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What Causes Drastic Foreign Exchange Rate Changes?

Foreign Exchange Rate

What Causes Drastic Foreign Exchange Rate Changes?

When you talk about drastic changes in foreign exchange rates you are generally talking about megatrends.  These are prolonged trends that seriously change the foreign exchange rates of a country.  A lot of traders assume that this is something you generally find with emerging economies.  However, this is not true as many stable and commonly traded currencies also have megatrends.  It is important that you know what causes these trends.

Foreign Exchange Rates Affect Each Others

Something that many traders do not consider is how one currency can affect another.  As all currencies are traded as pairs there is going to be an impact when one of them drastically changes.  The affect of the change in one currency will not be limited to a single other currency.  As currencies are paired up with many other currencies, all will be affected.

An example of this is a megatrend in the US dollar.  When this trend occurs any currency that is connected to the dollar will also be affected.  The manner of this impact will vary depending on the relationship between the two currencies.  If there is a mega down trend on the US dollar then the US dollar and Canadian dollar pair will move accordingly.  However, the US dollar and Yen pair may move in a different manner to the trend.

The Changes in Commodities

There are a number of currencies that are considered commodity currencies.  Megatrends in these currencies can be caused by changes in the commodity prices.  The most commonly affect currencies are the Australian dollar and the Canadian dollar.  It is important that you know which commodities affect the different currencies.

The Canadian dollar is affected by the price of oil while the Australian dollar is mainly affected by the price of gold.  While these prices do have an effect on the foreign exchange rate you have to consider the other market factors as well.  These other factors will include the economic policies of the country and how they affect the impact of commodity prices.

Government Policies

One of the major causes of megatrends is government policies.  Government policies will include monetary policies and foreign assets.  While many of these policies do not affect the exchange rate directly they do impact the trader’s view of the currency.  This impact is what can cause the changes in the market.

Of course, there are some policies that the government implements that do directly affect the market.  These intervention policies often attempt to stabilise the rates and do not create megatrends.  When these interventions are completed you are able to make a profit from them as well.

Using All The Methods

When you look at making a profit from megatrends you have to consider all the factors that can cause them.  When you do this you will be able to successfully make a profit on the trend.  If you do not consider all the factors then you could get into the trend too late or trade on a movement that is not actually a megatrend.  Long-term traders are the ones who benefit the most from these megatrends.

 

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