The foreign exchange, or forex market is the biggest and most active financial market in the world. Everyday participants from all over the world engage in over $4 trillion worth of foreign exchange transactions. With the forex market being such a global and inter-connected marketplace, events from all corners of the globe can have an immediate effect on exchange rates and currency values. Here we will discuss a few typical global events that often occur, and how they may influence the forex market. (Learn how to set up a trading plan using this method, to profit as a forex trader. Check out Using Elliott Wave To Trade Forex Markets.)
TUTORIAL: Economic Indicators To Know

Political Events
An election - a common event in almost every nation - can have a large impact on a country's currency. Elections can be viewed by traders as an isolated case of potential political instability and uncertainty, which typically equates to greater volatility in the value of a country's currency. In most situations, forex participants will simply keep an eye on pre-election polls to get a sense of what to expect, especially looking for any type of change at the top. A change in government often means a change in ideology for the country's citizens, which usually means a different approach to monetary or fiscal policy, both of which, especially the former, are big drivers of a currency's value. Additionally, political parties or individuals who are seen as more fiscally responsible or more concerned with promoting economic growth tend to boost a currency's relative value. So in the case where an incumbent who is seen as "pro economy" is in danger of losing his or her position of power, traders may sell out of the currency for fears of limited future economic growth and predictability.

Another circumstance of great importance is an unexpected election. Whether it comes via a non-confidence vote, corruption scandals or other situation, unplanned elections can wreak havoc on a currency. Especially in cases where upheaval among citizens results in protests, work stoppages, etc. Such events cause great uncertainty in countries and increased political instability. Even in cases where an autocratic government is being challenged in favor of a new, more democratic and economically open-minded government, forex traders don't like the uncertainty caused by such protests. In most situations, the political instability will outweigh any positive anticipated outcomes from a new government in the short run and related currencies will usually suffer losses. In the long-term, however, basic valuation factors and principals will once again apply and currencies should settle at or around a rate indicative of the country's economic growth prospects. (Investing overseas begins with a determination of the risk of the country's investment climate. See Evaluating Country Risk For International Investing.)

Natural Disasters
The fallout from a natural disaster can be catastrophic for a country. Disasters such as earthquakes, floods, tornados and hurricanes harm a country's citizens, morale and infrastructure. Additionally, such disasters will also have a negative effect on a nation's currency. The loss of life, damage to major factories and distribution centers, in addition to the uncertainty that inevitably come with natural disasters, are all bad news for a currency.

Infrastructure damage is a key concern due to the fact that basic infrastructure is the backbone of any economy, and breaks in that infrastructure can severely limit the economic output of a region. Furthermore, the additional costs that are incurred to clean up and rebuild after a disaster takes away from government and private spending that could have been used towards economically advantageous ventures, rather than towards patching up a break in the value chain from damages in infrastructure. Add to this a probable decrease in consumer spending due to the economic uncertainty and a possible loss of consumer confidence, and any economic strengths can be turned into economic weaknesses, especially when compared to other nations that may prosper from the other's loss by filling the needs of those unable to import goods or services from the disaster stricken nation. All in all, a natural disaster will almost surely hit an economy's currency hard.

Here we're not talking about a currency war - in which countries actively attempt to devalue their currencies to aide their domestic economies in global export trading. We're discussing the impact of a physical war on forex, and it usually isn't pretty. Much like a natural disaster, the impact of war is brutal and widespread. As discussed with disasters, the damage to infrastructure deals a huge blow to a nation's short-term economic viability, costing citizens and governments billions, most of which must be borrowed. War rebuilding efforts must often be financed with cheap capital resulting from lower interest rates, which inevitably decrease the value of a domestic currency. Add to this the complete uncertainty surrounding such conflicts, on not only future expectations but on a day-to-day basis as well. Volatility of currencies actively at war are typically much higher than those not involved in a confrontation.

One aspect that some economists point to, however, is the potential economic upside to war. War at times can kick-start a fledgling economy, especially its manufacturing base, when forced to concentrate its efforts on war time production. Think of the United States in World War II. The U.S.'s entry into the war following the attacks on Pearl Harbor almost instantly pulled the country out of the grips of the Great Depression. While there is historical precedent for this viewpoint, most would agree that an improved economy at the cost of human lives is not a choice most would be willing to make. (After World War II, Germany was in ruins. Learn about the country's quick rise to the third strongest economy in the world. Refer to The German Economic Miracle.)

The Bottom Line
These are just a few events that can have a profound effect on the currency markets. As you can see, the key points to take from this discussion is that much of a currency's value is derived from the economic strength of the nation, and any unforeseen uncertainty to predictable future forecasts of economic outputs will typically not work in a currency's favor. While it is very difficult to plan for the unexpected in the forex market, an informed trader will be quicker to react to global events than one who is unsure of what moves to make in their wake.

Related Articles
  1. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  2. Economics

    Long-Term Investing Impact of the Paris Attacks

    We share some insights on how the recent terrorist attacks in Paris could impact the economy and markets going forward.
  3. Economics

    Understanding Donald Trump's Stance on China

    Find out why China bothers Donald Trump so much, and why the 2016 Republican presidential candidate argues for a return to protectionist trade policies.
  4. Forex Education

    Top 6 Most Tradable Currency Pairs

    The most frequently traded currency pair is the euro/U.S. dollar. The euro is the base currency in the pairing, while the dollar is the quote currency.
  5. Forex Fundamentals

    How to Buy Chinese Yuan

    Discover the different options that are available to investors who want to obtain exposure to the Chinese yuan, including ETFs and ETNs.
  6. Trading Strategies

    How to Trade In a Flat Market

    Reduce position size by 50% to 75% in a flat market.
  7. Markets

    Will Paris Attacks Undo the European Union Dream?

    Last Friday's attacks in Paris are transforming the migrant crisis into an EU security threat, which could undermine the European Union dream.
  8. Markets

    What Slow Global Growth Means for Portfolios

    While U.S. growth remains relatively resilient, global growth continues to slip.
  9. Economics

    How Bitcoin Helps People Bypass Government Currency Control

    Bitcoin has helped ordinary citizens in some countries bypass government controls over free exchange conversions.
  10. Forex Education

    9 Tricks Of The Successful Forex Trader

    These steps will make you a more disciplined, smarter and, ultimately, wealthier trader.
  1. How do you make working capital adjustments in transfer pricing?

    Transfer pricing refers to prices that a multinational company or group charges a second party operating in a different tax ... Read Full Answer >>
  2. How do mutual funds work in India?

    Mutual funds in India work in much the same way as mutual funds in the United States. Like their American counterparts, Indian ... Read Full Answer >>
  3. Marginal propensity to Consume (MPC) Vs. Save (MPS)

    Historically, because people in the United States have shown a higher propensity to consume, this is likely the more important ... Read Full Answer >>
  4. When do I need a letter of credit?

    A letter of credit, sometimes referred to as a documentary credit, acts as a promissory note from a financial institution, ... Read Full Answer >>
  5. When has the United States run its largest trade deficits?

    In macroeconomics, balance of trade is one of the leading economic metrics that determines the trading relationship of a ... Read Full Answer >>
  6. How are NDFs (non-deliverable forwards) priced

    The price of non-deliverable forward contracts, or NDFs, is commonly based on an interest rate parity formula used to calculate ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  2. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  3. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  4. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  6. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
Trading Center