Currency trading is becoming more and more popular as investors discover the many opportunities that are available in the foreign exchange markets. What many people don't realize is that they can apply their existing knowledge to profit from foreign exchange movements! Read below to learn how currency movements can be closely related to events in other markets.
Currency Movements and Equities
Currency traders who anticipate a rally in the stock market of a certain country know that when the rally starts, demand for the that country's currency is going to increase as foreigners rush to invest.
Traders who anticipate a recovery in Japan, for example, can position themselves for a stock market rally early on-instead of buying individual stocks, traders will profit from the appreciation that happens in the Yen as investors pour money into Japan.
Currency Movements and Interest Rates
Interest increases in a country also tend to attract international investors to its bond markets, since higher returns are now available. This movement of capital into the country can also push up the price of the currency in the long term, creating an excellent opportunity to make a currency trade.
In 2002, the Royal Bank of New Zealand started increasing interest rates. In mid 2003, the New Zealand dollar was trading at 0.5000. Making a standard currency trade at that time would have yielded over $20,000 two years later, with a transaction cost of only $40!
Currency Movements and Commodities
Commodity investors can also use their understanding of global supply and demand to trade currencies. Certain countries like Australia, New Zealand and Canada, are net commodity exporters. A change in demand or supply for the commodities they produce will affect the price of their currency. For proof of this, just watch the USDCAD next time the price of crude jumps, or the AUDUSD when the price of gold increases!
Opportunities Abound in the Currency Markets
Analysis of other markets is just one method that currency traders use to spot trading opportunities. Learn the basics of currency trading.