Traders look at foreign exchange rates to understand the economic strength of a country and its currency. Most traders keep track of the exchange rates so that they are able to understand the market better and increase their chances of success. As currencies are traded in the forex market it is important that you learn and understand the different factors that affect the exchange rates so that you are able to plan your trading in an effective manner.
When the exchange rates are high the imports become cheap and the exports become costly. Similarly, when the exchange rates are low the exports become cheap and the imports become costly. Traders who watch the rates closely may be able to determine the strength of the currency and this can help them make important trading decisions about the currency pairs to trade.
Key factors that affect foreign exchange rates
One of the key factors that affect foreign exchange rates is inflation. The currency of a country that has low inflation appreciates whereas the currency of a country that has high inflation depreciates. As a forex trader it is important that you keep a watch on the inflation rate so that you may decide on the value of the currency pairs you wish to trade. If the inflation rate is more, then the government of Australia and the central bank may take measures to bring it down so that the value of the AUD increases.
Interest rates also influence the exchange rates. The interest rates data is released by central banks on certain specific dates and you need to be aware about them so that you are able to plan your trade. When a higher interest rate is announced by the bank it helps in appreciating the value of the currency as it attracts foreign investment in the country.
If a country has large public debt it may affect the value of the currency. Countries that have large public debts find it difficult to attract investors due to which the value of the currency may go down. Balance of trade is also an important factor that affects exchange rates. If the exports are more than the imports then the balance of trade is said to be favourable, whereas if the imports are more than the exports then the balance of trade is negative.
Economic strength affects foreign exchange rates
The economic strength of a country affects foreign exchange rates and it is best to choose currency pairs of countries that have a stable economic outlook and political stability. You should avoid investing in a currency of a country that has political turmoil and economic problems.
If you want to be a successful trader it is important that you are aware of the economic, political and social factors that affect the exchange rates. You can also make use of the economic calendar to learn about the dates when the important economic data is released by various government agencies and central banks. You may be able to determine the best time to trade based on this information and make consistent profits.