FOREX FUNDAMENTAL FACTORS

While foreign exchange movements are influenced by international trade in goods and services, this effect is small relative to the buying and selling associated with investment-related activity. International companies, financial institutions, investment firms and funds desiring to invest in a foreign country, whether in corporate or government financial assets or real assets such as building and property, must first acquire that country's currency. Investment decisions are motivated by a simple expectation: to earn profit. The greater is the perceived gain of an investment in a country, the greater will be foreign participation in that investment and this will work to raise the value of that country's currency. For example, the significant rise in value of Brazil's stock market leading up to 2009 and the foreign investment that this attracted led to a marked appreciation of Brazil's currency.

The release of any news that has implications for foreign investment opportunities in a country can have an impact on that country's currency. For example, strong economic data that translate into a rising domestic stock market can lead to a general appreciation of the domestic currency in response to buying from foreign investors. So, too, can rising domestic real-estate prices so long as this is not associated with rising inflationary expectations. Domestic inflation in general tends to discourage foreign investment and this can weaken the domestic currency.

High rates of return, or expectations that rates will move higher, on bonds, short-term notes and/or money market instruments will also attract foreign investment from those countries having lower rates and can provide a boost to the value of the domestic currency provided that the higher rates are not seen as being a consequence of rising inflation or excessive government borrowing.

On the political front, a government that becomes more protective in its trade posture with the international community will likely see a general decline in foreign investment and this will serve to undermine the domestic currency.

At any given time, there may be a range of factors affecting the value of a country's currency, some even working against each other. Through careful study and observation, the forex trader can start to determine which are the more relevant for a particular currency pair, how those factors may change, and then place an appropriate forex trade.