market currencies.Why has
the Euro appreciated?

Up until 2012, there were concerns over the liquidity of many sovereign European countries – bond
yields in countries such as Ireland, Italy, Portugal and Spain were rising to dangerous levels. Since 2012,
the ECB has been more willing to act and intervene in the bond markets. This has helped reduce bond
yields, giving more confidence in holding Euro securities. The worst fears of the Euro bond crisis have
eased, causing an appreciation in the Euro.

Low inflation does make a currency more attractive. In the long term, relative inflation rates play an
important role in determining the level of a currency. If prices in Europe are rising at a slower rate than
elsewhere, European goods become relatively more attractive and therefore, there is higher demand for
Euros. Europe has one of the lowest inflation rates in the world, so it’s goods are relatively competitive.

Another reason for the relative strength of the Euro are signs of improving economic activity. This might
sound surprising given that European unemployment is still at critical levels, but investors often look for
small signs of the economy turning the corner. They may think that signs of improved private sector
activity leads to the possibility of future growth; therefore in the medium / long term, there is the
prospect of a return to more normal economic activity and therefore higher interest rates. (in the long
term)

Currencies often don’t perform as you would expect. There are many economic reasons to explain
changes in the currency (e.g. see: factors that influence the exchange rate). However, in the real world, it
can appear exchange rates don’t seem to follow the logic of economic theory. This is because:

It may be due to speculation about future changes in the economy, with investors trying to predict what
may happen in a year or two.
It may just be a correction to a previous decline. For example, since the start of the Euro crisis in 2010,
the Euro was weak, therefore, to some extent the recent strength of the Euro could be a correction for
that previous weakness.

It may because investors are nervous about the performance of all currencies, given the general global
economic weakness. Therefore, a currency like the Euro benefits from being relatively less bad than
others.

The strength of the Euro, may prove to be short lived. Even the ECB is becoming concerned about the
strength of the Euro. The ECB has said it believes the strong Euro is an important factor in reducing
inflation to 0.5%, and also reducing exports and economic growth. The ECB are even hinting at
unorthodox monetary policy, such as quantitative easing. If the ECB do loosen monetary policy and
target higher inflation, then we can expect to see the Euro to weaken in the coming months.

Pound:

The pound sterling (GBP) is one of the more popular currencies traded in the foreign exchange (forex)
market. As the home currency of the United Kingdom, the pound sterling has a rich history and is the
oldest actively traded currency on the forex market. Its popularity also stems from the fact that London
is one of the largest forex hubs in the world.

Due to its popularity and familiarity among traders, many people that begin to trade forex often choose
the GBP as one of the currencies they trade. For traders that trade on fundamentals (economic reports
and news events), knowing which reports to follow that affect the GBP the most can save them a lot of
time and provide guidance on specific areas on which to focus their efforts. With that said, this article
will pinpoint some economic reports that should be useful to newer traders as a starting point for
further research.

TRADING FOREX & CURRENCIES

5 Reports That Affect The British Pound

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BY JOSEPH NGUYEN Updated Nov 15, 2018

The pound sterling (GBP) is one of the more popular currencies traded in the foreign exchange (forex)
market. As the home currency of the United Kingdom, the pound sterling has a rich history and is the
oldest actively traded currency on the forex market. Its popularity also stems from the fact that London
is one of the largest forex hubs in the world.
Due to its popularity and familiarity among traders, many people that begin to trade forex often choose
the GBP as one of the currencies they trade. For traders that trade on fundamentals (economic reports
and news events), knowing which reports to follow that affect the GBP the most can save them a lot of
time and provide guidance on specific areas on which to focus their efforts. With that said, this article
will pinpoint some economic reports that should be useful to newer traders as a starting point for
further research.

Five Core Areas

Before we begin, it is important to understand that all currencies across different countries are generally
affected by the same underlying economic factors. Specifically, five factors that tend to affect all
currencies the greatest include monetary policy, price inflation, confidence and sentiment, economic
growth (GDP) and the balance of payments. Using these five general factors as a template, you can then
determine which reports are most important to form a comprehensive view of the direction of a
currency.

