Why does the price move? The answer is here!!! - page 11
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Here's a piece of text I wrote for myself once to understand forex (there was an argument with a friend about the inversion of a move - what does the community say?)
You have to wait for the movement to go in some direction. Let's say it went up. Question! Why did it go up? There are only two reasons.
First, someone in a quiet market decided that the price will go down and made a sell. Since he opened a position, the chart went up to balance his position. This needs to be explained in details. You cannot sell more currency than you can buy. But, the currency you sell will not affect the rate, because you were in fact sold another currency. You can sell everything if you discount the price of that currency, but in this case, only you will discount the price and the outside buying price of the currency will be higher. This is why the chart should go up, as you are selling cheaper and the total price simply has to be higher. The one who likes to sell better sees that you can do it at a better price and makes a sell again - the chart goes even higher. And it will go until the one who likes to buy sees the upward trend and pauses the movement, and lets it go in the opposite direction. Closing positions affects these swings in exactly the same way, only in the opposite order.
Second: an event has happened, which clearly points in one direction, but it is not so clear, because the money is looped, and someone must pay for everything - it cannot fly in one direction (and if it does, acceptance of bets will be limited - the issuer state will pay for the flight) - as a result, we must consider the first reason.
Here's a piece of text I wrote for myself once to understand forex (there was an argument with a friend about the inversion of a move - what does the community say?)
You have to wait for the movement to go in some direction. Suppose it went upwards. Question! Why did it go up? There are only two reasons.
First, someone in a quiet market decided that the price will go down and made a sell. Since he opened a position, the chart went up to balance his position. You cannot sell more currency than you can buy. But, the currency you sell will not affect the rate, because you were in fact sold another currency. You can sell everything if you discount the price of that currency, but in this case, only you will discount the price and the outside buying price of the currency will be higher. This is why the chart should go up, as you are selling cheaper and the total price simply has to be higher. The one who likes to sell better sees that you can do it at a better price and makes a sell again - the chart goes even higher. And it will go until the one who likes to buy sees the upward trend and pauses the movement, and lets it go in the opposite direction. Closing positions affects these swings in exactly the same way, only in the opposite order.
Second: an event has occurred, which clearly points in one direction, but it is not so clear, because the money is looped, and someone must pay for everything - it cannot fly in one direction (and if it does, acceptance of bets will be limited - the issuer state will pay for the flight) - as a result, we must consider the first reason.
If someone made a sale, the price goes down. The more sales, the lower the price goes.
Demand and supply. The higher the supply, the lower the price, and vice versa, the higher the demand, the more willing to buy, the higher the price.
You can buy/sell as much currency as you like - it is a process provided by the market-maker bank. Once again, everybody should remember that on Forex, as opposed to the stock market, clients do not trade directly with each other, but each with a market maker, who guarantees the execution of any (sized) deal. The bank will also set the price of any transaction, depending on supply and demand.
If someone made a sell, the price goes down.
If someone made a sell, the price goes down.
The higher the prices and production costs at home compared with foreign ones, the greater the increase in imports compared to exports. Therefore, a high price level inside a country and a low price level outside it usually means high prices for foreign currency. This factor, which in the 1920s was considered the most important, was called the "purchasing power parity" of exchange rates. According to the concept of purchasing power parity, the change in the ratio of the exchange rates of two countries, other things being equal, is proportional to the change in the ratio between domestic prices and prices abroad.
The stronger the desire to have foreign goods and use foreign services, the greater the price must be offered for foreign currency. As national income rises, so does the demand for imported goods. This causes a trend towards the depreciation of the national currency. On the other hand, high national income abroad lowers the price of foreign currency. All this is due to the country's "propensity to import": an increase in national income leads to an increase in imports almost as much as an increase in domestic consumption.
Capital flow
If investors seek to get more foreign debt, bonds, stocks, bank deposits or cash, they thereby increase the price of foreign currency. In contrast, payments by other countries to a particular state contribute to the appreciation of its national currency.
This factor, which determines the movement of capital, is closely related to currency speculation. If it were only exports of goods or payments for current transactions, then the foreign exchange rate would probably be sluggish and fluctuate very little. However, when the euro falls from 1.04 to 0.97 dollars per euro, many begin to fear that it will fall even more. Therefore, they are trying to get rid of the euro. The increase in sales of the single European currency and the reduction in demand for it as a result of short-term speculative capital movements contribute to an even greater depreciation of its exchange rate.
Thus, small fluctuations in the exchange rate are often spontaneously exacerbated by the movement of "hot money" that moves from one country to another with any rumor of impending problems, a change in political direction, or a fluctuation in the exchange rate. When such "capital flight" begins on a large scale and in any one direction, it can lead to sharp movements in exchange rates and even to a financial crisis.
