Yesterday, we published the first four factors that influence currency exchange rates of the forex. Today, here are the other four.
The public debt
The public debt corresponds to the financial commitments of a country. If borrow is not a bad thing, it is still necessary to spend that money wisely. In other words, it is preferable that these funds are intended to finance investments because it is positive for investors instead of paying loan interests, past previously.
The higher the debt of a country is important, the more investors are leery. This suggests, indeed, some uncertainty as to the solvency of the country in question and leads to an increase in inflation. It’s a question of trust. Investors take into account the level of debt but also its progression. If the progression is rapid, it has, for example, a negative impact on the local currency.
When investors are confident, that does not impact the exchange rates, but if, on the other hand, the latter begin to doubt the country’s ability to repay its debt, then its currency will be depreciated on the foreign exchange market.
The current account balance
The current account balance corresponds to the balance of the cash flows arising from international trade of goods, services, income and current transfers of a country. When this balance is positive, the country can repay its public debt. When it is negative, the country is obliged to borrow from other countries to pay it off. Logically, when the current account is in deficit, the currency of the country depreciates because it is obligated to sell its currency and buy foreign currency to meet its deficit.
For the exchange rate, inflation is a decreasing factor. Indeed, this last fact lose value in a currency, because during these periods, with the same amount of money, we can buy fewer goods and services because the prices have increased. Whether this phenomenon is difficult to combat, inflation has not as defects to the exchange rate. Usually the inflation goes hand in hand with economic growth because it promotes exports and reduces the amount of the debt. However, when the inflation rate becomes too large, overheating can occur. The central banks set a maximum threshold for inflation, above which they act.
Central banks have a key role in the evolution of the exchange rate. The monetary policies that they place have, in effect, of the effects on the price trends of currency pairs. The objectives of each central bank are different. It depends on the economic situation of the country. Some support their growth, others are struggling against inflation, against deflation, and so on To do so, they have at their disposal various tools (interest rates, » quantitative easing «, etc).
That’s it, you now know all the factors that influence the currency prices in the forex market. As you can see, the exchange rate is based on the consideration of many parameters.