It is FX rates which help to indicate what the Australian Dollar is worth against another currency like the US Dollar, the Euro or the British Pound. However these rates are then drive by a number of different factors such as political and psychological ones as well as fundamental and technical ones.
If for instance a country has a very sound economic policy in place regarding inflation, unemployment, import and export along with balance of payment and capacity inflation you will find that the FX rates relating to this country’s currency is a lot stronger.
Below we take a closer look at the factors mentioned above that influence what the rates you see are when trading on the Forex market.
The kinds of factors that will have an affect on Forex rates include inflation and interest rates, official intervention, capital movement and what that country’s exchange rate policy is.
When for example Capital is moved from a low yielding to high yielding currency then this causes the Foreign Exchange rates to fluctuate. However if the country’s inflation rate is relatively high this will cause their competitiveness in other country’s markets to be reduced. In turn this will lead to demand for that country’s currency to weaken.
You can usually expect changes to occur to FX rates when official intervention occurs or when changes are made to how the market is regulated. Normally the results that occur are ones that will help to strengthen the value of that country’s currency. But if say Australia doesn’t really put much effort into helping to strengthen the Australian Dollar then of course you could expect FX rates to diminish somewhat.
Another major factor that affects FX rates is what the difference is between various countries interest rates. If a country’s interest rates are higher than another of course more people will be interested in investing in that country’s currency as they are likely to see a far better return on their investment.
Should any country suffer from any kind of political crisis such as that occurring in Egypt and Syria at this time of course this will affect FX rates also. Most traders involved with the Forex market will then choose to trade only in the stronger currencies including the Australian Dollar as they see it as some kind of refuge.
As well as those mentioned above there is plenty of other factors, which you need to know about that also, affect FX rates. Other factors that could affect these rates include how much is going to be raised by Forex dealers when trading on this market. Also another one that is going to have quite a big affect on FX rates is what the attitudes of banks in various countries are towards keeping certain positions open both during or at the end of each days trading.
Certainly if you want to make sure that you make well informed decisions about trading on the Forex market understanding what factors affect FX rates is crucial.