Exploring Exchange Rate Influences Growth, Trade Balance & Natural Resources
In our last video, we explored the role of fundamental analysis and the impact of supply and
demand on the markets. Let us know delve into what drives exchange rates.
In this lesson we’ll look at three factors influencing exchange rates over the short, medium
and longer term.
- Starting with growth factors, countries with fast-expanding economies are appealing
to traders as they present greater opportunities for growth. At the same time, higher
salaries, boost demand. While traders are eager to purchase stocks of companies in
these booming economies, foreign companies are frequently looking to establish
business in these nations by buying businesses, developing factories, and opening
stores. The country’s currency typically appreciates as a result of this increased
demand. - Next is the country’s trade balance. This is determined by subtracting its imports and
exports of goods and services. In general, the currencies of nations that consistently
have trade surpluses are stronger than those of nations that consistently have trade
deficits. This is due to the fact that a nation’s demand for its currency is greatly
impacted by its need in the global markets. For instance, if Japan exports more
goods to the US than it imports, the US will demand more Japanese yen, which could
strengthen the yen’s currency against the dollar and lower the USD/JPY exchange
rate. - Finally, nations possessing an abundance of natural resources can see an increase in
the value of their currency as a result of earning foreign exchange through the
export of these resources. The value of the nation’s exports rises in response to an
increase in the price of the exported resource, which causes the currency to
appreciate. On the other hand, the currency might weaken if the price of the
resource drops. The correlation between the Australian dollar and iron ore, the New
Zealand dollar and dairy products, and the Canadian dollar and oil are classic
examples in the foreign exchange market.
We will talk about the closely related topics of inflation and monetary policy in the
upcoming lesson.