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Unit 14: Currency/Forex Market

include such things as cars and appliances, giving economists an idea of the amount of individual Notes
spending on these longer-term goods, along with an idea of the health of the factory sector. This
measure again gives market participants insight into the health of the economy, with data being
released around the 26th of the month by the Department of Commerce.
Trade and Capital Flows

Interactions between countries create huge monetary flows that can have a substantial impact
on the value of currencies. As was mentioned before, a country that imports far more than it
exports could see its currency decline due to its need to sell its own currency to purchase the
currency of the exporting nation. Furthermore, increased investments in a country can lead to
substantial increases in the value of its currency.
Trade flow data looks at the difference between a country’s imports and exports, with a trade
deficit occurring when imports are greater than exports. In the U.S., the Commerce Department
releases balance of trade data on a monthly basis, which shows the amount of goods and services
that the U.S. exported and imported during the past month. Capital flow data looks at the
difference in the amount of currency being brought in through investment and/or exports to
currency being sold for foreign investments and/or imports. A country that is seeing a lot of
foreign investment, where outsiders are purchasing domestic assets such as stocks or real estate,
will generally have a capital flow surplus.

Did u know? Balance of payments data is the combined total of a country’s trade and capital
flow over a period of time. The balance of payments is split into three categories: the
current account, the capital account and the financial account. The current account looks at
the flow of goods and services between countries. The capital account looks at the exchange
of money between countries for the purpose of purchasing capital assets. The financial
account looks at the monetary flow between countries for investment purposes.
Macroeconomic and Geopolitical Events
The biggest changes in the forex often come from macroeconomic and geopolitical events such
as wars, elections, monetary policy changes and financial crises. These events have the ability to
change or reshape the country, including its fundamentals. For example, wars can put a huge
economic strain on a country and greatly increase the volatility in a region, which could impact
the value of its currency. It is important to keep up to date on these macroeconomic and
geopolitical events.
There is so much data that is released in the forex market that it can be very difficult for the
average individual to know which data to follow. Despite this, it is important to know what
news releases will affect the currencies you trade.

Self Assessment

Fill in the Blanks:

12. ……………………….. is the economic theory that price levels between two countries should
be equivalent to one another after exchange-rate adjustment.
13. Fisher Effect theory suggests that the exchange rate between two countries should change
by an amount similar to the difference between their ……………………….. interest rates.
14. ……………………….. data measures the increases and decreases of price levels over a
period of time.

15. The ……………………….. of a country is a measure of all of the finished goods and services
that a country generated during a given period.

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