Prices and Inflation

Reports to Focus on CPI, PPI

The first important factor, price, and inflation, plays a crucial role in the value of the GBP. In general,
countries with high levels of inflation relative to other countries see their currency value depreciate
more compared to those other currencies. In addition, inflation also usually causes the central bank to
take action, such as adjusting interest rates to control these unwanted effects.

To gauge levels of inflation in the U.K., traders will typically follow the Consumer Price Index (CPI),
compiled and released by the Office for National Statistics. The CPI calculates the change in prices of
goods and services purchased by consumers in a given period. This report is important because it is the
measure that the Bank of England (BOE) uses for its inflation target. Any changes in the CPI that deviate
from the BOE's inflation target could imply future monetary policy action that could significantly affect
the GBP.

In addition, although consumer prices tend to affect the majority of changes in the level of inflation,
other measures such as the Producer's Price Index (PPI) are also useful. The PPI is considered by many a
leading indicator of inflation because it shows inflationary changes at the raw material level that could
eventually work its way up to the consumer level as reflected in the CPI. The PPI report is also released
earlier than the CPI, so both should be viewed together for a more complete picture.

Monetary Policy

Report to Focus on: Bank Rate, BOE Inflation Report

Monetary policy enacted by the Bank of England (BOE) is also an important factor to consider. One of the
core mandates of the BOE is to promote monetary stability defined by the bank as "low inflation and
confidence in the currency." Whenever the BOE feels that inflation is getting to a level that threatens the
stability of the pound, the bank will use monetary policy tools at its disposable to control inflation. It is
the timing of these monetary policies, such as interest rates changes that traders want to predict.

To keep track of monetary policy, traders will follow the changes in the bank rate, which is the interest
rate banks charge other banks on balances held at the BOE. The rate decisions are determined by the
Monetary Policy Committee (MPC) on a monthly basis and can be found at the Bank of England website.
Of note is that if the MPC simply maintains the previous bank rate, there will generally be no
accompanying discussion. However, if there is a change in the rate, the MPC will release a statement
which is more interesting and can give clues about future action.

Confidence and Sentiment

Report to Focus on: Gfk Consumer Confidence, Nationwide Consumer Confidence

Surveys that gauge market sentiment are another important tool for fundamental traders. Confidence
and Sentiment reports for the U.K. are important because traders want to know whether the majority of
people are optimistic about the economy or pessimistic. The changes and the size of the change can be
keys to detecting shifting trends in the underlying economy and consequently changes in the GBP.

To track sentiment in the U.K., many traders will follow the Gfk Consumer Confidence, and the
Nationwide Consumer Confidence Index (NCCI) reports. Both reports are surveys based on five questions
that relate to the general economic environment, employment and expectations for the future. The main
difference between the reports is the time periods used. For the NCCI, the survey reflects the
respondent's feelings towards their current situation and their expectations for the next six months. On
the other hand, the Gfk reflects the respondent's feelings towards events that happened in the previous
12 months, and their expectations for the next 12 months. Both can be used to gauge sentiment towards
the direction of the U.K. economy.
GDP/Economic Growth

Report to Focus on: Manufacturing PMI, Services PMI, Retail Sales, GDP

The overall level of economic activity in the U.K. is another key factor that can impact currency values.
The primary measure of economic activity in the U.K., as in many other countries, is the gross domestic
product (GDP). There are three different GDP reports traders should be aware of – Preliminary GDP,
Revised GDP, and Final GDP. The Preliminary GDP estimate is released the earliest and tends to have the
biggest impact because it gives traders a first look into the economic health of the U.K. The Prelim GDP is
also the least accurate and tends to be revised in the follow-up Revised GDP and Final GDP reports Also,
because the GDP is a quarterly report, many traders will supplement that report with more frequent
indicators of economic activity such as retail sales, manufacturing PMI and services PMI. As consumers
are generally considered by many as the drivers of economic activity, retail sales are usually given a
larger weighting of importance.

