This article looks at the impact the commodities and equities markets have on the foreign exchange rate.
Traders spend hours trying to forecast the movement of the foreign exchange rate. Some traders assess the gross domestic product and trade relations of countries, but it may be possible to make predictions by watching the equity markets. The companies that are listed on the equities markets issue daily reports and you may have the opportunity to use the reports for your predictions.
The foreign exchange rate of a country is based on supply and demand, but there are other factors that could affect it positively or negatively. A high level of demand for a particular currency by investors will cause the currency value to increase. If the demand declines, the currency value will decline.
The foreign exchange market is the largest financial market and exceeds the securities markets by a huge margin. If you consider the effect of the equities market on the forex market, you have to consider the global impact of that effect. This makes it important for you to keep a watchful eye on the corporations with international links. These types of companies deal with worldwide consumers and their company stocks are bought on a global basis. This will provide you with an overall corporate view of the foreign exchange market.
If you wish to focus on the commodities market, you could choose to watch crude oil. The prices for crude oil are usually quoted in US dollars. In the event that the dollar starts a decline in comparison to the other majors, it is possible for the oil price to increase. The price of oil is normally used as a stabilising factor for the prices other countries need to remit in their domestic currency. There are other commodities you can keep your eye on, such as corn, sugar and wheat. However, the movements in crude oil have the most effect on the currency market.
The movements on the equities market often affect movements in the forex market. A country with a weak currency will offer cheaper exports. This ensures more capital inflow into the country and the companies in the export market experience growth. The equities markets are affected by the increased earnings and growth of companies. This movement is often apparent with equities that are linked to major currencies.
The Future of the Foreign Exchange Rate
The constant movement of the foreign exchange rate in the trading market creates a lag in the industry. The publication of company reports detailing earnings is the precursor to movement in the forex market. You should define between soft and hard assets to identify the potential impact on the foreign exchange rate. The main factor to bear in mind is the level of necessity of the asset. Items such as food, medications and gasoline fall quite high on the necessity list, whereas items such as jewellery and clothing fall at the lower end. This makes the financial status of companies that supply good globally a more useful indicator than the financial status of a company that sells clothing.
You should not use the assessment of the equities market as a standalone method of predicting forex rates. You should consider other fundamental factors related to your currency pairs as well.