Forex And Other Markets (Part II)
Take oil as an inflation input and a limiting factor on the overall economic growth. The higher the price of oil, the higher the inflation would be and the slower the economic growth is going to become. The lower the prices of oil, the lower the inflationary pressures are going to become but this is not always true.
We would like to factor changes in the prices of oil into our inflation and growth expectations and then draw conclusions about the course of US Dollar from them. Above all, oil is just one input among many.
Stocks: Almost everyone is familiar with stocks and the stock markets. Stocks are units of ownership rights that get traded on the stock exchanges. You can take stocks as microeconomic securities rising and falling in response to individual corporate results and prospects.
You can think of individual countries as companies and their currencies as stocks that get traded in the global financial markets. Currencies are essentially macroeconomic securities fluctuating in response to wider ranging economic and political developments. There is no intuitive reason that stock market should be related to the forex market. Virtually nowhere else does the forex market serve as the perfect hedge for your investments than in the stock market? If you are a longer term investor who enjoys the long range returns of the stock market but who doesnt enjoy watching your account value drop whenever the stock market cycles through a downturn, you can offset your losses in the Forex market.
There was a boom in the Tokyo Stock Exchange a decade back. Many investors wanted to take part in that boom. But in order to invest in Japanese stocks, they needed Japanese Yen (JPY). Heavy buying pressure on JPY made it appreciate. So sometimes a relationship develops between a stock market and a currency for the time being. However, long term correlation studies bear this out that there is no major relationship between stocks and currencies. Major USD currency pairs and the US equity markets over the last five years have almost zero correlation coefficients. However, the two markets occasionally intersect.
The US stock market may drop on an unexpected hike in the US interest rates while USD may rally on the surprise move. For example, when equity market volatility reaches extraordinary levels like when S&P 500 Index loses 2% in a single day, USD may experience more pressure than it otherwise would have. But there is no guarantee of that.
Bonds: The bond market rules the world. Everything that anyone does in the financial markets anymore is built upon interest-rate analysis. When interest rates are on the rise, at some point, doing business becomes difficult, and when interest rates fall, eventually economic growth is energized.
Financial markets in interest rate futures, Eurodollars, and Treasuries (bills, notes, and bonds) important for all consumers, speculators, economists, bureaucrats, and politicians due to the relationship between rising and falling interest rates.
How can you anticipate the interest rate changes in the market? By following the bonds market! Ten-year T-note yields are the key for setting long-term mortgage rates. By watching this interest rate, you can pinpoint the best entry times for re-mortgaging, relocating, or buying rental property, and you can keep tabs on whether your broker is quoting you a good rate. Both the bond market as well as the forex market reacts to interest rate changes and inflation. Bond or fixed income markets have a more intuitive relationship with the forex markets as both are heavily influenced by the interest rate expectations. However, the short term supply and demand fluctuations interrupt most attempts to establish a viable link between the two markets on a short term basis.
Sometimes, the bond markets more accurately reflect the changes in interest rate expectations with the forex market doing the catch up. At other times, the forex markets react first and fastest to the shifts in the interest rate expectations.
As a forex trader, you definitely need to keep an eye on the yields of the benchmark government bonds of the major currency countries to better monitor the expectations of the interest rate market. Changes in the relative interest rates exert a major influence on forex markets. - 23208
We would like to factor changes in the prices of oil into our inflation and growth expectations and then draw conclusions about the course of US Dollar from them. Above all, oil is just one input among many.
Stocks: Almost everyone is familiar with stocks and the stock markets. Stocks are units of ownership rights that get traded on the stock exchanges. You can take stocks as microeconomic securities rising and falling in response to individual corporate results and prospects.
You can think of individual countries as companies and their currencies as stocks that get traded in the global financial markets. Currencies are essentially macroeconomic securities fluctuating in response to wider ranging economic and political developments. There is no intuitive reason that stock market should be related to the forex market. Virtually nowhere else does the forex market serve as the perfect hedge for your investments than in the stock market? If you are a longer term investor who enjoys the long range returns of the stock market but who doesnt enjoy watching your account value drop whenever the stock market cycles through a downturn, you can offset your losses in the Forex market.
There was a boom in the Tokyo Stock Exchange a decade back. Many investors wanted to take part in that boom. But in order to invest in Japanese stocks, they needed Japanese Yen (JPY). Heavy buying pressure on JPY made it appreciate. So sometimes a relationship develops between a stock market and a currency for the time being. However, long term correlation studies bear this out that there is no major relationship between stocks and currencies. Major USD currency pairs and the US equity markets over the last five years have almost zero correlation coefficients. However, the two markets occasionally intersect.
The US stock market may drop on an unexpected hike in the US interest rates while USD may rally on the surprise move. For example, when equity market volatility reaches extraordinary levels like when S&P 500 Index loses 2% in a single day, USD may experience more pressure than it otherwise would have. But there is no guarantee of that.
Bonds: The bond market rules the world. Everything that anyone does in the financial markets anymore is built upon interest-rate analysis. When interest rates are on the rise, at some point, doing business becomes difficult, and when interest rates fall, eventually economic growth is energized.
Financial markets in interest rate futures, Eurodollars, and Treasuries (bills, notes, and bonds) important for all consumers, speculators, economists, bureaucrats, and politicians due to the relationship between rising and falling interest rates.
How can you anticipate the interest rate changes in the market? By following the bonds market! Ten-year T-note yields are the key for setting long-term mortgage rates. By watching this interest rate, you can pinpoint the best entry times for re-mortgaging, relocating, or buying rental property, and you can keep tabs on whether your broker is quoting you a good rate. Both the bond market as well as the forex market reacts to interest rate changes and inflation. Bond or fixed income markets have a more intuitive relationship with the forex markets as both are heavily influenced by the interest rate expectations. However, the short term supply and demand fluctuations interrupt most attempts to establish a viable link between the two markets on a short term basis.
Sometimes, the bond markets more accurately reflect the changes in interest rate expectations with the forex market doing the catch up. At other times, the forex markets react first and fastest to the shifts in the interest rate expectations.
As a forex trader, you definitely need to keep an eye on the yields of the benchmark government bonds of the major currency countries to better monitor the expectations of the interest rate market. Changes in the relative interest rates exert a major influence on forex markets. - 23208
About the Author:
Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading stocks and currencies. Try These 1500 Pips A Day Forex Signals From Heaven. Develop Your Own Forex Trading System!
posted by X - Men @ 4:46 AM
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