Understanding Currency Valuations in Forex

Intra-day fluctuations in currency valuations in the foreign exchange (forex, FX) market may be causing more confusion thanks to the rise of real-time data search capabilities that are …

Intra-day fluctuations in currency valuations in the foreign exchange (forex, FX) market may be causing more confusion thanks to the rise of real-time data search capabilities that are influencing investors with snapshot headlines and short-term trends that distract market movers from monitoring the factors that are traditionally understood to change valuations: overnight interest rates and the economic strength of the region in question. This causes the appearance of more volatility in the short-term when the reality should be more predictable. Experts advise tracking business cycle outlooks and longer-term analyses to get a better read on currency movement. For more on this continue reading the following article from The Street.

The valuations of global currencies have been historically based on two things: the overnight interest rate in the region and the current economic strength of the regions’ business cycle. The laws of economics determine how attractive one currency is compared to another, and that is how fair value is found in the futures market.

That overall view of forex trade has become very clouded since the twitter-like world of 10-second media sound-bites accompanied the retail investor into the commercially based forex arena. There is now an insatiable appetite for information and a desire to have a reason for each pip or tick of price movement.

Forex follows the moves in main futures markets as the vehicle used to hedge forward commitments. However, there also always seems to have to be an intra-day answer as to why a pair moved and why therefore a headline was created. The reason may be found in the explosion in use of headline-searching algorithms that can run amok in low-volume environments.

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Often there is no intra-day answer for every move which come from the basic institutional futures revaluations that respond to regional equity open and closes, the fixing of daily Libor, gold and oil rates. To stay connected to the global market, and to get a complete education and support on trading today’s fast moving trading arena, traders can access TheLFB Training Academy.

The daily moves in reaction to commercial market mechanics tend to be actionable and reliable. The headline-induced moves tend to be short-term views that create volatility and short-term trading opportunities which detract from the newer trader’s understanding of the longer-term basics of currency valuations. Overnight and daily interest rate differentials, along with regional business cycle strength, dominate daily movement.

Business cycle outlooks are key to most institutions as they determine in the long run where currency valuations are likely to be, once the near-term headline dust has settled. Traders may be well advised to try to retain a bigger picture view via four-hour chart analysis, even when intra-day trading because ultimately institutions will buy the stronger economic region and trend eventually.

The long-term outlook creates a trend that can be used to allocate risk; treading against a trend with a very good reason is acceptable if there is a reduction in trade exposure and lot size. In the long term, it is the trend trader, on the daily and four-hour chart, who will tend to stay the distance and tend to enjoy the ride, while they dip down and counter-trend trade for limited exposure trades while waiting for the bigger moves.

This article was republished with permission from The Street.


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