Forex influences

[BradK]

Being over in the UK hassa gotta me thinkin about currency exchanges.

The aussie is pretty strong against the sterling right now.

can someone please list the influences on forex?

eg.

high interest rates.

Or give me a link about the various influences ...

 

[disarray]

i was curious as well but i don't know economics so i did some googling, corrections by people who know more is welcome.

Exchange Rate Tutorial

What Influences Forex Prices

i think some big factors are -

interest rates - these have a big effect on the price of a currency. high interest rates attract global money which makes the currency stronger.

World Interest Rates Table

inflation - higher inflation leads to a weaker currency because it buys less and imports become cheaper so more money flows out of the country. the RBA reckons 2-3% inflation is a sustainable level.

theres this whole interplay between the 2, for eg. in australia now the economy is strengthening and inflation is rising so interest rates are rising to keep it in check. so strong economy + increasing interest rates + low inflation = strengthening currency.

trade balance - the flow of goods between 2 countries. if australia imports $10 from america and exports $12 then the $AU strengthens against the $US because they need to buy more $AU to cover the shortfall.

 

[>Apocalypto<]

What influences FOREX?

Bloody everything!

 

[prawn_86]

What influences FOREX?

Bloody everything!

Lol.

Although i would say there is less fear and greed from small time or 'mum and dad' investors.

makes for less stupid volatility

 

[Trembling Hand]

Lol.

Although i would say there is less fear and greed from small time or 'mum and dad' investors.

makes for less stupid volatility

Not so sure. Has been plenty of stories lately about Japanese Mums going nuts on the carry trade.

 

[>Apocalypto<]

Lol.

Although i would say there is less fear and greed from small time or 'mum and dad' investors.

makes for less stupid volatility

You want to make a bet! have a good look at the 1 hour 4 hour and daily charts you will see lots of huge moves that on the next candle just evened out. FX is much more volitile then the stock exchanges mate, heaps more! but that is what makes it so much fun! example yesterday eur/usd on 1 & 4 hour looked like a short then bang report came out and bang it moved 150 pips. Swissy looked like a new up trend was kicking up next 6-7 hours later its making new lows. great on the short term.

what buying and selling power do mum and dad investors have compared to the interbanks and funds! NOTHING!

Peace

 

[>Apocalypto<]

Not so sure. Has been plenty of stories lately about Japanese Mums going nuts on the carry trade.

Ha Ha Ha

that is a force to be reckoned with TH!

 

[prawn_86]

You want to make a bet! have a good look at the 1 hour 4 hour and daily charts you will see lots of huge moves that on the next candle just evened out. FX is much more volitile then the stock exchanges mate, heaps more! but that is what makes it so much fun! example yesterday eur/usd on 1 & 4 hour looked like a short then bang report came out and bang it moved 150 pips. Swissy looked like a new up trend was kicking up next 6-7 hours later its making new lows. great on the short term.

what buying and selling power do mum and dad investors have compared to the interbanks and funds! NOTHING!

Peace

Ok, perhaps volatility is the wrong word.

next try:
Forex seems to me to be more "logical". IE - although volatile, it doesnt seem to get oversold or overbought to ridiculous amounts as certain stocks can.

That is my newbie view

 

[Stormin_Norman]

The aussie is pretty strong against the sterling right now.

can someone please list the influences on forex?

I spent 7 years at Uni, ending up with a Masters of Economics. That question is a hard one to answer in the length of a blog post. But here it goes.

Simply put currency prices move like other prices of goods; due to supply and demand.

From this all other analysis follows.

Everyone is probably familiar with supply and demand. But I'll quickly do it again, because it is such a fundamental principle in understanding any price movement.



The amount of supply and demand of a good is shown. Green is supply. Small quantity supplied for sale at a low price; high quantity for sale at a high price.

Blue is demand. Lots of demand at low price, and less demand at higher prices.

Where they meet is the equilibrium. It gives us the market price (P1) and the amount of goods traded in the market.

If demand rises, the price and quantity demanded (traded) will rise. As below.



And the opposite effect if the demand falls. The price and quantity demanded (traded) will fall.

The same principle with a rise in supply. As below.



