4 Factors that Affect a Currency’s Price!

[Sean Hyman]

As I watched my currency screen yesterday, I was amazed as the Aussie dollar plunged against the Japanese yen by a full 5% …just yesterday alone!

The volatility has been fierce. So what are the actual forces behind such fluctuations? What really moves these things anyway? Here are the top 4 factors that I see moving currencies every day.

1. Economic Data – For instance, the PPI (wholesale inflation number) out of Australia came out on Sunday night WELL BELOW expectations and the currency plunged. Why? Currencies love inflation, because the best way to fight inflation is by hiking interest rates. However, with high interest rates you earn more on that currency than if inflation was tame and rates were much lower.

So any major economic number that comes in well above or well below expectations can move the currency majorly in a very short period of time. This could be the rate of inflation, employment levels, interest rate decisions, etc.

2. Sentiment – Sentiment in its simplest form is how investors around the world collectively “feel” and think about the currency. This is one thing that drove the British pound down over 6,600 pips in less than a year! Was all of that strictly due to the data? No! Sure, the data was bad there and it was bad in most places. However, the sentiment in the U.K. was horrible. Therefore, part of the weight on the pound was sentiment in addition to actual economic data. When a positive or negative sentiment (mind set) comes about with traders all over the world, it’s a powerful thing. Positive sentiment can push a currency into heaven and negative sentiment can push it down into hell. That may sound extreme, but so is sentiment

3. Political Stability – Ideally, currencies don’t like big shifts in the government. At least when a party is in power, the market tends to know what to expect. However, when shifts of power come about, it brings about instability in the political realm until the new agenda of the incoming party is known. Also, if you have crooked governing or coups that overthrow the government, etc. it brings on instability too. When I think of an untrustworthy government, I think of Russia and its ruble. When I think of coups, I think of Thailand and its baht.


4. Trends in stocks & commodities – This one is very important as well. You will find that when stocks do good, generally so does the euro, pound, Aussie, Canadian and New Zealand dollars vs. the dollar, yen and franc. The same happens when commodities rise except that AUD, NZD and CAD get an even bigger vote of confidence since these nations are major commodity exporters. Therefore, by watching the trend of major stock indices (especially in the U.S.) and by watching major commodities like gold, oil, copper and the CRB index, you can get a good idea of where these foreign currencies mentioned above are headed vs. the buck.

So once the major economies start to hit on all cylinders (or at least most cylinders) once again in the months to year ahead, you will see the economic numbers and sentiment pick up even more. You’ll see stocks revive and commodities flourish. So as long as there’s not major political instability, then you should see the Aussie, Canadian and New Zealand dollars, euro, and pound rise up against the dollar, franc and yen once again.