What the currency price range depends on?

Export and import

The higher prices and production costs inland in comparison with overseas are, the higher a volume of import as compared with export. That is why the high price level in the country and low price level beyond the boarders of the country usually means expensiveness of the foreign currency. This factor which was considered as the most important one in the 20-es of the XX century got the name "purchasing power parity". According to the concept of purchasing power parity, variation of exchange rate relations along with similarity of other conditions is proportional to the change of ratio between the domestic prices and foreign prices.

The stronger the wish to have foreign commodities and use foreign service, the higher will be the price of foreign currency. Along with the growth of national income, demand for foreign goods also increases. It causes the tendency of national currency cheapening. On the other hand, high national income abroad reduces the value of foreign currency. It happens because of a "country’s propensity to import": the growth of national income leads to the expansion of import almost as much as domestic consumption increases.

Capital movementv

If investors strive to get more foreign bonds, stock, shares, bank money or cash, this way they bid up the foreign currency. On the contrary, payments of the countries to one other country contribute to its national currency strengthening.

This factor determining the flow of capital closely related to the currency speculation. If the point of issue was about export or payments on current operations, the rate of foreign currency would probably be slack and fluctuate insignificantly. However, when the rate of euro falls from 1.04 to 0.97 US dollars for one euro, many traders begin to apprehend that it can fall lower. So they try to get rid of it. Increasing in sells of Common European Currency and reduction of demand for it as a result of short-term speculative capital movement, contribute to the greater reduction of its rate of exchange.

So small fluctuations of the currency rate often spontaneously worsen due to "hot money" movement which is transferred from one country to another when any rumor of following problems, change of political direction or currency price fluctuations appear. When such "capital flight" starts upon a large scale and in one direction, it can lead to the sharp currency price movements and even financial crisis.

Data release and waiting for the data release

The occurrence of the following events can be referred to the notion "data": publication of economic indicators by the countries-owners of the trading currency, information about the changes of interest rates in these countries, reviews of economic situation and other events having great impact on the currency market (for instance, the end of financial year in Japan on March 31, presentation of the state budget project by the Prime Minister to the Parliament, etc.)

Waiting for some event and occurrence of this event are strong driving force for the currency exchange rates. It is hard to say which of these has stronger impact on the market – event itself or waiting for it – however, it is safe to say that release of any serious data can lead to significant and long-term price fluctuations. Such important data is: Nonfarm payrolls, GDP, Industrial production, CPI, PPI and some others.

Date and time of any indicator publication is known beforehand. There are so-called economic calendars where indicators and the most important events of some countries are introduced (with specification of concrete dates or approximate time of release). Market expects these events. There appear anticipations and forecasts of what indicators’ value will be and how it will be interpreted.

Data release can lead to the sharp currency rates fluctuations. Depending on how market participants will interpret some indicator, currency rate can move to one direction or another. This price movement can lead to the strengthening of existing trend, its correction or new trend beginning. The result depends on several factors: situation at the market, economic status of countries-owners of considered currencies, preliminary anticipations and attitude and, in the end, the rate of the concrete indicator.

For example, after the release of upgoing indicators’ rates (GDP, Nonfarm payrolls, CPI, PPI) the rumors about probable increase of the interest rates in the USA can appear at the market. Even if this change will occur in several months, market participants will start buying US dollars against other currencies starting from this moment. So the uptrend starts for the US dollar against other currencies. After publication about the change of interest rate, uptrend can be corrected.

Some proverbs are connected with data (or any information which has influence on the market) release: "sell good news", "buy on rumor, sell on fact". These proverbs apply to the situations when market is waiting for some event.

Before the information report the price movement occurs to the certain direction (direction of future event interpretation), i.e. market "founds". So often after the data has announced (if information meets expectations) price moves backwards. It is connected with the fact that positions were opened on anticipations and when something which everybody was waiting for happens, - they close the positions. So-called "profit taking" occurs. Such situations can be characterized by the expression "priced in" (i.e. occurrence of this event has already been founded in the price – rate of one currency against the other one).

Funds operations

Funds (hedging, investment, insurance, pension) take the first place by the impact on the long-term trends in price rates’ movement. One of their activity lines is investing in some currencies. Having got huge assets they can make some rate to move in the certain direction. Management of funds’ assets is made by the fund managers. They are real foremost workers.

Depending on operating principles they can open long-term, intermediate-, and short-term positions. Fund managers make decisions based upon serious analysis of financial market. Different types of analysis are in operational service with them: fundamental, technical, computer, psychological, analysis of related markets. Fund managers strive to foresee the consequences of the events on the basis of processed data and open positions in the right direction in time. So their main aim is advanced trading.

Managers are trying to imagine the world of currency exchange market in whole (so to say bird’s-eye view) and when the situation is clear, they choose the instruments and direction of trading. No one type of analysis can give the ideal result. However, using bug-free (and perfective) trading system and having considerable capital, funds are able to start, strengthen and correct the strongest trends.

Exporters and importers’ activity

Exporters and importers are market users in their pure form. Exporters have constant interest to sell foreign currency, and importers – to buy it. There are analytical departments specialized in forecasting of currency rates with the purpose of more or less profitably sell or buy foreign currency in the firms of repute dealing with export-import operations.

Significant impact of exporters and importers is observed at the Japanese market of the US dollar against the Yen. If there are not strong trends at the market, exporters do not allow the rate to jump up and importers – to jump down. So they are able to keep the rate in the certain diapason (create "range trading"). From time to time the levels of probable exporters’ appearance (resistance level) and importers’ (support level) at the market are specified in the analytical reviews of the dollar against the yen market.