A fall in supply would have the opposite effect. A rise in price and a fall in amount supplied (traded) in the market.

Now to apply to the Foreign Exchange Market:

The Foreign Exchange quotes a relative price between two currencies.

The currencies are our goods. There are two of them. For example the AUD and the USD.

Both of these currencies are independently (and perhaps even jointly) effected by supply and demand.

Each currency's supply and demand effects the value of each country's currency. Because the currencies are quoted together a movement in the supply and demand of either currency will effect the price between the two.

So effectively there are four factors effecting any given pair. In the AUDUSD it is the Australian Dollar Demand, the Australian Dollar Supply, the American Dollar Demand and the US Dollar Supply.

In my blog on Sunday I wrote about this concept with regards to the USD supply and demand. It has been a pretty profitable week after coming to the conclusion I generally reached in my blog post.

Just have to work on my entry/stop loss methods.

 

[Trembling Hand]

Of course with speculation in market supply and demand gets turned on its head. Sorry my masters comes from the school of market hard knocks. :

As prices rise supply also decreases as more want in and those with stock hold for ever higher prices. Opposite with falling prices as prices drop demand decreases. There is always tipping points but supply demand theories aren't that helpful when fear and greed rule.

 

[Stormin_Norman]

you look at a much shorter timeframe then I do though though according to your blog (which is a good read - nice computer display! im jelous).

my time frame is minutes to a couple of hours.

my time frame is hours to a couple of days.

the longer time frame trends are generally more fundamental movements; short term movements seem to be more technical in nature. So I understand where you are coming from.

The 'randomness' of the short term waves caused me problems with my new stop loss/ risk ratio trades. Technical entries are something I have to work on.

Long term however, it is clear to see the effects of fundamentals. That's not to say they are overly worthwhile in analysis with a short time frame however.

And lastly a thought to throw out there. The speculators that buy and sell a currency. Why do they decide to do that? Surely they would be attempting a fundamental analysis of the currencies they trade before selling or buying large lots of a currency.

 

[Trembling Hand]

yeah was being a bit facetious. but it is a bit weird that the supply demand gets turned on its head just because its gone up. Imagine being in a business that as you increased your prices more and more customers wanted it.

 

[prawn_86]

yeah was being a bit facetious. but it is a bit weird that the supply demand gets turned on its head just because its gone up. Imagine being in a business that as you increased your prices more and more customers wanted it.

Going off topic a bit here, but i study a marketing degree and UniSA does a lot of real world research compared to other unis.

They have found that it is pretty consistent with inelastic goods, in particular, alcohol that a price rise can result in increased demand/market share.

Wine especially as it has that 'snob' factor. IE - if its expensive it must be good. Same with vodka, and even beers that move up into the premium or sub premium markets.


bit of useless info for you all

 

[Stormin_Norman]

as marketers were our arch nemesis at uni (even more then accountants) i gotta have a dig and say that if youre going to study economics, for god's sake, don't listen to a marketing teacher about it!

and you show my the diagram you were shown? perfect inelastic demand would not see a quantity demanded increase from a price rise. It might not see a significant fall, but a rise in price in a normal good will not occur.

But I would not class alcohol as either a Veblen good, or a Giffen good.

To me alcohol/drugs are a normal product with an extremely inelastic demand function; which by definition cannot have a quantity demand increase from a price rise.

 

[prawn_86]

I am in the rare position of doing a double degree with both marketing and finance, which also covers a fair bit of economics. So it gives me very polar lessons and theorys

While i agree with the economic inelastic demand scenarios Norman, if you wish, i can source recent studies to back up my claim that a rise in price can (but doesnt assure it)bring about a rise in market share

The thing a lot of economists use to get off the hook is that most S & D graphs are drawn to be "ceterus paribus" (is that spelling right?), or "all other things being equal. Therefore this does not take into account consumer psychology :

man this is getting very academic...

 

[Stormin_Norman]

While i agree with the economic inelastic demand scenarios Norman, if you wish, i can source recent studies to back up my claim that a rise in price can (but doesnt assure it)bring about a rise in market share

market share? oh sorry. i thought you were talking about price and quantity sold.

yes. if one brand product is more inelastic then another, and both prices are risen; then the more inelastic demand will increase market share.

unless they are a special type of good (mentioned above) their level of sales will fall.

market share and sales are two different things. one is relative, the other absolute.

