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Geopolitical Influence in the Forex Market
Written by: PaxForex analytics dept - Friday, 04 September 2015 0 comments
The currency of every country can potentially be converted to a universal and exchangeable foreign currency in international markets; this however happens only when such a currency is demanded from other countries. The increase of currency demand in global foreign currency exchange markets results in the discussion of currency geopolitics. It means that a country which is successful in providing its economic and political security will also be able to employ its currency as a globally valid currency.
Geopolitics is nothing more than a fancy word used to describe what’s going on in the world at large. As it’s applied to the currency markets, geopolitics tends to focus on political, military/security, or natural disruptions to the global economy or individual regions or nations. Because currency markets are the conduits for international capital flows, they’re usually the first to react to international events as global investors shift assets in response to geopolitical developments.
Currency markets have no national or patriotic allegiances when it comes to favoring one currency over another. The forex market simply calculates the likely economic fallout from any international event such as a military conflict or change of political leadership in a major economy and its likely
currency impact. As such, you have to interpret each international event dispassionately, with an eye on the short and long term economic impact to determine its significance for individual currency pairs.
Generally, Australian and New Zealand dollar currency pairs and to a lesser extent Swiss Franc appreciate during such times. Australia is a large gold exporting country. The value of its currency is therefore highly influenced by the price of gold in the commodities market. In addition, the value of the New Zealand currency is influenced by the Australian dollar being its closest neighbor. Swiss Franc, on the other hand, is considered politically neutral country by most investors. Therefore they tend to invest in the currency in the hope that its currency will not be affected by the geo political turmoil and remain stable during the period.
These are just a few events that can have a profound effect on the currency markets. The key points is that much of a currency's value is derived from the economic strength of the nation, and any unforeseen uncertainty to predictable future forecasts of economic outputs will typically not work in a currency's favor. While it is very difficult to plan for the unexpected in the forex market, an informed trader will be quicker to react to global events than one who is unsure of what moves to make in their wake.