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April 26, 2021

Factors to Consider when Forming Currency Biases

Theo Ashley-Hacker

Interest rates

The big one. Increases in interest rates cause a currency to appreciate as foreign capital is attracted by the incentive of higher returns on their money, which causes its value to rise. There are many ways investors try to predict interest rate changes, from the Federal Reserve Chair's speeches to CPI figures. They look for signs that central banks may considering changing rates. You can do the same.

Economic Performance

Economies are said to be performing well when the companies that operate in them are performing well enough to be able to expand their workforce. This results in more spending in the economy as people are employed so have more money to spend, and as overseas companies invest. When they are doing this they need to invest with the local currency so it appreciates. This increased spending is likely to increase inflation which can lead to central banks hiking interest rates. Economic indicators such as inflation, retail sales and unemployment figures are released monthly and are used by central banks to consider interest rates.

COT reports

Commitment of Traders reports are released weekly and give an overview of the general direction different participants in the futures market are trading. The commercial aspect refers to business and large corporations which employ the best economists so being on their side isn't normally a bad thing. Opposed to commercial is is non-commercial traders. They tend to be tipped against commercial traders and generally loose money.

Balance of Payments

Trade balance information is released monthly and gives the difference in the value of imported and exported goods during the reported month. It both affects and is affected by exchange rates as if you wish to buy something from another country then you need to purchase their currency to do so. When there is a strong demand for an economy's goods, its currency appreciates as there is more demand for it, the change in the balance of payments can sway investors outlook for an economy as demand for the currency increases when demand for locally produced products increases from abroad.

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