How
Interest Rate Increases Drive Currency Prices
Fundamentally, if a country raises its interest
rates, the currency of that country will strengthen
because the higher interest rates attract more foreign
investors. When foreign investors invest in U.S.
treasuries, they must sell their own currency and
buy U.S. Dollars in order to purchase the bonds.
If you believe U.S. interest rates will continue
to rise, you could express that view by going long
U.S. Dollars.
If you believe that the Fed has finished raising
rates for the time being, you could capitalize on
that view by buying a currency with a higher interest
rate, or at least the prospect of relatively higher
rates. For example, U.S. rates may be higher than
those of Euroland now but the prospect of higher
rates in Euroland, albeit still lower than the U.S.,
may drive investors to purchase Euros. How
Rising Gold Prices Affect Currencies
It's not hard to understand why we've experienced
a run-up in gold prices lately. In the U.S, they're
dealing with the threat of inflation and a lot
of geo-political tension. Historically, gold is
a country-neutral alternative to the U.S. dollar.
So given the inverse relationship between gold
and the U.S. Dollar, currency traders can take
advantage of volatility in gold prices in innovative
ways.
For example, if gold breaks
an important price level, one would expect gold
to move higher in coming periods. With this in
mind, forex traders would look to sell dollars
and buy Euros, for example, as a proxy for higher
gold prices. Moreover, higher gold prices frequently
have a positive impact on the currencies of major
gold producers. For example, Australia is the
world's third largest exporter of gold, and Canada
is the world's third largest producer of gold.
Therefore, if you believe the price of gold will
continue to rise you could establish long positions
in Australian Dollar or the Canadian Dollar -
or even position to be long those currencies against
other major countries like the UK or Japan.
Translating Rising
Oil Prices to Currency Trading Opportunities
Equity investors already know that higher oil
prices negatively impact the stock prices of companies
that are highly dependent on oil such as airlines,
since more expensive oil means higher expenses
and lower profits for those companies.
In much the same way, a country's
dependency on oil determines how its currency
will be impacted by a change in oil prices. The
US's massive foreign dependence on oil makes the
US dollar more sensitive to oil prices than other
countries. Therefore, any sharp increase in oil
prices is typically dollar-negative.
If you believe the
price of oil will continue to increase for the
near term, you could express that viewpoint in
the currency markets by once again favoring commodity-based
economies like Australia and Canada or selling
other energy-dependent countries like Japan.
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