Search

What tends to move the FX markets?


As we have mentioned in other posts, when you think of the 'Foreign Exchange' (FX) markets, you should imagine an actual old fashioned market, with stalls, sellers, masses of stock and/or more niche and homegrown wears.

Whilst the financial markets exist only in the electronic sphere, each of their many iterations are the same in principle and are fuelled by supply of products and demand for them.

But, someone who doesn't visit a market and relies on others to buy produce for them (we're sticking with the 'market' analogy here) would be forgiven for not understanding some of the terms and concepts at play.

Furthermore, if a change in the price of something directly affects you and your pocket, but, a detailed understanding of why that price has changed is not openly and freely available outside of the world that determines the price, then, how can you be expected to choose wisely when it comes to where best to buy what you want?

Rates of exchange change all the time.

Why?

We have commented before that, in one sense, this is because of the speed and sophistication of software that matches what someone is willing to pay for a currency with what someone is prepared to sell the currency for...

The bigger question is really what determines those two figures/prices?

What determines the rate/price a bank might ask for one currency and the amount a bank is prepared to pay for another?


Well, short of going into a dissertation about the global capital markets, we thought we might venture an opinion on some of the theory behind this question and some of the things that influence whether a currency is bought or sold, or held for the longer term.

Generally speaking 'risk' is one of the biggest factors in determining whether anyone does anything, regardless of whether that 'anything' is to do with financial products, stocks and shares, investments, building a house, leaving one's job, moving abroad...

The risk of something changing to one's detriment and the likelihood or probability of the opposite occurring tends to be the overriding motivator in any action.

Risks come in many forms and can be expressed in many different ways.

Again, 'risks' aren't necessarily confined to talk about finance and returns or losses.

A currency is, generally speaking, a measure of worth or value.

Yes, currencies are typically a system of money in use in a particular country, but, given that more or less anyone can accumulate a currency, currencies are essentially the unitary measure of the worth of a series of abstract, tangible or intangible, expressions.

You and I think of currency as being hard money we might use to pay for something.

But, goodwill is a form of currency.

Payment in kind could be considered a type of currency too.

When it comes to what influences the worth someone, whether they are a country or an individual like you and I, places on something, one has to look at the uses that person might have for that 'currency'.


What can that measure, that good will, that gold, that bike, that bit of data, be used for?

In a globalised world, holding currencies serves as security.

Having a stock-pile of readily available and globally in demand currency means you can react quickly to changes in circumstance; both your own and someone else's.

You can offset the effects of certain things and you can mitigate the risk associated with a certain course of action or the effects of certain influences that might more broadly affect your circumstances.

When it comes to currencies, changes in the rate of exchange are generally fuelled, for good or ill, by the perceptions of those holding or seeking to hold, those currencies.

On the Prime Cap Data Centre we list a few of the publicly acknowledged influences that can have effects on the movements of rates of exchange.

These are:

  • ​Central Bank meetings, minutes & press conferences.

  • Interest rate changes + speculation, inflation reports & GDP figures.

  • National Indexes - mortgage approvals, employment count, public sector borrowing, consumer price index.

  • Natural disasters, terrorist acts, political uncertainty & civil unrest.

  • News media sentiment, innuendo & day-trading shifts and appetites.

We must emphasise that the factors listed above are really only anecdotally relevant 'sign posts' which we know to be looked at by those who make decisions about the currencies they hold.

Whether you or I (at a high-street level) or a Central Bank, institution or globalised business, if we are holding currencies for currencies sake then we might look at these sign posts to determine how we feel about our longer term dealings in currencies.

All of the information and data sources referenced above are, in fact, directly linked to actual rates of exchange in one way of another.

By this we mean that you can, to a greater or lesser extent, identify a relationship between the flow of capital into or out of a country which, when expressed as a value, might prompt someone to increase or decrease their holding in a particular currency, but, that increase and/or decrease could and can, in itself, determine the measure of other expressions of activity in other areas of an economy.

Look at the recent price corrections with regards to products being sold in UK super markets.

The government uses the Consumer Price Index (CPI) as a measure of inflation.

A higher or lower rate of exchange has a direct effect on the price at which something might be sold in a supermarket.

A higher price because of a change in the exchange rate is fed in to the CPI which in tern has an effect on how the Bank of England views inflation in the UK.

Now, the rate of exchange on it's own does not prompt the BoE to increase or decrease their intervention in the UK's monetary system per se, but, it is both a symptom and a cause depending on how you chose to value it's role and, when considered along with the myriad of other indicators, it may prompt a certain outcome or recommendation.

The reason why you will not find anyone with an understanding of the part rates of exchange play in economics predicting with any certainty as to where a rate will be and when, is because the influences, demand, supply and appetite for a currencies changes as often as the wind.

Yes, those working with currencies or those with some sort of an engagement with foreign exchange and currency activities, can interpret certain data and arrive and certain conclusions, but, the landscape and the framing of that interpretation can very well change without warning depending on the appetites of 'the market'.

