The world markets are influenced by global events in many ways. The forex market is particularly susceptible to major world events since it is part of the international trade itself. Nowadays, the world is much more connected and information tends to spread very fast. This is why traders in financial markets are always tuned into the general current affairs in the world.
Exchange rates can change dramatically in the span of a few hours especially when major political and economic events take place. There are many ways that the market is affected by global events. Let’s look at some of the common ways global affairs influence the forex market.
Natural Disasters and The Forex Market
Natural disasters are not very rare in the world. Looking at the last decade, several hundred natural calamities have happened. Some of them have had major effects on the market but some have only had some mild aftereffects. Natural disasters can affect the economies of countries and thus have ripple effects that reverberate to the forex market. Things like earthquakes are especially devastating on a nation’s currency since they derail the path of development and affect normal business.
Natural disasters are also bad for the economy because they destroy the infrastructure which is the backbone of an economy. In the efforts to rebuild and contain the effects of a strong hurricane or major earthquake, for instance, most other sectors of the economy are forced to stop so that the destruction can be fixed. This comes with a lot of costs in both currency and human resources.
Strong currencies are always supported by the strong economic activity in a particular country. The value of the currency thus goes down when a natural calamity strikes since it cannot compete effectively in the forex market. Admiral Markets has listed some of the major economies and how the economic activity in these economies correlates to their currency value.
In short, natural calamities can destroy the value of the currency since they:
- Destroy infrastructure
- Lead to the loss of human lives who are the backbone of the economy
- Lead to the loss of morale thus resulting in reduced economic activity
The Impacts of War on the Forex Market
Just like when a natural calamity occurs, war also affects the forex market in profound ways. War leads to a change in priorities in the economy and there are costly effects of this. Any nation that partakes in a war must spend a lot of resources on the war even though the time will not be enough to generate more resources. War generally affects the economy because it forces a nation to:
- Allocate a huge chunk of all resources to the war and thus deprives important sectors of the economy
- Undergo destruction and loss of lives that comes as part of the war
War is so devastating to a nation’s economy such that even rumors of a war can have tangible effects on the currency. In few words, investment and the perception of a particular country changes in the face of war. There are no investors who will willingly put their money in a country that is about to go through war since they will lose their investment. The deprivation of foreign currency to an economy means that the local currency is not attractive and it will thus weaken in value.
The Effects of Politics on Currencies
Finally, political events are some of the more common causes of currency exchange rate changes in the forex market. Politics plays a central role in the direction of any country. When a new leader is elected, the markets can shift in relation to the perception the world has on such a leader. Other than that, the policy in any economy is based on the choices of people through their political leaders. It is common to see the markets shifting because some major political events have happened.
In 2018, for instance, the political decisions surrounding the meeting between President Donald Trump and North Korea’s leader Kim Jon Ung are expected to have ramifications on currencies.
The forex market is part of international trade. Global affairs thus play a central role in determining the direction the market takes. Since information flows seamlessly, the shareholders in the forex market are always watching what is happening around the world so that they can formulate strategies that work for them.