|
|
|
Forex vs. Stocks
Detailed Answer Key |
 If the Australian stock market rallies the Australian dollar SHOULD |
 |
Strengthen |
|
|
|
A rallying stock market in any part of the world provides an ideal investment opportunity for individuals regardless of their geographic location. Australia, with its ample mineral resources in close proximity to booming China, has seen its All Ordinaries Index more than double since 2003. As the equity market has risen, investment dollars have flowed in to seize the opportunity, and the Australian dollar has risen as a result. Alternatively, falling equity markets see investors move money out to find better opportunities elsewhere, putting downward pressure on a currency.
|
 If the US current account deficit widens due to a Japanese sell off of US treasuries, the US dollar SHOULD |
| |
Weaken |
|
|
The US currently imports more than it exports, so it has a trade deficit. This net flow of dollars out of the US puts downward pressure on the value of the US dollar, as US dollars are sold to buy foreign goods in foreign currency. Because of this, the US requires net foreign capital inflows, such as investments in the US stock or bond markets, to finance the deficit and push up the currency. The large US trade deficit requires net foreign capital inflows of over $2 billion per day. Smaller than expected purchases of American assets by foreigners offer a possible signal that the deficit may be becoming unsustainable, and should weaken the US dollar. |
 In a surprise decision, the FED raises interest rates by
50 bp. The US dollar SHOULD |
| |
Rise |
|
|
Over the past few years, interest rate expectations have been the biggest mover of currency prices. When a country raises its interest rates, the currency tends to strengthen. This is because countries with high interest rates are capable of attracting foreign investment from individuals, institutions, and governments. Indicators that have the biggest impact on interest rates are PPI, CPI, employment, and GDP. These are the same indicators that tend to have the biggest impact on currencies.
The table below documents the rise of Eurozone interest rates. The European Central Bank raised rates 25 bp repeatedly during this time, while the rate in Japan was raised only twice, in June 2006 and February 2007.
|
|
|
|
Date |
New Rate |
|
Euro/Yen Price |
|
|
|
|
June 15, 2006 |
2.75% |
|
145.01 |
|
|
August 9, 2006 |
3.00% |
|
148.37 |
|
|
October 11, 2006 |
3.25% |
|
149.91 |
|
|
December 13, 2006 |
3.50% |
|
155.38 |
|
|
March 14, 2007 |
3.75% |
|
154.85 |
|
|
June 13, 2007 |
4.00% |
|
163.39 |
|
The steady series of interest rate rises by the ECB really manifested themselves in the euro/yen price during the course of 2006 and 2007. Investors worldwide pulled out of low-yielding investments in Japan (and even took out low-interest loans there), and invested the money in Europe. This movement led to a rise of 12.67% over course of the year. Clearly, the rapid series of interest rate cuts had left their mark. With an FXCM account, you can trade movements like this with up to 200:1 leverage, and you can also earn interest on the trade daily. *
|
 If oil prices surge to record highs, what effect will this have on the US dollar? |
| |
Negative |
|
|
| Oil is one of the most important commodities on earth, and one of the most internationally traded. Oil importing countries will see their economies negatively affected by high oil prices, while exporters will see positive effects. The US is the world’s largest oil consumer, and needs to import almost half the oil it uses. Therefore, it will be more sensitive to higher oil prices than other countries, such as the UK, which supplies most of its own oil. |
 An increase in unemployment numbers in the US will have what effect on the US dollar? |
| |
Negative |
|
|
Currency prices are strongly affected by the overall strength of the economy. The unemployment rate is a widely recognized indicator of overall economic strength and can affect currency prices. When unemployment is high, the economy may be weak – and its currency may fall in value.
The monthly Non-Farm Payrolls release in the United States is one of the most market-moving regular events in FX. For example, on January 5, 2007, the Bureau of Labor Statistics reported that payrolls had increased by 167,000 in the previous month. The market had been expecting an increase of only 110,000. The better than expected news cause the US dollar to surge against all other currencies, including the Swiss franc, pictured here: |
|
|
| |
| *Without proper risk management, Currency Trading has a high degree of leverage which can lead to large losses as well as gains. |
|
|
|
|