Events that cannot be predicted have a very significant effect on exchange rates largely because those engaged with rates of exchange have to, when presented with something they had not anticipated, make decisions very quickly.

Some times these decisions themselves can have effects on rates of exchange, but, most governments, institutions and investors want to limit the detrimental effects of an event on them.

This does not mean that a rate of exchange goes up or down per se, but, it does mean that there are very sharp and distinct changes in rates which, in and of themselves, can prompt other market participants to consider their positions.

Weirdly, those commenting on the state of capitalism and, in particular those discussing the role of financial hubs like The City of London, have in a round-about-way and, in some instances quite directly, suggested that those operating in 'the money markets' are simply gambling.

Institutions are engaging in actions on the basis that the alternative is less disadvantageous, you might say.

There is no certainty that one outcome will absolutely happen...if there were then everyone would be arrive at the same conclusion and act accordingly.

Institutions take a view and prepare for that view to be wrong in precisely the same way they might prepare for the positive outcome they are hoping for, but, there is simply no way of knowing and, in fact, it is those who are the last to see a failed opportunity for what it is that end up holding the baby.

Institutions employ intelligent people because they believe those intelligent people have more chance of making the right decision than someone less intelligent, aware or prepared, and, the extremely profitable institutions are often the ones who have the most intelligent people in their employ.

There is no coincidence there.

Whilst we are firm advocates in favour of the education of our clients as to the information and data that may or may not result in a particular outcome becoming a reality, we have to concede that our Data Centre is a tool designed to enhance our position as an operator who knows more than others.

We publish material, commentary, rates of exchange and all sorts of other information in the hope that it helps us stand out from rivals who leave you to simply infer without guidance.

And yet, the information we release and promote puts you in no better a position to forecast markets with certainty, necessarily.

What we tend to do is justify an outcome by looking back at what, in hindsight, suggested it was likely.

Providing commentary on a market does, by implication, mean that you are talking about events that have already happened. We cannot talk about events that are yet to happen and their effects basically because an event in isolation does not, de facto, have one result or outcome.

Essentially, we, like anyone else, do not know how the wider world is going to digest and then act on certain information.

We can talk about previous reactions and we can labour the point that if they were to happen again such-and-such an outcome would not be beyond the realms of possibility, but, if we knew that something was going to happen we would be acting on it ourselves and providing you with our commentaries from the Caribbean rather than windswept London.

The most useful thing a firm like Prime Cap can offer you, aside from the confidence of working with a relative sense of the environment you're operating in, is the speed to act.

We can help you prepare for a change in circumstances and, if you've not prepared we can act quickly to mitigate the effects of any change, should you have to react.

Some of our clients like to monitor things themselves and prefer to speak with us about what is going on in the markets because they like a balance of views.

Others choose to act when certain factors are obviously going to affect their position rather than before. They prefer to transact empirically and this is generally the approach of someone who knows they have a transaction to execute, but, are not convinced as to the direction in which the market may go. Generally speaking, clients with this approach have an understanding of the volatility of the markets and they rely on us to grant them access and to execute with speed.

Many currency brokers talk about how 'timing is everything'. The trouble with that rhetoric is that they do not know what is round the corner.

The 'timing' slogan is one used to try and appropriate your confidence.

Having worked for some of London's most aggressive brokers we know, first hand, the tricks used to get you to transact.

By suggesting they know more than you they get you to offload the decision making process.

They will always caveat their commentary heavily, but, it is fair to say that if you're worried you might have to pay more tomorrow for what you need to buy today, then you should not delay your purchase.

Ask our team for a break down of the current state of the market.

You will be met with a broad strokes assessment of current themes you may have seen across business headlines.

We will probably mention dates that will see certain information released to the market and we will certainly give you a sense of where the current rate is in relation to previous dates in the trading cycle as well as a relative sense of where the rate is now compared with where it was when at it's lowest or highest point recently.

If none of this interests you then simply rely on our tight rates. Whenever you need to exchange currency, you can be sure we will provide the most competitive margin, so, at least there is one thing we know for certain.

#FXtrends #Forextrends #UKinflation #UKdata #BankofEngland #financialmarkets #FXtrading #AUDtoGBP #USD #FOMC

Prime Cap Payments Limited (T/A Prime Cap | Prime Cap Payments | Prime Cap Global Payments) is registered in England and Wales No: 10755730. Registered address: 27 Old Gloucester Street, London, WC1N 3AXPrime Cap is partnered with, and a programme manager of, Ebury Partners UK Limited who provide Prime Cap's FX and payment services.  Ebury Partners UK Limited is authorised and regulated by the Financial Conduct Authority as an Electronic Money Institution (Financial Services Register No. 900797) and is registered in England and Wales (registered no. 7088713). Registered office: 3rd floor, 100 Victoria Street, Cardinal Place, London, SW1E 5JL.  Ebury Partners UK Ltd is registered with the ICO with registration numnber ZA345828.