There are several factors that affect the change in currency pairs and you have to understand the relationship of these factors to other currencies. An economist would tell you that there are three factors that affect the exchange rates and these are as follows;
- Capital flows into investments like bonds and stocks
- International trade
- Purchases of assets like real property, factories or machinery located in other countries.
The third factor is often ignored because it plays a small part in the changes of the exchange rates. Traders tend to make use of the news we see day to day so as to speculate the market movements in the exchange rates.
These factors provide information that influences the market movements and these are what drive the currency prices. For example, if returns from other investments and bonds are very high in a certain country compared to another these yields would affect the capital flows and hence they will cause a major effect on the exchange rates.
Therefore currencies prices are affected by the changes in the interest rates or yields and credit market of a particular economy.
Currencies are divided in two groups and they are crossed against the USD being the denominator and these are the International Trade Currencies and the Capital Flow Currencies.
The International Trade Currencies are the currency pairs that are influenced by trade issues.
The Capital Flow Currencies are the currency pairs that are influenced by the changes in the flow in and flow out of money in an economy.
International trade currencies: The international trade currencies are highly influenced by the global demand of finished goods and commodities. Here are some of the common international currencies; the New Zealand dollar (NZD), the Australian dollar (AUD) and the Canadian dollar (CAD). These currencies are also known as the ‘commodity currencies’. The AUD and the NZD have got high target interest rates and they are very sensitive to the changes in the credit market, interest rates and yields.
Capital flow currencies: these currencies are highly influenced by the demand for investments such as bonds, interest bearing investments and equities. The common currencies are the euro (EUR), U.S. dollar (USD), Swiss franc (CHF) and British pound (GBP). These primary capital flow currencies have the highest strength in moving the financial and banking sectors in the world.
Having a great understanding of the Currency Characteristics and Categories will help you get to know how the currencies pairs move the prices in the forex markets. The exchange rates are the ones that drive traders to trade on various markets on a daily base due to the factors that influence these currencies from time to time. These significant changes in the exchange rates are what the traders are seeking for. If the exchange rates change in their direction hence they will make a profit. Once you have understood these concepts clearly you will soon get the idea on how the forex markets work. All you have to do is read more and understand so as to gear up yourself for a better trading activity.
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