In simplest terms, exchange rate refers to the price of a currency in terms of another currency. The exchange rate of most of the world currencies increases or decreases occasionally grounded on its supply and demand in the foreign exchange market. Fluctuation in exchange rates is also a function of the volume of transactions in the mercantile sector of the country’s economy. The basic rule is that exchange rates appreciate when the general demand for the currency is greater than its supply at a given point in time. Conversely, depreciation is prompted by the demand being less than supply of the currency.
Practically all forex platforms such as Juno markets provide information and automated converters for foreign exchange. These automated converters offer great utility for traders whether they are in the market for the real thing or for a forex demo account. To date, the four most stable forex currencies based on the stable currency index are the Swiss franc (CHF), the United States dollar (USD), the New Zealand dollar (NZD) and the Singapore dollar (SGD). Interestingly, it was observed that active currencies in the forex market fluctuate every four seconds. And since the UK’s Brexit, GBP is very unstable and is making some big fluctuations in both in global economy and in forex trading. All Forex Brokers are taking some Brexit safety measures and so is Juno Markets company and you can read Juno markets opinions on Brexit and forex trading from their interview online.
There is, however, more to a foreign currency exchange rate than meets the eye. A survey on forex brokers’ perception regarding the single most important factor affecting movements in exchange rate revealed that for within-the-day transactions, close to one-third of the respondents considered over-reaction to news as the top factor. Three out of every 10 respondents, however, singled out bandwagon effects as the most important influence for exchange rate movements. Meanwhile, slightly over a quarter and one in every ten of the respondents designated speculative forces and technical trading, respectively as the main predictors of exchange rate movements.
The above perceptions dramatically differed for determinants of forex movements in both medium-run and long run investments, which arrived at a common consensus for economic fundamentals. The second most popular responses for the medium-and long run forex deals are speculative forces and technical trading, respectively. Surprisingly over-reaction to news that was extremely important determinants of forex rate movements for intra-day activities did not matter much for forex dealers in both medium- run and long-run operations. The next paragraphs briefly elucidates on the three most important predictors of exchange rate fluctuation.
In his 2008 book Turning Losing Forex Trades into Winners, author Gerald Greene narrates how economic news drives forex movement. As Greene observed, trading days with no financial or economic announcements are generally less dynamic. He cautioned about a typical intra-day trading mistake of thinking about the likelihood of a major market stir even with no financial news to underpin the expectation for a movement. Moreover, trading before an expected announcement is also risky in the light of possible movements against such trade strategy, unless technical indicators point towards the anticipated forex movement.
Another factor, bandwagon effect, otherwise known as the herd behavior, is the tendency for people who think and do things simply because many people do and think such things. Unfavorable developments in the market often result in further buying and hedging among non-bank players because of the bandwagon effect. The day-to-day movement in forex trading, which is characterized by hypersensitivity to short-term developments both locally and globally, is further exacerbated by the volatile flow of private capital when the market is affect by the bandwagon effect.
According to an IMF publication, a speculative bubble in forex trading exists as expectations of the market dictate the foreign exchange rate instead of fundamental factors that typically influence this rate. In effect, speculative forces spawn free-floating rates of exchange. When the market is driven by a speculative bubble, it tends to deteriorate and fuel volatility of prices. If the condition remains unchecked, the currency will eventually collapse.