International Finance: How to Predict the Potential Price Movements in the FOREX Market

Introduction:

The Foreign Exchange Market or Currency Market or FOREX Market  is a form of  exchange for the global decentralized trading of international currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. EBS and Reuter's dealing 3000  are two main interbank Foreign Exchange trading platforms. The foreign exchange market determines the relative values of different currencies.

The foreign exchange market assists international trade and investment by enabling Currency conversion. For example, it permits a business in the United states of America to import goods from the European Union member states especially Euro-zone members and pay Euros, even though its income is in US Dollars. It also supports direct speculation in the value of currencies, and the carry trade, speculation based on the interest rate differential between two currencies.

Major Factors to Predicting Forex Market Movements: To profit from the fascinating world of international trade, you must have a firm grip on the key factors that affect a currency's value. When making our trades, we analyze five key factors.  In order of importance, they are:

(1) Interest Rates

(2) Economic Growth

(3) Geo-Politics

(4) Trade and Capital Flows

(5) Change of Commodity Price Index

(6) Merger and Acquisition Activity

Out of these factors, here I’m discussing about change of Commodity Price Index or " How to use commodity price to predict the potential price movement in the FOREX Market". 

From the above discussion it is clear that the forex market can be moved by many factors such as the supply and demand, interest rates, economic growth and so on. Besides this, traders should also know that certain currency pairs can be greatly influenced by the price of some commodities such as oil.

What currencies are closely related to the price of commodities in the FOREX Market?

It is know that the economic strength of a country is directly related to its domestic industry and its international trades. Thus, the price of important commodities produced in a country can greatly influence the value of the underlying currency in the FOREX Market. According to survey, the top three currencies that have the tightest correlations with commodities are the Australian dollar (Australia is a major producers of precious metal such as gold), the Canadian dollar (Canada is a major producer to crude oil). Other currencies that are also impacted by commodity prices but have a weaker correlation are the Swiss Fanc, New Zealand  Dollar and the Japanese Yen. When trading in the FOREX Market, knowing which currency is correlated with what commodity can help traders have a better understanding of the potential market movements of certain currency pairs.

How to use commodity prices to predict the potential price movements in the FOREX Market?

When trading in the FOREX Market, traders should not only focus on the trend within the FOREX Market itself, they should also look beyond the price movements of the market; for example, they can watch the commodity prices and predict the potential price movements of certain currency pairs. We already know that oil and gold are two major commodities worldwide and they are watched by a great number of traders in order to do better FOREX Analysis. Thus, it has to be learnt how to use them to predict the potential price movements in the FOREX Market. The following is an example that might be able to tell traders how to predict the potential movements of CAD / JPY in the FOREX Market with oil prices. We know that oil is a basic necessity worldwide at present and the price of oil has been surging over the past few years. The fluctuation of oil price mainly influences two types of countries, oil exporter and importer. When the oil price goes up, oil exporters such as Canada will benefit a lot from it and their currency tends to gain strength in currency trading; conversely, when the oil price falls, oil importer such as Japan will enjoy the benefits. A great number of traders tend to watch the oil price in order to predict the price movements of CAD / JPY. For example, when oil price goes up, traders tend to go short CAD / JPY for the value of CAD tends to appreciate in the FOREX Market.

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Despite of the above mentioned simple rule, predicting price movement in online FOREX trading is not very easy to do so. However, there are two methods for predicting FOREX price movement. The two methods are fundamental analysis and technical analysis. Let’s go in details about these two methods.

Fundamental Analysis: The first method which you can employ to predict the movement of price in FOREX is fundamental analysis. You can used this method to forecast the currency price movements focus on the political, economic as well as the social factors which can direct the supply and demand. In this method you need to analyze the interest rates, unemployment, inflation and the growth of the economy. You should make a sound assessment on the present condition of the currency afterwards then predict the currency's movements in the future. You need to be constantly informed of the events so as to analyze the data. However, the major basis to fundamental analysis comes from the balance of payments of the country. Yet this is one of the great methods of predicting price movement in FOREX trading online.

Technical Analysis: The other method which you can employ for predicting price movement in FOREX trading is through the use of technical analysis. Technical analysis is totally based on or used historical price data to determine the movements of the price and to predict the movements of the future prices. There are two basic principles behind technical analysis. The first principle defines that history repeats itself and this means that the rates will move today according to the ways and patterns that have already been established by time. The second principle reveals that it is not essential to study the other present information about the market to forecast the movements of the market because this is already indicated in the prices of the currency.