Balance of Payments

Report to Focus On: Trade Balance, Current Account

Lastly, the balance of payments (BoP) for a country is an accounting record of its interaction with the rest
of the world. The BoP is made up of three accounts, but generally, only the current account is of interest
to forex traders. The current account shows how much a country is exporting and importing, and the
flow of income payments and transfer payments. In general, a current account surplus is positive for the
currency as it shows more capital is flowing into the currency than leaving, and a deficit is negative for
the opposite reasons.

Also, it should be noted that the trade balance report is released monthly, while the current account is
released quarterly. If you are just looking for imports/exports data, then the trade balance would be the
report to use.

The Bottom Line

There are numerous economic indicators that can affect the pound. Knowing which data reports to use is
the first step. Being able to interpret and combine reports to generate a trading direction is the hard
part. However, if you are starting out and want to base your pound-based trades on fundamental
reports, these five key areas are a good place for you to start.

Question 2: Determine the reasons for the recent fluctuations in selected currencies which are dollar,
euro and pound.
Answer:

Understanding how currency exchange rates work is important for businesses, investors, currency
traders and, of course, vacationers. But what causes currency exchange rates to fluctuate up and down?
FX101 breaks down the world of currency exchange, from the fundamental to the complex.

Here are 10 factors that affect currency exchange rates:

1. SUPPLY AND DEMAND

Currency can be bought and sold just like stocks, bonds, or other investments. And just like these other
investments – and almost anything else you can buy or sell – supply and demand influences price. Supply
and demand is one of the most basic economic principles, but nevertheless can serve as a good starting
point to understand why currency exchange rates fluctuate.

2. POLITICAL STABILITY

Currency is issued by governments. In order for a currency to retain its value (or even exist at all) the
government which backs it has to be strong. Countries with uncertain futures (due to revolutions, war or
other factors) usually have much weaker currencies. Currency traders don’t want to risk losing their
investment and so will invest elsewhere. With little demand for the currency the price drops.

3. ECONOMIC STRENGTH

Economic uncertainty is as big of a factor as political instability. A currency backed by a stable


government isn’t likely to be strong if the economy is in the toilet. Worse, a lagging economy may have a
difficult time attracting investors, and without investment the economy will suffer even more. Currency
traders know this so they will avoid buying a currency backed by a weak economy. Again, this causes
demand and value to drop.

A strong economy usually leads to a strong currency, while a floundering economy will result in a fall in
value. This is why GDP, employment levels and other economic indicators are monitored so closely by
currency traders.

4. INFLATION
inflation_currency_exchange_rates

HYPERINFLATION CRIPPLED ZIMBABWE’S ECONOMY THROUGHOUT THE LATE 1990’S AND 2000’S AND
DECIMATED THE VALUE OF THE COUNTRY’S CURRENCY

Low inflation increases the value of a currency, whereas high inflation usually makes the value of a
currency drop. If a candybar costs $2 today, but there is 2% inflation then that same candy bar will cost
$2.02 in a year – that’s inflation. Some inflation is good, it means that the economy is growing but, high
inflation is usually the result of an increase in the supply of currency without an equal growth in the real
value of a country’s assets.

Think of it like this, if there is more of something then it’s usually worth less – that’s why we pay so much
for rare autographs and collectors’ items. With more currency in circulation the value of that currency
will drop. Inflation results from a growing economy, this is why China, India and other emerging
economies typically have high growth and high inflation – and their currencies are worth less. Zimbabwe
experienced hyperinflation throughout the late 1990’s and 2000’s reaching as high as 79.6 billion percent
in 2008, rendering the currency near worthless.

But wait, right now many European countries have low, or even negative inflation so how is it that the
euro is dropping? Well, inflation is just one of many factors which impact currency exchange rates.

5. INTEREST RATES

When the Bank of Canada (or any other central bank) raises interest rates it’s essentially offering lenders
(like banks) a higher return on investment. High interest rates are attractive to currency investors,
because they can earn interest on the currency that they have bought. So when a central bank raises
interest rates investors flock to buy their currency which raises the value of that currency and, in turn,
boosts the economy.

