How
Interest Rate Increases Drive Currency Prices
Fundamentally, if a country raises its interest rates, the currency
of that country will strengthen because the higher interest
rates attract more foreign investors. When foreign investors
invest in U.S. treasuries, they must sell their own currency
and buy U.S. Dollars in order to purchase the bonds. If you
believe U.S. interest rates will continue to rise, you could
express that view by going long U.S. Dollars.
If you believe that the Fed has finished raising rates for the
time being, you could capitalize on that view by buying a currency
with a higher interest rate, or at least the prospect of relatively
higher rates. For example, U.S. rates may be higher than those
of Euroland now but the prospect of higher rates in Euroland,
albeit still lower than the U.S., may drive investors to purchase
Euros. How
Rising Gold Prices Affect Currencies
It's not hard to understand why we've experienced a run-up
in gold prices lately. In the U.S, they're dealing with the
threat of inflation and a lot of geo-political tension. Historically,
gold is a country-neutral alternative to the U.S. dollar.
So given the inverse relationship between gold and the U.S.
Dollar, currency traders can take advantage of volatility
in gold prices in innovative ways.
For example, if gold breaks an important
price level, one would expect gold to move higher in coming
periods. With this in mind, forex traders would look to sell
dollars and buy Euros, for example, as a proxy for higher
gold prices. Moreover, higher gold prices frequently have
a positive impact on the currencies of major gold producers.
For example, Australia is the world's third largest exporter
of gold, and Canada is the world's third largest producer
of gold. Therefore, if you believe the price of gold will
continue to rise you could establish long positions in Australian
Dollar or the Canadian Dollar - or even position to be long
those currencies against other major countries like the UK
or Japan.
Translating
Rising Oil Prices to Currency Trading Opportunities
Equity investors already know that higher oil prices negatively
impact the stock prices of companies that are highly dependent
on oil such as airlines, since more expensive oil means higher
expenses and lower profits for those companies.
In much the same way, a country's dependency
on oil determines how its currency will be impacted by a change
in oil prices. The US's massive foreign dependence on oil
makes the US dollar more sensitive to oil prices than other
countries. Therefore, any sharp increase in oil prices is
typically dollar-negative.
If you believe the price of oil
will continue to increase for the near term, you could express
that viewpoint in the currency markets by once again favoring
commodity-based economies like Australia and Canada or selling
other energy-dependent countries like Japan.
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