Data output and waiting for data output
The concept of "data" can include the occurrence of the following events: the release (publication) of economic indicators of the host countries of traded currencies, reports on changes in interest rates in these countries, reviews of the state of economies and other events that have a significant impact on the foreign exchange market (for example, the end of the financial year in Japan on March 31, the presentation of the draft state budget by the Minister of Finance to Parliament, etc.).
The expectation of some event and the occurrence of this event are strong movers of exchange rates. It is difficult to say what has a stronger impact on the market, the event itself, or its expectation, but we can say with confidence that the release of serious data can lead to significant and prolonged movements in exchange rates. Such important data include: Nonfarm payrolls, GDP, Industrial production, CPI, PPI and some others.
The date and time of the release of this or that indicator is known in advance. There are so-called calendars of economic indicators and the most important events in the life of individual states (with specific dates or approximate time of their release). The market is preparing for these events. There are expectations and forecasts of what value of this or that indicator can come out and how it can be interpreted.
The release of data can lead to sharp fluctuations in exchange rates. Depending on how market participants interpret this or that indicator, the rate can go either way. This movement of the rate can lead to an increase in an existing trend, its correction, or the beginning of a new trend. This or that outcome depends on several factors: the situation on the market, the economic condition of the host countries of the currencies in question, preliminary expectations and sentiments, and, finally, the value of a particular indicator.
For example, after the release of a series of growing indicator values: GDP, Nonfarm payrolls, CPI, PPI, there may be talk on the market about a possible increase in interest rates in the United States. Even if this change occurs in a few months, already now they are actively beginning to buy US dollars against other currencies. Thus, an up-trend in the US dollar begins - a steady trend of the dollar strengthening against other currencies. After the release of the message about the change in the rate, a correction for this movement may begin.
The following sayings are associated with the release of certain data (or any information that affects the market): "sell when good data is released" (sell good news), and "buy on rumors, sell on facts" (buy on rumor, sell on fact). ). These sayings are suitable for situations where the market is waiting for an event to occur.
Even before the release of information about this event, the exchange rate moves in a certain direction (the direction of interpretation of the future event), i.e. the market is "setting up". Therefore, often after the release of the data (if the information corresponds to expectations), the rate moves in the opposite direction. This is due to the fact that positions were opened on expectations, and when what was expected happened, these positions are closed. There is a so-called "profit taking" (profit taking). Situations when such events occur are characterized by the expression "priced in" (that is, the occurrence of this event is already included in the price - meaning the exchange rate of one currency against another).
Foundation activities
The first place in terms of the impact on long-term trends in the movement of exchange rates is occupied by funds (hedge, investment, insurance, pension). One of their activities is investing in certain currencies. Possessing huge funds, they are able to make the course move in a certain direction for a long time. The funds are managed by fund managers. They are true professionals in their field.
Depending on the principles of work, they can open long-term, medium-term and short-term positions. Fund managers make decisions based on sound analysis of the financial markets. They are armed with all sorts of types of analysis: fundamental, technical, computer, psychological, analysis of interconnected markets. Based on the processed information, fund managers try to foresee the consequences of certain events in order to open positions in the right direction in time. Thus, one of the tasks of their activity is to play ahead of the curve.
Managers try to present the picture of the world of the currency market as a whole (so to speak from the height of their flight) and when the picture is clear, the choice of tools for work and the direction of trade takes place. Of course, none of the types of analysis can give an ideal result. However, using a proven (and improving) trading system and having significant funds, funds are able to start, strengthen and correct the strongest trends.
Activities of exporters and importers
Exporters and importers are pure market users of the foreign exchange market. Exporters have a constant interest in selling foreign currency, and importers - to buy it. With reputable firms engaged in export-import operations, there are analytical departments that specialize in forecasting exchange rates in order to more or less profitably sell or buy foreign currency.
Significant influence of exporters and importers on the market is observed in the Japanese market of the dollar against the yen. If there are no strong trends in the market, then exporters do not let the rate go up high, and importers - deep down. Thus, they are able to keep the rate in a certain range of levels for some time (create "range trading"). From time to time, in the analytical reviews of the dollar market against the yen, the levels of possible entry into the market of exporters (resistance level) and importers (support level) are indicated.
It is also important for exporters and importers to track trends in terms of hedging currency risks. By opening a position opposite to the future operation, this type of risk is minimized (currency risk hedging).
