The forex market is the largest among the global financial markets. No other financial market can be compared to its size, but other market can leave impact on the forex market. For example, the value of the USD can be affected by the U.S. bond market. Similarly, the value of the JPY can be affected by the Japanese stock market.
If you want to be a successful forex trader, you need to learn the relationships among the financial markets. Only then, you will be able to understand how the currency pairs being traded are affected by these relationships.
Sometimes, investors get warning in advance of what will happen in the forex market. For example, if the value of gold is rising fast, a corresponding rise in the value of the AUD/USD is most likely to happen. When you know what to look for, you can benefit from the same correlations watched by the large institutional investors.
How Commodity Markets Influence Forex?
The universal demand of commodities is rising, and it has tied the commodity market to the forex market. Virtually, all economies across the world must import some of the commodities they consume. For purchasing the commodities, importers exchange their currency with the currency of the economy from which the goods are imported. Due to this transaction, the demand for the exporter’s currency goes higher, and it increases the value of the currency.
Three major currencies; the CAD, AUD, and NZD have close relation with commodity values due to being major commodity exporters. Along with the rise of the commodities’ price, the value of these currencies also rises usually, and they both follow together as well. All these commodity currencies are affected by various commodities differently. For example, the correlation of AUD with gold. When the price of gold rises, the value of AUD also goes higher. Similarly, the value of AUD goes lower when the price of gold falls. This correlation is not perfect, but it is significant.
You can generate better profits from forex trading by paying attention to what is going to happen in the commodity market during the next few years. Due to the demand from global growth, commodity prices should be pushed higher for years to come. You must be prepared so you can benefit from both the currencies strengthening and currencies weakening with the increase of commodity prices.
How Stock Markets Influence Forex?
Compared to any other market, individual investors keep an eye on the stock markets more. Stocks have been around for a long time and they are exciting. Most individual investors relate to companies when they buy stock from them. At good times, money flows into the stock market and it flows out when times are bad.
Due to globalization, investors can invest in the international stock markets easily, which allows them to buy stocks from another country. For example, if investors see the stocks in the UK performing well, they can rush to purchase those stocks. Then again, if the stocks in Japan start performing better and outperform the stocks in Europe, investors can take their money out of Europe to invest it in Japan.
If you are a foreign investor and want to invest in stocks in the UK, you must convert your currency into GBP (British Pounds) first. Thus, the demand for GBP increases and its value goes higher. At the same time, the supply of international currencies in the market is increased which drives their values lower.
Forex investors closely monitor the performance of the stock markets in major countries. If the stock market in one country outperforms the stock market in another country, forex investors know that other investors will move their money to the country with the strong stock market from the country with the weak stock market. As a result, the value of the currency of the country with the strong stock market will go higher, and the value of the currency of the country with the weak strong market will go lower. In this situation, you can make a great profit by selling the currency of the country with the weak stock market and buying the currency of the country with a strong stock market.
How Bond Markets Influence Forex?
The universal bond market is the second largest financial market in the world after the forex market. Individual investors, as well as governments and institutions, participate in the global bond market actively. The goal of all these market participants is the same; a profitable return on investment.
Government bonds take most of the space of the universal bond market. Since these bonds are supported by strong national governments, they are usually considered risk-free investments. However, there are exceptions. Some government bonds have higher interest rates than others. International investors take these interest rates into consideration when they decide where to invest their money. Generally, investors are attracted to bonds with higher interest rates if relatively stable economies cover the bonds.
Investors that want to purchase government bonds must buy them with the currency of the represented government. For instance, if international investors want to buy U.S. government bonds, they need to exchange their currencies with USD first. Thus, the demand for USD will increase and its value will go higher. At the same time, due to the increased supply of international currencies into the market will drive their values lower.
If you want to know which currencies to buy and which ones to sell, you have to know which governments are offering higher rates of their bonds and which bonds are getting popular among international investors. Fortunately, the direction of the international bond market rarely changes instantaneously. It more likely cycles in longer-term trends that are somewhat predictable and exploitable.
If the correlation among the financial markets is clear to you, you will be able to take advantage of any financial changes easily. Therefore, pay close attention to these three markets and their impact on the forex market.