 

[disarray]

As prices rise supply also decreases as more want in and those with stock hold for ever higher prices. Opposite with falling prices as prices drop demand decreases. There is always tipping points but supply demand theories aren't that helpful when fear and greed rule.

one thing i have noticed in my short time in the market is how fear and greed impact the market systems of supply and demand. i've only seen the august correction and january crash but it seems to follow a pattern.

a price range is where everyone agrees the fundamentals say a price should be. markets are just chaotic systems with pre-conditions, responding to various inputs to provide a predictable, ordered outcome. left to its own devices it would just churn along responding to inputs (interest rates, inflation or whatever) and maintaining a "natural balance", like an ecosystem (with the odd extinction period along the way). the problem is people. fear and greed distort our judgement so the "input" into the system becomes erratic which throws the system out of balance (much like our ecosystem).

so there is a price, and a change in supply/demand (fundamental) pre-conditions allows the system to adjust its price up or down to a new natural range. however input fear and greed and this distorts the systems range and pushes it beyond its natural, fundamental limits, leading to a crash or correction (depending on the severity of the distortion).

so greed pushes a price beyond its natural range, its loses balance and corrects to a lower range, fear then kicks in and pushes it below its natural range and insightful (cashed-up) people pick up bargains and push the price back to its natural supply/demand fundamentals trading range. rinse repeat with whatever market.

so with both crashes i've experienced once the market is obviously overvalued it goes to correct, fear pushes it too low then people come into to buy it back to its natural range. money flows first into the big solid fundamental companies (bhp etc.) bringing them back to their natural range (and slimmer profit margins) before moving onto the next tier of stocks and so on. my watchlist has both times now seen the large caps with supply/demand fundamentals in place recover quickly, followed by the next tier (i think we are here now) and barring any further downward corrections the money will flow back into the specs once oxiana etc. are back in their natural trading range.

i suppose the point of this ramble is that -

There is always tipping points but supply demand theories aren't that helpful when fear and greed rule

supply demand fundamentals, through the market system, provide the natural system determined price of something. its a base from which greed and fear distort either up or down. i can't see this in forex but on stock charts it sticks out like dogs balls (i've been watching AED with a morbid fascination for 6 months now).

obviously i'm not an economist and could be wrong, its just how i am seeing it at the moment. cheers.

p.s. thanks for the quick lesson stormin

 

[Stormin_Norman]

o

so greed pushes a price beyond its natural range, its loses balance and corrects to a lower range, fear then kicks in and pushes it below its natural range and insightful (cashed-up) people pick up bargains and push the price back to its natural supply/demand fundamentals trading range. rinse repeat with whatever market.

another thing to think about is bank lending. at times like this, with the demand for liquidity high, it is harder for borrowers to get loans.

this is very very bad for the economy and has its effects lagged 12-24 months. currently good projects are going unfunded because of previous bad projects (sub prime home loans anyone??) were funded.

As a Schumpeterian economist; this is what creates business cycles. innovation and the entrepreneurial spirit will allow the economy to grow along these cycles endlessly.

as another aside, the US needs 2 quarters of negative growth to be in a recession. i doubt the US has actually hit the definition of a recession yet. so i think anyone predicting the end of a 'recession' at this point is totally ahead of themselves.

 

[>Apocalypto<]

one thing i have noticed in my short time in the market is how fear and greed impact the market systems of supply and demand. i've only seen the august correction and january crash but it seems to follow a pattern.

Be careful trying to use fear and greed in the FOREX, it's very fundamentally based, on many factors. Just remember us retail speculators make up a tiny percentage of the market we really are nothing. our fear and greed have very little to no impact on the price we just add to the liquidity. the interbanks central banks and funds are the market makers.

Sorry to be picky I just hate to see the words fear and greed as a influence in the Forex. I just can't believe these big players would trade so unprofessionally and survive.

But i spouse good old nick Leeson at Barings was a exception!

Cheers

 

[tayser]

^ fear = buy back Mr. Yen.