Financial Knowledge

Several aspects in the analysis of foreign exchange Fundamentals

June 17, 2020

Why does the economic data affect the exchange rate? The economic data can reflect the current development of the domestic economy and the objective performance of the expected development in the future. The change of the exchange rate follows a principle (except for political factors), that is, where the interest rate is high, capital will be attracted, so as to achieve currency appreciation, and where the interest rate is low, capital will be released, so as to make the currency devalue. Several econometric models can help us analyze how exchange rate changes.

Inflation rate. On the one hand, the inflation rate shows that the change of prices will affect the competitiveness of a country’s goods and services in the world market. When one country has higher inflation than the other, the price of its goods and services will rise, which will lead to the relative decrease of exports and the relative increase of imports, and thus the pressure of balance of payments deficit. The balance of payments deficit reflected in the foreign exchange market will have the pressure of appreciation of foreign exchange, the pressure of devaluation of the local currency. This is one of the effects of inflation on exchange rate movements. On the other hand, inflation will also affect the supply and demand of foreign exchange market and exchange rate by affecting the real interest rate. When the inflation rate of a country is higher than that of other countries, the real interest rate of that country will decrease, and the decrease of interest rate will reduce the return on investment of investors, so the capital will flow out of the country, and the flow of capital will change the supply and demand of foreign exchange in the foreign exchange market, thus leading to the change of exchange rate.

The employment data mainly focuses on non-agricultural, followed by the lmci employment market index and weekly unemployment compensation data. Consumer needs to focus on CPI and PPI data as well as sales data. The research criteria of these simple data are mainly compared with the expectation, not most investors think that they are compared with the previous value. If the data is larger than the expected and the previous value, it is easy to generate a soaring market. If the data is larger than the expected and smaller than the previous value, then it is also based on the rising market. However, in this case, it is most likely to form a market on both sides. If the data is both smaller than the previous value and smaller than the expected, then the general down market is mainly.

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