FOREX THEORY
Fundamental Factors That Affect
Currency Values (Part 2)
Capital Flows
Globalization, technology advances
and the internet have all contributed to the ease of investing your money
virtually anywhere in the world, regardless of where you call home. You’re only
a few clicks of the mouse away (or a phone call for you folks living in the
Jurassic era of the 2000’s) from investing in the New York or London Stock
exchange, trading the Nikkei or Hang Seng index, or from opening a forex
account to trade U.S. dollars, euros, yen, and even exotic currencies.
Capital flows measure the amount of
money flowing into and out of a country or economy because of capital
investment purchasing and selling. The important thing you want to keep track
of is capital flow balance, which can be positive or negative.
When a country has a positive
capital flow balance, foreign investments coming into the country are greater
than investments heading out of the country. A negative capital flow balance is
the direct opposite. Investments leaving the country for some foreign
destination are greater than investments coming in.
With more investment coming into a
country, demand increases for that country’s currency as foreign investors have
to sell their currency in order to buy the local currency. This demand causes
the currency to increase in value.
Simple supply and demand.
And you guessed it, if supply is
high for a currency (or demand is weak), the currency tends to lose value. When
foreign investments make an about-face, and domestic investors also wants to
switch teams and leave, and then you have an abundance of the local currency as
everybody is selling and buying the currency of whatever foreign country or
economy they’re investing in.
Foreign capital love nothing more
than a country with high interest rates and strong economic growth. If a
country also has a growing domestic financial market, even better! A booming
stock market, high interest rates… What’s not to love?! Foreign investment
comes streaming in. And again, as demand for the local currency increases, so
does its value.
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