Fundamental analysis of Forex: peculiarities of currencies worthy of attention

In the last issue of ForTrader.org, we learned about the general fundamental factors that cause exchange rates to move. Now we will take a look at the specific characteristics of particular currencies.

There are different currencies

To begin with, it is worth mentioning that in terms of investors' attitude to risk currencies are divided into "shelter currencies" and "risky" currencies. Sanctuary Currencies strengthen during periods of market anxiety and uncertainty as investors seek to preserve their assets. Risky currencies - currencies of countries-exporters of raw materials. The demand for them grows in periods of relative stability in the world economy and politics. The dynamics of the world stock markets can serve as an indicator of investors' attitude to risk (growth speaks of risk appetite, decline - of investors' aversion to risk).

Now let's move directly to the individual currencies.

Specific factors affecting the USD exchange rate

• Demand for the USD as a reserve currency. The U.S. dollar is the world's leading reserve currency. This means that central banks around the world hold their currency reserves in the U.S. dollar. Meanwhile, many nations, such as China, are trying to diversify its foreign exchange reserves, reducing the share of USD in them. If the volume of dollar foreign exchange reserves increases, the dollar exchange rate increases and vice versa.
• Demand for USD as a safe haven currency. The U.S. bond market is the most liquid in the world and is considered the world's premier "safe haven. In times of uncertainty, when investors are willing to sacrifice higher yields for the safety of their funds, they buy U.S. currency and assets.
• Influence of cross rates. The dynamics of the U.S. dollar can be influenced by the movement of other pairs, which do not include the dollar, for example, EUR/JPY affects USD/JPY and EUR/USD.
• From the point of view of the economy, labor market indicators are of particular importance, since it is the state of the labor market that guides the FEDby implementing an incentive policy.

Specific factors affecting the EUR exchange rate

When talking about the euro, it should be understood that it is the currency of the 18 countries of the euro area, so it is necessary to consider economic indicators for both the entire bloc of countries and individual economies.

• Debt auctions (especially in Greece, Spain and Italy). An auction can be considered successful if a country manages to sell bonds in the planned volume and at a lower yield. In this case, the euro may rise on the intraday charts. Yields of peripheral European economies usually are compared to the German. The higher the yield of peripheral bonds and the greater their spread with German securities, the greater the negative impact on the EUR.
• News related to the debt problems of European countries: meetings of eurozone and EU finance ministers (Eurogroup and ECOFIN), requests from eurozone countries for financial assistance in the form of new credit lines and payment of individual tranches.
• Demand for EUR as a reserve currency. The euro is the second most used reserve currency after the U.S. dollar. The EUR exchange rate tends to rise when central banks (usually Asian banks) buy euros to diversify their foreign exchange reserves. The Swiss National Bank buys euros to stop the strengthening of its national currency (franc).
• Global markets' risk appetite. Since the eurozone crisis began in 2010, the single currency has become risky. Thus, its exchange rate rises when investors' risk appetite improves and falls when it worsens.
• Financial inflows into the eurozone. Many eurozone periphery states attract investors with high yields, so the current account balance of payments is especially important for the euro.

Specific factors affecting the GBP exchange rate

• Demand for sterling as a safe haven from eurozone financial problems. When the eurozone debt crisis intensifies, there is an outflow of some money to the UK, which causes the GBP to strengthen.
• Investment flows. Britain is an important destination for global investment. Inflows investments - positive factor for the GBP.
• Demand for GBP as a reserve currency. The British pound is the third most used reserve currency after USD and EUR.
• Global market risk sentiment. The pound is not considered a risky currency like the AUD, but the GBP tends to depreciate against the USD and JPY during times of negative market risk sentiment.

Specific factors affecting the JPY exchange rate

• Global market sentiment toward risk. The yen has traditionally been used as a "sanctuary currency," and it rises in times of uncertainty and negative risk appetite among investors.
• Interventions. The Bank of Japan has often been known to resort to foreign exchange interventions in order to depreciate the yen and combat deflation. Deflation (falling prices) has been a serious problem in Japan since the 1990s after the real estate price bubble burst in the late 1980s. Much weight is given to verbal comments by Japanese politicians and monetary officials.
• The volume of foreign assets of Japanese investors. Japanese companies have huge foreign investments. When they repatriate profits, the demand for JPY increases. Japan's tax year ends on March 31.
• Oil prices. Japan is very dependent on oil imports. Rising oil prices increase the cost of production in Japan, making Japanese exporters less competitive, which has a negative effect on the Japanese economy and the JPY exchange rate.
• Carry trade. In times of increased investor appetite for risk, the yen is used as a carry trade financing currency. Japan's low interest rates allow traders to borrow money in yen and then invest it in currencies of countries with higher interest rates. That's a negative factor for the JPY.
• CNY exchange rate. Japanese and Chinese exporters compete for markets in China, Japan and the US. So if the CNY goes up against the USD, Japanese exporters win the price war, which has a positive effect on the Japanese economy and the JPY exchange rate.
• The most important economic indicator is inflation - the Bank of Japan is working hard to get this indicator to 2%.

Specific factors affecting the CHF exchange rate

• Global market sentiment toward risk. The franc has traditionally been used as a safe haven currency in times of uncertainty. The franc is particularly important as a safe haven from the eurozone debt crisis, thanks to Switzerland's economic stability and reputation as a leading global banking center.
• Interventions. Monetary authorities of Switzerland quite often resort to currency interventions. For example, in September 2011. This means that the regulator will buy the euro in order to prevent the strengthening of the franc and the fall of the euro below the above-mentioned level.
• Carry trade. The franc is used as a carry trades financing currency. Low interest rates in Switzerland allow traders to borrow cheap funds in francs and invest in more profitable currencies. This is a negative factor for the CHF.

Specific factors affecting the CAD rate

• Dynamics of the U.S. economy. The United States is the leading importer of Canadian oil and Canada's largest trading partner. As a result, the exchange rate of Canadian dollar is strongly dependent on the performance of the U.S. economy. As a result, a high reading is seen as positive, or bullish for the CAD, and a low reading is seen as negative, or bearish. Negative data from the U.S. contributes to strengthening of the USD as a result. shelter currencies and the weakening of the Canadian dollar.
• World oil prices. The Canadian dollar is a commodity currency because Canada is a major oil exporter. Rising oil prices increase the income of Canadian exporters. As a result the Canadian dollar is strengthening (the pair USD / CAD is falling). A decline in oil prices causes the growth of USD/CAD.

Specific factors affecting the AUD rate

• The risk sentiment of the world markets. Australian is a risky, high-yielding currency. In times of worsening market sentiment to risk, investors switch to more reliable currencies (JPY, USD) and the AUD declines.
• Commodity prices. Australia exports natural resources, so the rate of its national currency is highly dependent on the prices of raw materials (oil, gold, diamonds, iron ore, agricultural products, nickel and coal). High prices for raw materials support the exchange rate Australian dollar against the USD, and low commodity prices are causing a decline of the AUD.
• China is the largest importer of Australian raw materials. The state of the Chinese economy determines the demand for Australian resources and, consequently, for the Australian dollar. Growing Chinese demand has contributed to the strengthening of the Aussie over the past decade. Negative data from China, on the contrary, negatively affects the AUD/USD.