The forex market is primarily driven by overarching macroeconomic factors. These factors influence a trader’s decisions and forex maker market economics determine the value of a currency at any given point in time. The economic health of a nation’s economy is an important factor in the value of its currency. The global capital markets are perhaps the most visible indicators of an economy’s health, while stock and bond markets are the most noticeable markets in the world.
It is difficult to miss the release of public information in capital markets, as there is a steady flow of media coverage and up-to-the-second information on the dealings of corporations, institutions and government entities. Similarly, many economies are sector-driven, such as Canada’s commodity-based market. In this case, the Canadian dollar is heavily correlated to the movements of commodities such as crude oil and metals. The bond markets are similarly critical to what is happening in the forex market, since both fixed-income securities and currencies rely heavily on interest rates. Treasury price fluctuations factor in to movements in currencies, meaning that a change in yields will directly affect currency values. Another key factor is the balance of trade levels and trends between nations.
The trade levels between nations serve as a proxy for the relative demand of goods from a nation. Trade surpluses and deficits also exemplify a nation’s competitive standing in international trade. The political landscape of a nation plays a major role in the economic outlook for that country and, consequently, the perceived value of its currency. Forex traders are constantly monitoring political news and events to gauge what moves, if any, a country’s government may take in the economy.
For instance, an upcoming election is always a major event for currency markets, as exchange rates will often react more favorably to parties with fiscally responsible platforms and governments willing to pursue economic growth. The fiscal and monetary policies of any government are the most important factors in its economic decision making. Central bank decisions that impact interest rates are keenly watched by the forex market for any changes in key rates or future outlooks. Economic reports are the backbone of a forex trader’s playbook. Maintaining an economic report calendar is crucial to staying current in this fast-paced marketplace.
GDP may be the most obvious economic report, as it is the baseline of a country’s economic performance and strength. GDP measures the total output of goods and services produced within an economy. Inflation is also a very important indicator, as it sends a signal of increasing price levels and falling purchasing power. Employment levels, retail sales, manufacturing indexes and capacity utilization also carry important information on the current and forecasted strength of an economy and its currency, serving as a suitable complement to the factors we’ve outline above. The forex market is ultimately driven by economic factors that impact the value and strength of a nation’s currency. For additional reading on the economic factors that specifically impact the U.
Investopedia is part of the Dotdash publishing family. The most common type of market maker is a brokerage house that provides purchase and sale solutions for investors in order to keep the financial markets liquid. A market maker can also be an individual intermediary, but due to the size of securities needed to facilitate the volume of purchases and sales, almost all market makers are or work for large institutions. Making a market” means a willingness to buy and sell the securities of a defined set of companies to broker-dealer firms that are member firms of that exchange. Thus, market making enables the smooth flow of financial markets. Without this, investors and traders would not be able to buy and sell as easily.
Less transactions in a market naturally translates to less investing, overall. Exchange rules often have more than one category of market maker. Within the rules, a market maker firm can decide to commit to more responsibility for the smooth market performance of the specific securities in which it agrees to make a market. All market makers are compensated for the risk of holding assets. The risk they face is a decline in the value of a security after it has been purchased from a seller and before it’s sold to a buyer. Make a market is an action whereby a dealer stands by ready, willing and able to buy or sell a particular security at the quoted bid and ask price.