What moves the Forex markets?

Category: forex-faq

Currency valuations are driven by many factors, chief among them probably being interest rate differences. A nation offering a higher interest rate than its trading partners will tend to see the value of its currency rising as investors sell low or non-yielding currencies for higher yielding ones.  

Then you have economic performance. A country exhibiting robust growth, with rising GDP, and a healthy labour market, will tend to have its currency outperform trading partners that may be experiencing economic contraction and unemployment.

A country that is comparatively more indebted, can also see its currency depreciate relative to a less indebted nation. These data are crucial to a certain contingent of FX traders who follow economic data releases closely and trade the volatility surrounding them. 

But currencies also exhibit other features and allow investors to gain exposure to the changing tides in other markets. For instance, currencies like the Australian Dollar (AUD), the Canadian dollar (CAD), and the New Zealand dollar are tightly correlated with certain commodities and so offer a means of exposing a portfolio to those assets without trading them directly. The Australian dollar is often traded as a proxy for gold, and the Canadian dollar for oil.