Forex & 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: You must have invested in stocks sometimes back. Many people invest in stocks. Buy and hold is the best strategy that has been followed over the years by the stock investor. Almost everyone is familiar with stocks and the stock markets. You can take stocks as microeconomic securities rising and falling in response to individual corporate results and prospects. Stocks are units of ownership rights that get traded on the stock exchanges.
On the other hand, currencies are essentially macroeconomic securities fluctuating in response to wider ranging economic and political developments. As such there is no intuitive reason that stock market should be related to the forex market.
Long term correlation studies bear this out. 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 response of the two markets to different economic news may be different and some cases exactly opposite. 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 lie 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: When interest rates are on the rise, at some point, doing business becomes difficult, and when interest rates fall, eventually economic growth is energized. The bond market rules the world. Everything that anyone does in the financial markets anymore is built upon interest-rate analysis.
That relationship between rising and falling interest rates makes the markets in interest rate futures, Eurodollars, and Treasuries (bills, notes, and bonds) important for all consumers, speculators, economists, bureaucrats, and politicians.
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.
Just about every country in the world with a convertible currency has some kind of bond or bond futures contract that trades on an exchange somewhere around the world. 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.
Changes in the relative interest rates exert a major influence on forex markets. 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. - 23167
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: You must have invested in stocks sometimes back. Many people invest in stocks. Buy and hold is the best strategy that has been followed over the years by the stock investor. Almost everyone is familiar with stocks and the stock markets. You can take stocks as microeconomic securities rising and falling in response to individual corporate results and prospects. Stocks are units of ownership rights that get traded on the stock exchanges.
On the other hand, currencies are essentially macroeconomic securities fluctuating in response to wider ranging economic and political developments. As such there is no intuitive reason that stock market should be related to the forex market.
Long term correlation studies bear this out. 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 response of the two markets to different economic news may be different and some cases exactly opposite. 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 lie 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: When interest rates are on the rise, at some point, doing business becomes difficult, and when interest rates fall, eventually economic growth is energized. The bond market rules the world. Everything that anyone does in the financial markets anymore is built upon interest-rate analysis.
That relationship between rising and falling interest rates makes the markets in interest rate futures, Eurodollars, and Treasuries (bills, notes, and bonds) important for all consumers, speculators, economists, bureaucrats, and politicians.
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.
Just about every country in the world with a convertible currency has some kind of bond or bond futures contract that trades on an exchange somewhere around the world. 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.
Changes in the relative interest rates exert a major influence on forex markets. 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. - 23167
About the Author:
Mr. Ahmad Hassam is a Harvard University Graduate. 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 @ 4:50 AM
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