Home » Finance » Currency Trading

Currency Movements Punish Deficit Nations

Jun 10, 2008
Currency movements are an accepted risk when making international payments and can have a real and significant impact on profitability and cash flow for businesses involved in international trade. Over time movements in a nations currency will largely reflect how well or how poorly as nation is managing its international trading accounts.

A nation that is importing considerably more than it is exporting will tend to have a weak currency. One needs to look no further than the current trend of the US Dollar to see how this principal works in the real world.

Currency risks for companies involved in international trade necessitate pro-active management, which in turn requires a certain level of expertise. Currency movements are not correlated to investments such as equities and bonds. Investment portfolios are thus valuable diversified by the addition of a foreign exchange component. Currency movements are momentum based. Rather than responding to standard fundamentals, a currency's value is in itself one of the most important fundamentals.

Foreign currency ETFs are bought and sold just like regular ETFs, throughout the day. Foreign exchange (forex) markets form the core of the global financial market, a seamless twenty-four hour structure dominated by sophisticated professional players - commercial banks, central banks, hedge funds and forex brokers - and often extremely volatile. Many investors, particularly American ones, tend to ignore currency movements, and few financial analysts are trained to analyze the details of forex markets.

Countries are trading more goods and services, an increasing number of firms now operate across national borders, and savers and borrowers have greater access than ever before to global financial markets. Over the past decade, world trade has grown twice as fast as world output, foreign direct investment three times as fast, and both currency trading and share trading about ten times as fast. This means that huge amounts of currencies are now being traded every business day. Up to three trillion dollars a day is the current estimate.

This heavy volume of trading means that no one entity, central banks included, can control the currency market. The currency market will punish those nations that manage their financial affairs poorly and it is beyond the power of the central bankers to reverse long term trends without a change in policy. Generally, under such conditions countries that are heavy users of energy and have to import a large percentage of their energy needs would experience problems in maintaining a stable currency. Market forces will overpower the limited power of the central bank and take their currency lower.

Exchange rate movements will favor surplus energy producing countries, like Russia and Canada, over energy deficit countries like the United States. You would expect a rise in the currency of the energy producing country and a decline in the currency of the energy importing country. This is a long term negative influence on the value of the US Dollar as the US is now paying through the nose for it's oil imports.

Fundamental analysis yields very little benefit when a market is in such a state. By definition, all that can be known is known, and is already reflected in prices. Fundamental analysis is based on the belief that there are cause-and-effect relationships that need to be understood in order for pricing anomalies to be sensibly identified and acted upon. Technical analysis is based on the assumption that past price relationships are indicative of future price relationships. Fundamental analysis is concerned with the reasons or causes for currency movements. Many Forex traders who rely on fundamental analysis plan their trading strategies around a number of key U.S. economic indicators.

Fundamentally, the US now lacks the industrial base to correct its trade imbalance. According to the Bureau of Census, roughly 25,000 manufacturing plants have been shuttered since 1998, and in recent years, because of weak market conditions, manufacturing companies have cut back on plant and equipment spending.

This does not bode well for the strength of the US Dollar no matter how many rabbits Fed Chairman Ben Bernanke tries to pull out of his magic hat.
About the Author
Gerald "Taipan" Greene is a retired forex trader and portfolio manager who worked in Asia for over 20 years. The nickname was acquired in Hong Kong and is now used for a number of financial, political, and Internet business related blogs. One of them is at Learn to Trade Forex
Rating:
Please Rate:
(Average: Not rated)
Views: 164
Print Email Report Share
Article Categories
    • Artists
    • Gambling
    • Humanities
    • Humor
    • Movies
    • Music
    • Photography
    • Tattoos
    • Television
    • Classic Cars
    • Motorcycles
    • Recreational Vehicles
    • SUVs
    • Trucks
    • Vans
    • Branding
    • Business Opportunities
    • Careers and Jobs
    • Corporate
    • Customer Service
    • Direct Mail
    • Entrepreneurship
    • Ethics
    • Financing
    • Franchising
    • Home-Based Business
    • Human Resources
    • Import and Export
    • Leadership
    • Management
    • Market Research
    • Marketing and Advertising
    • Negotiation
    • Network Marketing
    • Networking
    • Organizational
    • Presentation
    • Project Management
    • Public Relations
    • Small Business
    • Strategic Planning
    • Team Building
    • Telemarketing
    • Training
    • Data Recovery
    • Databases
    • Games
    • Hardware
    • Networks
    • Operating Systems
    • Programming
    • Security
    • Software
    • Spyware and Viruses
    • Ask an Expert
    • College and University
    • Home Schooling
    • K-12
    • Languages
    • Online Education
    • Psychology
    • Coffee
    • Cooking
    • Gourmet
    • Recipes
    • Wine and Spirits
    • Acne
    • Aerobics
    • Alternative Medicine
    • Beauty
    • Cancer
    • Cosmetics
    • Depression
    • Diabetes
    • Diseases and Conditions
    • Fitness Equipment
    • Fitness
    • Hair Loss
    • Heart Disease
    • Medicine
    • Men's Health
    • Muscle Building
    • Nutrition
    • Skin Care
    • Supplements and Vitamins
    • Weight Loss
    • Women's Health
    • Yoga
    • Arts and Crafts
    • Babies
    • Collecting
    • Elderly Care
    • Genealogy
    • Hobbies
    • Parenting
    • Pets
    • Pregnancy
    • Woodworking
    • Feng Shui
    • Gardening
    • Home Appliances
    • Home Security
    • Interior Design
    • Landscaping
    • Affiliate Programs
    • Article Marketing
    • Auctions
    • Audio
    • Banner Advertising
    • Blogging
    • Broadband
    • Domain Names
    • E-Books
    • E-Commerce
    • Email Marketing
    • Ezines and Newsletters
    • Forums
    • Internet Marketing
    • Link Popularity
    • Pay-Per-Click
    • Podcasting
    • RSS
    • Search Engine Marketing
    • Search Engine Optimization
    • Security
    • Social Media
    • Spam
    • Video
    • Viral Marketing
    • Web Design
    • Web Development
    • Web Hosting
    • Copyright
    • Cyber Law
    • Intellectual Property
    • National, State, Local
    • Patents
    • Regulatory Compliance
    • Trademarks
    • Buying
    • Selling
    • Baseball
    • Basketball
    • Boating
    • Cycling
    • Extreme Sports
    • Fishing
    • Football
    • Golf
    • Hockey
    • Hunting
    • Martial Arts
    • Running
    • Scuba Diving
    • Soccer
    • Swimming
    • Tennis
    • Dating
    • Divorce
    • Marriage
    • Weddings
    • Astrology
    • Buddhism
    • Christianity
    • Faith
    • Hinduism
    • Islam
    • Judaism
    • Meditation
    • Metaphysical
    • New Age
    • Cable and Satellite TV
    • Cell Phones
    • Communication
    • Gadgets and Gizmos
    • GPS
    • Satellite Radio
    • Video Conferencing
    • VoIP
    • Addictions
    • Coaching
    • Goal Setting
    • Motivational
    • Stress Management
    • Time Management
    • Clothing
    • Electronics
    • Fashion
    • Gifts
    • Jewelry
    • Causes and Organizations
    • Environment
    • History
    • Holidays
    • Men's Issues
    • Nature
    • Philosophy
    • Politics
    • Women's Issues
    • World Affairs
    • Air Travel
    • Camping
    • Cruises
    • Destinations
    • Outdoors
    • Article Writing
    • Book Reviews
    • Copywriting
    • Fiction
    • Non-Fiction
    • Poetry
    • Quotes
    • Screenplay
    • Tools and Resources