Investing in the Forex market is a very profitable venture, but it is important to know what drives the market. There are five key drivers: inflation, sentiment, government debt, stock market crashes, and foreign exchange rates.
Government debt
Developing countries have faced important external indebtedness challenges over the past decade. These challenges are posed in a context of fast integration into international financial markets. They also are accompanied by the challenge of currency mismatches. The historical position of these economies as debtors in foreign currencies has served as a source of vulnerability to external shocks.
The global financial crisis prompted governments to cut economic activity, which in turn resulted in an increase in total external debt to GDP. A combination of higher short-term external debt and higher private long-term debt contributed to the rising share of total external debt. During this period, the share of PPG debt owed to private creditors increased from 43 per cent in 2000 to 61.6 per cent in 2020.
The increasing risk profile of developing economies exposes them to more volatile financing costs and shorter maturities. In addition, their access to international financial markets has increased, which increases the risk of sudden reversals of private capital flows.
Inflation
Keeping a close eye on inflation is a critical task for central banks. They examine it in order to determine whether or not to raise interest rates or reduce the money supply. Inflation is also an important metric for determining the exchange rate of a currency.
The Consumer Price Index (CPI) is a good indicator of underlying price changes, although the PPI is a bit more volatile. However, the Consumer Price Index is not the only measure of a similar nature.
For example, the Federal Open Market Committee’s (FOMC) aggressive changes to monetary policy have resulted in a significant increase in the Fed’s overnight lending rate. These changes are expected to stimulate the economy and to tame inflation.
In addition, the Fed has raised its target range for fed funds by 75 basis points in November. This should boost the dollar and tame inflation. The dollar is expected to appreciate in the second half of the year.
In terms of the forex market, the most important determinant of exchange rate developments is inflation. It can either be positive or negative. If it is negative, the currency will depreciate.
Stock market crashes
Whether you’re looking to invest in the forex market or your own private portfolio, it’s important to know what makes it tick. Keeping an eye on news and trends can help you decide whether to make the jump or sit out.
One of the most important factors in the forex market is the state of the economy. A weak economy can lead to depreciation in the value of a country’s currency. This can lead to pain for traders.
There are a few factors that can trigger stock market crashes. They range from inflation to a sudden slowdown in the economy.
The best way to determine whether a stock market crash is imminent is to take a close look at the underlying economic conditions. If the country is in a recession, a stock market rally could be counterproductive and disconnected from the real economy.
The stock market is a complex system, containing thousands of stocks. A single stock can decline in size in a matter of hours. Some of these stocks are more valuable than others, depending on their performance.
