FX Analysis: Global Market Events Move Currencies
The FX market is volatile and highly elastic when it comes to political, economic, and financial events (earnings, latest news, geopolitical events, etc.). In this analysis, we dive into the volatility within the global FX (foreign exchange market) and some of the underlying causes (implications) behind major price changes in this market.For the sake of relevance and currentness, we are only looking at 2 major market movers of this year (2017). This analysis is not meant to be interpreted as investment/ financial guidance. Instead, this analysis serves to educate consumers and readers on the implications world events have on currency markets.
For more information on what currency pairs mean, check out some of the detailed explanations on currency markets and quote prices here. Here, we are evaluating geopolitical, economic, and financial events that have caused fluctuations in the value of the Euro relative to the US Dollar. All of these currency charts come from MarketWatch, another great publication for the latest market news.
In this chart we see the value of the Euro rise, or appreciate, in value compared to the US dollar. What is interesting is the general rise in price from April 2017 to the end of September. Below are a few reasons behind the steady rise in value of the Euro between April and September of this year.
- consistent aggregate economic growth across member nations despite political volatility in Spain, Germany, and the UK. If you want to get technical, this chart’s timeline across the x-axis is relatively long, and does not capture the currencies sharp (but short) price changes. Overall, countries like Poland, Spain, Germany, and even the UK have produced solid unemployment, inflation, and productivity numbers (data) this year.
- The Trump administration has led on investors to price in volatility that wasn’t originally accounted for in November after the election. The “Trump rally” as it is often called, claims that businesses will thrive under a Trump presidency. Seeing as now there is an apparent lack of unity and agreement within the Republican party, it is likely that no major policy nor legislation will come for some time. This leads investors to anticipate a smaller payoff from the Trump presidency than anticipated. That is one reason why the USD, relative to the EURO has fallen in value.
There are a few other noteworthy reasons why the EURO has rallied against the dollar for the better part of this year. Inflation data has proven promising for the EU as ECB expectations have often been less than actual economic performance. However, in recent weeks, there has been growing speculation in the UK’s ability to successfully construct a solid BREXIT agenda and establish a trade agreement for the exit. This drawback in negotiations has caused British sterling, as well as the Euro relative to the dollar, to decline.
In this chart, I took a year approach instead of a YTD approach, specifically because of major policy changes that happened under the Trump administration. The US’s recent exit from the Trans Pacific Partnership (TPP), a major unilateral trade agreement, we see a steady decline in the in US dollar relative to the Japanese Yen.
We can learn a lot about this chart. Below you’ll find a few explanations behind the price movement.
- We see from the chart that after president Trump was elected, we saw the USD appreciate in value relative to the Japanese Yen. One reason why the USD rose in value was due to the logic that Trump would be good to international corporations and that the overall expenditures and bottom line of US corporations engaged with Japanese companies would benefit US companies.
- US economic growth is consistent with appreciation of USD-JPY, considering that if US purchasing power rises, the ability for US consumers to afford and purchase Japanese exports rises, and thus the payoff for Japanese manufacturers rises.
- We do see the implications of the US departing from the TPP, as well as inherent political volatility being priced into the stead to normalized decline in USD-JPY.
There are many reasons why this relationship exists, and to be honest, there are relationships between economic indicators and investment inflows that I am researching right now. I suggest, if you want to know more about the causes of price action within FX markets, that you leverage the research of the Federal Reserve and other central banks across the globe.