Profitable on political events
Political events sometimes affect the currency market even more than economic events, because the dynamics of the economy is largely determined by the course chosen by the country's leadership. Let's find out what "political risk in trading" is, what types of political risks exist, and how they are reflected in the currency market. Forex market and how you can make money from it.
Why does politics affect exchange rates on ?
In the classical understanding of the term, political risk for any entrepreneur is a threat of profit reduction or loss, which is a consequence of government policy. First of all, it is associated with possible changes in the course or the very composition of the government. However, for traders and investors in the foreign exchange market, political changes are not only a danger, but also new trading opportunities. You and I can profit from both the strengthening of the currency and its decline, the main thing is to catch the right wave!
Why does politics affect the exchange rate? Investors in our global world want to invest in stable countries with strong economies and stable political systems. Political instability provokes a loss of confidence in currencies and a shift of capital to currencies of more trustworthy countries. Political risk is a component of country risk, i.e. the risk that current or future political or economic conditions in a country will change to the extent that they may affect the ability of the country, firms and other borrowers to meet external debt obligations.
High political riskAs a rule, it is characteristic of countries with underdeveloped economies and unstable legislative systems, or countries with open foreign policy conflicts. This type of risk varies over time: for example, since 2013, the level of political risk in Ukraine has increased significantly, although a few years ago the country was quite stable politically. The countries with the lowest level of such risk are Luxembourg, Norway, Switzerland and Denmark. These are countries with a high level of economic development, transparent electoral system and extremely neutral foreign policy.
Politics and Forex in modern examples
Let's break down the types of political events that affect the market using real modern examples so that you understand how they actually affect the foreign exchange market:
- Campaigns, elections. The parliamentary elections in Great Britain are a vivid example. There is no clear leader in this race, and the formation of a coalition may take a long time and create the so-called "hung government". This factor is a medium-term negative for the British currency.
- Appointments and resignations of members of the executive branch. There is a well-known saying "every new broom sweeps in a new way" - when a new manager comes to power, the uncertainty associated with the political course he will choose increases.
- High popular discontent with the country's leadership. Social instability - rallies, marches, strikes - could potentially lead to violent clashes, which is what capitalists fear the most.
- Increased foreign policy tensions between countries. Once again, the geopolitical conflict between Russia and Ukraine comes to mind, which in 2014 led to large-scale capital outflows from both countries ($150 billion from Russia and Ukraine) and a dramatic fall in both currencies.
- Referendums on the independence of parts of existing states. The Scottish independence referendum that took place in September 2014 is a good example. For several months, news about the results of the latest polls did not leave the tabloid headlines, and the British currency remained under pressure. The day after the vote was completed, the factor came to naught - Scotland opted to remain as part of the United Kingdom.
- Speeches and comments by political figures. Here it is simple: if Vladimir Vladimirovich Putin said that ruble exchange rate will grow, it will!
- International summits, meetings and assemblies. In 2015, the issue of Greece's insolvency has once again come to the forefront, so news from various meetings and summits where the fate of the country is discussed has a strong impact on the currency market. Uncertainty about the fate of Greece in the eurozone - medium-term bearish factor for the euro.
As we can see, there are different types of political events that affect the dynamics of exchange rates. The most important thing is to understand the current situation and assess the amount of currency risk it creates.
Warning! Important
Entering the market exactly at the time of important political events (elections, for example) is strictly not recommended, but trading on market expectations can bring solid dividends!
Article from issue 93 of ForTrader.org