Mira FX

What Affects Forex Rates?

There are several factors that move the markets. Currencies are traded every day in tourism, international trade, investments, governments, and speculators to name a few. Supply and demand in these areas will move prices.

Monetary policy is a big driver to a currencies value due to sensitivity to interest rate fluctuations. Central banks play a big role in the market, and at times use currency intervention. A central bank may look to devalue its currency to help exports for example, or to combat low inflation. Political and economic instability also influence prices. And while rare, natural disasters also have an impact on currency values.

Central Banks

A central bank is a public institution that acts as a nation’s monetary authority. Central banks have a range of responsibilities, including the control of the money supply, the setting of interest rates and the formation of monetary policy. Central banks also issue economic reports that show the health of a nation’s economy.

Central banks are both a source of information in the currency market and a major player. Although actions vary by nation and the character of their central banks, many central banks will intervene in the currency markets when they see the trends there as damaging to their economies.

For example, the Bank of Japan uses several levels of intervention, from merely calling for the rates on USD/JPY (signalling that they are watching it) to buying up foreign currencies to create demand and push the yen down in value.

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Federal Reseve European Central Bank
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Bank of England Bank of Canada
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Reserve Bank of Australia Reserve Bank of New Zealand
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Bank of Japan Swiss National Bank

Why is the Forex Market Different from Other Markets?

The foreign exchange market offers leveraged trading, meaning only a portion of the trade size is required as a deposit to initiate a trade. Brokers commonly offer leverage of 1:50 or 1:100, translating to a deposit requirement of 2% or 1% (respectively) of the total trading size. In recent times, leverage has been seen as high as 1:1000, meaning a trade can be initiated with a mere 0.1% deposit.

Leverage is commonly referred to as a double-edged sword. It has the potential to make a trader realize gains rapidly, but also to incur losses rapidly.

The forex market is decentralized, carrying both advantages and disadvantages. A centralized exchange involves middlemen, often increasing costs for the trader, while costs in trading generally only involve the difference in the spread of a pair. A disadvantage is that quotes differ between brokers. It is possible to see currency pairs trading at slightly different prices between brokers, or even in some cases during volatile events, a major difference in prices. These divergences can lead to a frustrating experience if a trader was stopped out because of a price spike that did not occur with other brokers, and can also impact technical analysis, and indicators.

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How to Trade the Forex Market?

In the currency market, trades are made in pairs. When one currency is sold, another currency is bought, meaning that a trader will always have exposure to two different currencies.
The eight most traded currencies in the world are the US Dollar, Euro, Japanese Yen, British Pound, Swiss Franc, Canadian Dollar, Australian Dollar, and New Zealand Dollar.

  • As the US dollar is the highest traded currency in the world, the most common currency pairs in the Forex market are EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, NZD/USD, and USD/CAD. These seven currency pairs are referred to as the majors.
  • In addition to the seven majors, there are 20 pairs derived from the remaining seven currencies. These pairs are referred to as cross rates, or alternatively referred to as cross-currency pairs, minor currency pairs, or simply minors.
  • Aside from the majors, and cross rates, there are also exotics. These pairs include currencies from emerging markets or smaller economies. Generally, these currencies that are not as commonly traded.

The currencies can be paired with a major currency, or against another exotic currency. Common exotic currencies are the Swedish Krona, Norwegian Krona, South African Rand, Hong Kong Dollar, Indian Rupee, Singapore Dollar, Turkish Lira, and Mexican Peso. There are several more currencies, but as volumes tend to be low in exotic pairs, spreads or commissions tend to be high, making them less popular.

Getting into Forex trading:
1. Start with our free Forex School
2. Open an account with a Forex Broker

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