Macroeconomic Indicators
Key Macroeconomic Indicators for Currency Trading
A list of some of the most important economic indicators when trading Forex currencies:
Macroeconomics
Credit Ratings and Agencies
Sovereign Credit Rating
Credit ratings provide global investors with insight into the level of risk associated with a particular country.
Basic Forex Economics
Factors Affecting Exchange Rates
Similar to any other financial price, the price of an exchange rate is determined by the forces of demand and supply. The price of an exchange rate reflects many economic and non-economic factors. The most important factors are interest rates, inflation, growth, employment, and political risk.
Exchange Rate Theories
Five Traditional Exchange Rate Theories
The traditional exchange rate models seek for the identification of an equilibrium between two economies in order to calculate the fair value of the exchange rate. An equilibrium based on the relative valuation of an identical commodity, on relative inflation, on the relative level of real interest rates, etc.
Purchasing Power Parity (PPP)
1. PURCHASING POWER PARITY (PPP)
The Purchasing Power Parity (PPP) model or else the “law of one price” estimates the adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to each currency's purchasing power.
Portfolio Balance Approach
2. THE PORTFOLIO BALANCE APPROACH
The Portfolio Balance approach is a modern theory based on the relationship between the relative price of bonds and exchange rates.
Interest Rate Approach
3. THE INTEREST RATE APPROACH & THE FISHER EFFECT
The connection between currency exchange rates and interest rate differentials appeared after the end of the Bretton Woods agreement in 1970-1972 (► What is Bretton Woods).
The Monetary Approach Theory
4. THE MONETARY APPROACH
The Monetary Approach focuses on the monetary policies of two countries in order to determine their currency exchange rate. The Monetary Approach uses two dynamics to determine an exchange rate, the price dynamics and the interest rates dynamics.
Balance of Payments Theory
5. THE BALANCE OF PAYMENTS APPROACH
According to the Balance of Payments theory, changes in a country’s national income affect the country’s current account. Consequently, the exchange rate is adjusting in a new level in order to achieve a new balance of payments equilibrium.
Modern Monetary Theory (MMT)
Modern Monetary Theory or Modern Money Theory (MMT)
The Modern Monetary Theory is an alternative to the traditional macroeconomic theory. Generally, MMT suggests that there is no limit to the quantity of money that can be created by a central bank. The only limit comes from the impact of inflation.