Factors that Influence the FX Market and GYEN’s Position in FX Market

The foreign exchange rate could be one of the most important determinants of a country’s economic health and level of trade. Therefore, exchange rates are among the most-watched, analyzed, and governmentally manipulated economic measures. With the upcoming presidential elections, we are curious about the fluctuations in the FX market and what affects the exchange rates. Furthermore, we would like to explore if there is any opportunity for stablecoins in the FX market.

General Factors that Influence Exchange Rates

As exchange rates are relative and are expressed as a comparison of the currencies of two countries, many of the determining factors of exchange rates are related to the trading relationship between the two countries. Here we list some of the determinants as below:

  1. Inflation
    Typically, inflation rates are negatively correlated with exchange rates. A country with higher inflation usually sees depreciation in its currency about the currencies of its trading partners. This is also usually accompanied by higher interest rates.
  2. Interest Rates
    Manipulating interest rates is one of the tools for influencing the economy used by the Fed or other central banks in the world.
  3. Current Account Deficits
    A deficit in the current account shows that the country requires more foreign currency than it receives through sales of exports, and it supplies more of its own currency than foreign demand for its products. The excess demand for foreign currency would lower the country’s exchange rate as a result.

Aside from the above factors, public debt, terms of trade, and etc. are all potential determinants that influence exchange rates from a Macroeconomics standpoint. However, external events like presidential elections, pandemics, etc. also cause volatility to the market and affect exchange rates. In 2020, we cannot deny that both COVID-19 and the U.S. presidential elections bring uncertainty to the marketplace. The U.S. presidential election has a great bearing on the direction of the domestic economy, and the potential influence on the USD itself can be substantial.

Political Uncertainty and Exchange Rate Volatility

Many studies have drawn links between political uncertainty, stock market return, and volatility. Also, we can see a few researchers conducted similar studies on the impact of political events on exchange rates. Though there are no significant results that indicate how presidential elections affect exchange rates directly, some empirical studies pointed out that higher uncertainty about election outcomes is attributed to higher volatility of the US Dollar and affects the short-term market. However, ultimately the US dollar’s long-term value is dependent upon many different factors as we mentioned in the previous section, and the elections may just result in a few interventions in the cycle.

In terms of the trading volume in Japan’s FX market, we could see that the trading volume of USD/JPY skyrocketed during 2020 and kept rising. Aside from the US presidential election in 2020, the outbreak of COVID-19 caused high uncertainty and impact on the entire economy, which led to the high volatility in the market and trading volume.

Japanese Yen’s Position in FX

From the chart of trading volume of major FX pairs, we can see that the USD/JPY has been the most traded pair in Japan before and after the pandemic evokes. From the global perspective, USD/JPY is the second-largest trading pair in the market and our FX arm alone settles $1 Trillion dollars on a monthly basis. As the most traded Asian currency and the well-known low interest rate in Japan, we see a huge opportunity in developing a JPY-pegged stablecoin. That is one of the reasons why we are bringing the first regulated JPY-pegged stablecoin, GYEN, and a new USD-pegged stablecoin, ZUSD, to the world.

We believe that the combination of GYEN and ZUSD could be an interesting opportunity for many crypto exchanges because they can easily offer USD/JPY trade pairs utilizing stablecoins and we are already working with a few of the credible exchanges trying to capture these audiences.

INX is one of our trusted partner exchanges that offers an amazing trading experience to traders in the United States. INX is regulated in the United States and owns money transmitter licenses across many states. More pairs of GYEN and ZUSD are coming soon, so sign up for an account and be the first to trade digital FX on INX!

GYEN and ZUSD are also available on other exchanges such as Liquid and Nexus, check out our website for the latest information.

There are many traders both institutional and retail capturing arbitrage opportunities between different exchanges across the globe. In addition, getting physical JPY out of Japan for any digital asset or crypto-related companies is very challenging given the low risk tolerance of the local banks so JPY stablecoin can serve these audiences as well.

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Disclaimer:This content is not financial advice and it is not a recommendation to buy or sell any financial instruments, cryptocurrency or engage in any trading or other activities. You must not rely on this content for any financial decisions. Acquiring, trading, and otherwise transacting with financial instruments or cryptocurrency involves significant risks. We strongly advise our readers to conduct their own independent research before engaging in any such activities.GMO Trust does not guarantee or imply that any cryptocurrency or activity described in this content is available or legal in any specific reader’s location. It is the reader’s responsibility to know the applicable laws in his or her own country.

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