Global currencies, world leaders, and capital markets

Global currencies, world leaders, and capital markets

Forex is a vast global marketplace where people buy and sell currencies worth trillions of dollars every day.

According to Wikipedia, it is, in fact, the most liquid financial market in the world. And rightfully so: Forex has existed for thousands of years, as people were changing money between themselves since before Biblical times.

Forex – a market of many faces, shapes, and colors

Operating on numerous different levels and through a whole network of financial institutions, Forex is subject to various influences. From inflation & interest rates to fiscal & monetary policies, international trade terms, government debt, natural disasters, economic news, or political developments – anything can potentially move things in the global currencies world.

But what happens to global currencies when world leaders such as Trump, Johnson, Powell, or the Golf oil gurus say or do something very important? How do the Forex and other financial markets react? And more importantly: can you turn these events into viable trading options?

We'll go into details and give you the answers to all the above questions and more.

What happens when world leaders make major announcements?

The currency markets don't react to every single statement or action a world-renown politician makes. That’s because Forex is an intricate mechanism*, where the governing laws are sometimes unpredictable. Still, there are some well-known exceptions (such as the GDP releases, interest rate decisions, critical events like war breakouts, or other).

*Here at CAPEX.com, we strive to make the world of investing more accessible! Discover CFDs trading by visiting our Academy, full of educational materials and resources designed to help you develop suitable trading strategies and gain valuable market information on CFDs on bonds, shares, Forex, and many more assets!

However, if the announcements in question are significant and echo loud enough, they will most likely have a strong effect on the currency markets.

An illustrative example here: in 2018, President Trump started the U.S – China trade war, imposing tariffs and declaring that "it will be easy to win this war." Shortly after his comments, the USD shed blood tears, while assets like the JPY and CHF rose, as investors worried the global trade situation would worsen. Volatility reached very-high levels at that moment in time.

The same thing happened when Trump tweeted war threats to Iran. Traders started looking for protection against an imminent danger and began investing more into gold, while the USD-tied assets lost ground.

The connection between markets

The financial markets are an accurate reflection of a country’s health status. The perpetual economic, political, and social media flow going into the capital markets can lead to either a rally or a sell-off of securities in a certain part of the world. And that's exactly when the capital markets drop clear signals of change.

Different financial markets can impact whole economies in various ways, shapes, or forms. For example, the Canadian Dollar has a strong correlation to the commodities market, specifically to Crude oil. So, any major announcement that can potentially affect global oil trading could move the Canadian Dollar price. Think about OPEC unexpectedly cutting oil production or the all-important changes in U.S Oil inventories reports.

Bonds are also good indicators for what could happen to the world's currencies, as both the Bond and the Forex market depend closely on interest rates. Look for Interest Rates decisions such as Fed's Interest Rate decision announced by Chairman Jerome Powell or by his counterparts from different countries. Treasury price variations are a factor in the movements of exchange rates. This means that changes in yields could directly affect currency quotes. Therefore, it is crucial to understand the bonds market if you plan on improving your forex trading.

Finally, the stock market heavily relies on currency strength. The lower a country’s currency is, the more it will reflect in companies’ valuations and growth potential. We can extrapolate to indices and, from there, to entire economic sectors and industries.

The Anticipation game – malice through the looking glass

When it comes to the currency markets, traders should always remain on the alert looking for what the world leaders say and how they act, trying to spot and foresee any noticeable movements following these announcements. Not everything they say will necessarily impact currencies the way you would expect. That’s because the markets are hostile towards certain assets or events.

Take Boris Johnson’s case: on the eve of his appointment as British Prime Minister, the Pound Sterling had reached a 27-month low. Immediately after Johnson was crowned PM, the Pound rose tremendously. How could that have happened? Simple: the markets were already expecting Johnson to become PM. Also, in his first speech outside his office, he referred to crafting a new and better deal, which provided stability to the currency and drew an aura of optimism on the future of GBP.


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Source: investopedia.com

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