The impact of exporters and importers on the market is short-term and is not the cause of global trends, since the volume of foreign trade transactions is insignificant compared to the total volume of transactions in the foreign exchange market. Most often, their activity creates rollbacks (corrections) in the market, since when certain levels are reached, it becomes profitable to sell or buy foreign currency.
Statements of politicians
Statements that can affect the movement of exchange rates appear during various reports, summits, meetings, press conferences, etc. (for example, meetings of the leaders of the G7 countries or a press conference after the next discussion of interest rates). Journalists of news agencies (Reuters, Bloomberg, etc.) closely follow such speeches and insert the hottest statements in real time into the news columns of their agencies (the so-called "hot lines" or "hot news"). In terms of the strength of their impact on the market, these statements can be compared with economic indicators.
Most often, the date and time of a performance are known. The market is preparing for these events, so shortly before they occur, forecasts or rumors appear about what can be said and how it can be interpreted. However, there are situations when this happens unexpectedly for the market. Then the market may begin strong movements in exchange rates, which are not always predictable.
Thus, after the sensational announcement of the resignation of German Finance Minister Oskar Lafontaine, the single European currency (euro) rose against the US dollar by almost 400 points in just two hours.
If certain statements carry long-term consequences (for example, the possibility of changing interest rates, the principles of forming the state budget, etc.), then such movements can turn into long-term trends.
For example, twice a year (winter and summer) all markets closely follow the speeches of the head of the Federal Reserve System before the two banking committees of the US Congress (Humphrey Hawkins testimony). During these speeches, market participants are trying to find a hint about the future direction of interest rates in the United States. Depending on how market participants interpret the words of the head of the Federal Reserve System, this or that trend in the US dollar may be established.
In relation to politicians, there is such a thing as "talking a course." This means that at certain points in time, when the national currency exchange rate reaches levels that are unfavorable for a certain state, they begin to say that, in their opinion, the exchange rate will not go any further, that they will not allow further movement, that intervention is possible, etc. P. And since these people are trusted (they already have established authority and they have certain powers), their words begin to have a direct impact on the market.
Most often this happens after a strong and long-term trend in one direction. Therefore, after such statements, traders may decide "not to tempt fate" and start "swearing" (closing existing positions). And this, in turn, leads to a correction of this trend.
When the exchange rate is indeed at critical levels, then interventions by central banks may follow the statements. And this is a very strong event in terms of its impact on the market - the rate can move more than one hundred points towards the direction of intervention in a short time (sometimes in a few minutes). In addition, intervention may make market participants wary of opening positions in the old direction. This, in turn, can lead to collapsed movements in the exchange rate.
Activities of central banks
The state exercises its influence on the foreign exchange market through central banks. If the central bank of a certain state absolutely does not interfere in foreign exchange transactions by buying and selling foreign currency on the international foreign exchange market, then the domestic currency is in a state of "free floating". In practice, this rarely happens. Countries that have floating rates from time to time try to influence the rate of their currency through foreign exchange transactions. This state of the currency is called "dirty floating".
In the interests of the development of production and the growth of consumption, states should engage in the regulation of the exchange rate. Usually direct and indirect regulation is used. Indirectly, regulation is carried out through the amount of money in circulation, the rate of inflation, etc. The direct ones include discount policy and foreign exchange interventions in foreign exchange markets.
Foreign exchange interventions are associated with a sharp release or equally sharp withdrawal of significant amounts of currency from the international market. The central bank enters the foreign exchange market through commercial banks. Since the volumes are very large (billions of dollars), foreign exchange interventions lead to significant movements in exchange rates.
For example, in 1998, the Bank of Japan, the central bank of Japan, carried out several foreign exchange interventions to prevent further depreciation of the yen against the US dollar. Several billion dollars were thrown into the market, which led to a significant fall in the dollar against the yen.
Central banks of different countries can also carry out joint interventions in the foreign exchange market. During one of the interventions in the market of the dollar against the yen in 1998, the US Federal Reserve (US Federal Reserve System) participated in it.
If at a certain stage of economic development it is necessary to devalue (depreciate) the national currency, then the state increases the supply of its currency on the international market. Often this is done through the additional issue of banknotes. If it is necessary to raise the price of a monetary unit, the central bank buys its own currency on the international currency market. Such acquisition of own currency occurs at the expense of the bank's foreign currency.
For example, the Swiss National Bank (SNB) has recently adopted a cheap Swiss franc policy. Therefore, when there was a significant rise in its price, the National Bank of Switzerland "entered" the market and added liquidity (that is, increased the supply of francs on the market at a lower interest rate) and thereby lowered the national currency.
What happens if someone sells? It depends on the volume of the position - if the volume is small, then up, and if the volume is large, then down. It is a paradox! But it seems to be true.