<Last updated 14.04.2020>
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.”