“Financial Markets and Currency Movements

 > Explanatory Article by Marios Kyriakou, MSc Economics


About the author: Marios Kyriakou has a bachelor’s degree in Economics from the University of Cyprus and a master’s degree in Economics from the University of Warwick. He is also a holder of CySEC’s Advanced Certificate in Financial Services Legal Framework and a professional in Online Trading, Forex and CFDs with more than 7 years of experience.

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<Last updated 14.04.2020>

Dear reader,

Hi! If you are interested in online trading currency pairs please read carefully the below article so you can be informed about what is causing currency moves.

 

Forex and Global Equity Markets

Equity markets can help gauge currency movement.

Invest in stocks in Japa > a European investor must first exchange his euros (EUR) into Japanese yen (JPY). This increases demand for JPY causes the value of the JPY to appreciate. On the other hand, selling euros increases its supply, which drives the euro’s value lower.

When the outlook for a certain stock market is looking good, international money flows in. (currency of denomination appreciates caused of increased demand for that currency).

> Strong stock market = strong currency.

 

How Fixed Income Securities Affect Currency Movements

Fixed income securities (including bonds) are investments that offer a fixed payment at regular time intervals. Economies that offer higher returns on their fixed income securities should attract more investments. In order to be able to buy these securities dominated in the country’s currency there must be an exchange performed and so appreciation of that currency.

Countries also offer bonds with varying terms to maturity. Comparing bonds with the same term to maturity is best (such as 5-year gilts to 5-year Euribors).

 

How bond yield affect Currency Movements

A bond is an “IOU” issued by an entity when it needs to borrow money. One major difference is that bonds typically have a defined term to maturity, wherein the owner gets paid back the money he loaned, known as the principal, at a predetermined set date.

> Periodical interest payments are commonly known as coupon payments.

It is known that bond prices and bond yields are inversely correlated. Bond yields actually serve as an excellent indicator of the strength of a nation’s stock market, which increases demand for the nation’s currency. investors move away from stocks and other high-risk investments, increased demand for “less-risky instruments” such as U.S. bonds and the safe-haven U.S. dollar pushes their prices higher.

The bond spread represents the difference between two countries’ bond yields. As the bond spread between two economies widens, the currency of the country with the higher bond yield appreciates against the other currency of the country with the lower bond yield.


 

“I hope I am clear on this one. If not, contact us on social media and we will do our best to help you.

Thank you for reading my articles and watching my videos.”

Marios Kyriakou

Disclaimer: This article is intended for educational purposes only and does not replace independent professional judgement. Its purpose is to act as a complementary educational service to society, promoting personal development and social, economic and cultural progress of citizens. While this content has been prepared in good faith, no representation or warranty, express or implied, is or will be made and no responsibility or liability is or will be accepted by the creator to the accuracy or completeness of the information presented or any other written or oral information made available to any interested party and any such liability is expressly disclaimed.
Risk Warning: Trading in Forex and Contracts for Difference (CFDs), which are leveraged products involves substantial risk of loss as there is considerable exposure to risk in any off-exchange transaction, including, but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of the markets that you are trading. You should carefully consider your investment objectives, level of experience and risk appetite before making a decision to trade with us. Most importantly, do not invest money you cannot afford to lose. It is possible to lose all the initial capital invested.

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