I like this. This is starting to get into the type of thinking I am wanting to delve in to. As my thought process is rolling, I’m trying to view price (I think this is the correct way of viewing the market) as a product of supply and demand. If one currency’s demand has increased while its supply is static, that means price is going to have to increase. This basic economic theory is foundational to any market. What you are saying is that maybe we can look into a country’s exports to get an idea for the demand of a currency. An highly export driven economy, such as Australia, sees a lot of foreign demand for its currency as other country’s need to buy its currency first in order to buy its exports. So what you are saying is that the price of that country’s exports, followed by the commodity index, gives us a quick and accurate gauge of what the change in demand will
Be for that currency.
I like it! Now that’s a variable that actually makes sense to use in predicting future price. This seems like something that you would have no idea is occuring just by looking at old price. Any more suggestions from you Peterma?
Intermarket analysis helps form a bias, but unfortunately it’s still only a bias, but it is a help.
The market lives in the future, always what is likely or liable to happen, it quickly forgets the past few days, e.g what about Draghi’s comments, have they evaporated? or is it eying something else?
Or GBP, has the market taken notice of this, if it has what is likely to happen next good news day on GBP?
Oh, and another thing to think about, longer term.
Much is being made about the threat of deflation by central banks in Europe and UK - these comments ‘hold back’ a currency, they become a reason for low int rates.
Commodity prices have been increasing this year, if they begin to rise yet again then consider what effect that will have on inflation.
Interesting. So it sounds like you are saying that deflation is not so much what will impact the market but rather the depressing effect it has on interest rates which in turn depresses the currency. I’ve read in my research how important interest rates can be to the foreign exchange market. Can you explain this effect and maybe how you like to take advantage of it?
Seems like there are some dots that maybe can start being connected.
Yeah, I remember once someone saying to me that surely deflation is a good thing, prices coming down should be a joy for all.
The reality is that central banks fear deflation, and correctly, even more than inflation. Their natural response to this enemy has been two fold, first reduce interest rates in the hope to increase borrowing, thus stimulating spending with the result of stimulating their respective economies and then causing inflation to rise to their target level.
Their second tool of late has been good old fashioned money printing (dressed up in fancy names), by increasing the money supply they hope to achieve the above two goals.
They have been using this second tool as interest rates have become lower and lower.
Both these tools have the net effect of weakening a currency, by firstly diluting it’s value (printing) and by giving a poorer return to investors (lower int rates).
So if the market is of the opinion that deflation will persist in an economy then that will be negative for that currency.
I know many find this stuff boring - maybe I’m a little weird but I find it interesting.
As I said, the market is always looking to the future, thus the reaction to news.
An example is retail sales - UK retail sales have been on the up, each month that there has been a positive number there was GBP buying - why should that be?, why would investors wish to buy GBP simply because more people in the UK are spending their cash?
The answer is simple, greater retail sales cause increasing prices (remember increasing demand etc), so increasing prices leads to increasing inflation which leads to increasing int rates, which attract buyers of GBP for the better return.
So this is actually something that can be directly inputed into a “mental” supply and demand model to help visualize where price should go based on information other then price itself. You have the increased supply (bank printing money) and a decrease in demand (foreign investors less interested because of lower interest rates). This would provide a reason for price to move lower.
It seems to me this is what is happening to eurusd right now no? Eurusd has low inflation, and draghi responds by threatening action which would either increase supply or decrease demand, and we see eurusd fall. Am I right? I don’t see how we would know or get this information from just old price on the left side of the charts.
Because you mentioned retail sales as a way to predict inflation, is there a way to predict retail sales? Seems like retail sales would be driven by consumer confidence, as the more optimistic consumers are the more they will spend? Also perhaps private credit growth would help predict retail sales numbers as this would have to expand in order for consumers to accommodate more purchasing. What do you think?
Now I’m thinking about equity and bond markets and how they correlate to the forex market. The way I’m thinking about it is government bonds are used to finance government debt. The more debt that the government needs to cover, the more bonds they issue. Depending on the country and the strength of their economy and the perceived safety of its debt, foreign investors grab up this debt and in order to do so will need to buy that country’s currency first, before buying the country’s debt. This would seem to increase demand and therefore appreciate the country’s currency relative to others. Again, not something that I know of that you could figure out just by old price on the left hand of the chart.
Yes Fibre is suffering because of the threat of deflation, or more specifically because Draghi has stated intentions to act. He did threaten before, it was huff and puff, but this time the market is taking him a little more seriously.
The result of any ECB action will immediately impact on the Euro, regardless of where price had been in the past - as I keep saying - it’s the future that the market is interested in.
Current retail sales in US (now already in the past) were disappointing, logic says that Fibre would have risen today.
It has fallen 70 pips - the market is watching the future:
I think taking news of a country in which the main currency of the country we are trading on. For example if we want to trade USDCAD then if we take news of Canada and USA and also those country which use USD or CAD then we can forecast an idea on it. I think it will help a lot in opening a new order.