But remember, no one single factor influences currency exchange. Often times a country will offer a very
high interest rate but the value of that currency will still fall. This is because despite the incentive of
profiting from a high interest rate, traders may be wary of the economic and political risks, or other
factors – and thus refrain from investing.

6. TRADE BALANCE
trace_balance_currency_exchange_rates

A country’s balance of trade (meaning how much a country imports vs how much that country exports)
is an important factor behind exchange rates. Simply put, balance of trade is the value of imports minus
the value of exports.

If a country has a trade deficit, the value of their imports is greater than the value of their exports. A
trade surplus occurs when the value of exports exceeds the value of imports.

When a country has a trade deficit it needs to acquire more foreign currency than it receives through
trade. For example, if Canada had a trade deficit of $100 to the US it would have to acquire $100 in
American currency to pay for the extra goods. What’s more, a country with a trade deficit will also be
over-supplying other countries with their own currency. The US now has an extra $100 CND that it
doesn’t need.

Basic supply and demand dictates that a trade deficit will lead to lower exchange rates and a trade
surplus will lead to a stronger exchange rate. If Canada had a $100 trade deficit to the US then Canadian
demand for USD would be high, but the US would also have an extra $100 Canadian so their demand for
CAD would be low – due to excess supply.

7. DEBT

Debt, specifically public debt (that is the debt incurred by governments) can also greatly affect interest
rates. This is because a large amount of debt often leads to inflation. The reason for this is simple – when
governments incur too much debt they have a special luxury that you or I don’t have – they can simply
print more money.

If the US owed Canada $100 the American government could simply run over to the mint, fire up the
presses and print out a crisp new $100 bill. So what’s the problem? Well, $100 isn’t a lot of money to a
government nor is $1 million, $1 billion is pushing it but Canada’s public debt is over $1 trillion while
America’s is well over $15 trillion (and grows by $2.34 billion per day). If a country tried to pay its bills by
printing money then it would experience massive inflation and ultimately devalue its currency.
Investors will also worry that a country could simply default on its obligations – or to put it another way –
be unable or unwilling to pay the bills. This is the precarious situation Greece and the eurozone find
themselves in currently.

8. QUANTITATIVE EASING

Quantitative easing – usually shortened to QE – is a mouthful, but it really isn’t all that complicated. The
simplest explanation is that central banks will try to stoke the economy by providing banks with greater
liquidity (meaning cash) in the hopes that they will then lend or invest that money and in doing so boost
the economy. In order to provide this greater liquidity central banks will buy assets from those banks
(usually government bonds).

But where do central banks find this extra cash? The short answer is: they create it. Creating more
currency (increasing supply) will devalue it, but it will also lead to economic growth – or so the theory
goes.

What’s the point of quantitative easing? Central banks will only use QE in times of low growth when they
have already exhausted their other options (like lowering interest rates). After the 2008 financial crisis,
the US, UK and other countries implemented QE, and the European Central Bank just recently
announced that it too will use QE to try to restart the Eurozone economy.

9. UNEMPLOYMENT

Unemployment levels in a country affect almost every facet of its economic performance, including
exchange rates. Unemployed people have less money to spend, and in times of real economic hardship
high levels of unemployment will encourage employed people to start saving, just in case they wind up
unemployed too. Unemployment is a major indicator of an economy’s health. In order to boost
employment a country must boost the economy as a whole. To do this central banks will lower exchange
rates and even resort to more extreme measures like quantitative easing, both of which can negatively
impact the value of a currency. This is why currency traders pay such close attention to employment
statistics.

10. GROWTH FORECASTS

Most countries aim for about 2-3% growth per year. High levels of economic growth lead to inflation,
which can push the value of currency down. In order to avoid devaluing their currency central banks will
raise interest rates, which will push the value of a currency up. Growth forecasts are important indicators
but have to be carefully weighed against other factors.

LAST WORD

If this article has demonstrated anything, it’s that no single factor determines exchange rates. Supply and
demand, political stability, economic strength, inflation, interest rates, trade balance, debt, QE,
unemployment and growth forecasts all interact (and sometimes contradict) each other. FX is complex
and it is never advisable to make serious investment decisions without the aid of a licensed professional.