It is also important for importers and exporters to track the trends for currency risks hedging. Due to the position opening, which is opposite to the future operation, there occurs minimization of this type of risk (hedging of currency risks). Exporters and importers’ impact on the market is short-term and can not be the reason of large–scale trends because the volumes of foreign trade transactions are insignificant in comparison with the total volume of operations at the currency exchange market. Their activity often creates the rollbacks (corrections) at the market, because reaching some levels there is much to gain from buying or selling foreign currency.

Pronouncements of politicians

Pronouncements which have influence on the price rates movement can appear during the reports, summits, meetings, press-conferences, etc. (for instance, G8 leaders meeting or press-conference after the discussion of interest rates).

Journalists of news agencies (Reuters, Bloomberg, etc.) keep a sharp lookout for such pronouncements and insert the hottest statements on-line in the columns of the news (so-called "hot lines" or "hot news"). These utterances can be compared with the economic indicators by the impact force.

The date and time of such public speaking often is known. Market gets ready for these events, so shortly before this, there appears forecasts or rumors about what will be said and how this can be interpreted. However, there can be some situations when events occur unexpectedly for the market. There can be started strong price fluctuations at the market and they can not be always predicted.

For instance, after the sensational resignation report of Finance Minister in Germany Oscar Lafontaine the Common European Currency got up against the US dollar almost by 400 points for only two hours.

If some pronouncements carry long-term consequences (for example, possibility of interest rates changing, correction of budgeting principles, etc.) then such movements can appear to be long-term trends. For instance, twice a year (in winter and in summer) all markets monitor the speeches of the Federal Reserve Governor Alan Greenspan during the Humphrey Hawkins testimony. During this public speaking market participants try to find in his words some slight cue for the future direction of interest rates changing in the United States. Depending on how Greenspan’s words will be interpreted certain trend for the US dollar can set up.

Notion of "price rate outtalk" exists as regards to politicians. It means that sometimes when national currency rate reaches the levels which are unfavorable for the certain country, they tell that, in their opinion, price rate will not move further, that they will not allow its movement, that intervention is possible, etc. So considering that people trust them (they have certain authority and power), their words have an impact on the market.

It often occurs after the strong and long-term trend in one direction. So after such speeches traders can decide to stretch their luck and start closing positions. And this, in its turn, leads to the correction of this trend.

When currency rate is really at the critical levels, pronouncements can be followed up with the central banks’ intervention. And it has very strong impact on the market – price can move in several hundreds of points to the direction of intervention for a short period (sometimes for several minutes). Moreover, intervention can make market participants to be afraid of opening positions to the previous direction. In its turn, it can lead to the price slumps.

Below we provide the names of politicians which are frequently seen in the titles of news agencies and whose opinion is significant for the market.

USA: Federal Reserve Chairman Alan Greenspan, Treasury Secretary Laurence Summers, Federal Reserve Bank of New York President William McDonough.

Germany: Finance Minister Hans Eichel, Bundesbank President Ernst Welteke, Bundesbank Ex-President Hans Tietmeyer, Bundesbank chief economist Hermann Remsperger.

European Union: ECB President Wim Duisenberg, ECB Executive Board member Tomasso Padoa-Schioppa, ECB Chief Economist Otmar Issing, Finance Minister Gerrit Zalm.

Japan: Keito University professor, Ex-Vice Finance Minister, "Mr Yen" Eisuke Sakakibara, Finance Minister Kiichi Miyazawa, Economic Planning Agency Minister Taichi Sakaiya, Bank of Japan Governor Masaru Hayami, the head of the international bureau at Japan's Finance Ministry Zembei Mizoguchi.

Great Britain: Chancellor of Exchequer Gordon Brown, Bank of England Governor Eddie George, Bank of England Monetary Policy Committee member Mervyn King, Bank of England Monetary Policy Committee member Willem Buiter, Bank of England Monetary Policy Committee member John Vickers.

Switzerland: Swiss National Bank Chairman Hans Meyer, SNB Chief Economist Georg Rich, SNB Governing Board member Bruno Gehrig.

France: Finance Minister Laurent Fabius, Bank of France Governor Jean-Claude Trichet.

Activity of the central banks

Government affects the currency exchange market by the central banks. If the Central Bank of some country does not absolutely interfere in FX transactions by purchase or selling of foreign currency at the international currency exchange market, then national currency is in the "free floating". It occurs very seldom in practice. Countries which have floating rates try to influence their currency rate by the exchange transactions from time to time. Such condition of the country is called "dirty floating".

In behalf of production development and increase of consumption governments should regulate the currency rate. Usually direct and inferential control is used. Inferential regulation is carried out by volume of active money, inflation rate, etc. Discount policy and currency intervention at the external exchange markets can be referred to the direct control. Currency interventions are connected with sharp inflow and withdrawal of significant volume of funds from the international market. The Central Banks enter the currency exchange market through the commercial banks. Volumes of funds are huge (billions of the US dollars), so currency interventions lead to the essential movements of currency rates.

For example, in 1998 the Bank of Japan carried out several currency interventions with the purpose of prevention the Japanese yen from further cheapening against the US dollar. Several billions US dollars were thrown into the market and it leads to the significant fall of the US Dollar against the Yen.

The Central banks of different countries can also execute consolidated interventions at the currency markets. During one of the interventions at the market of the US dollar against the Japanese yen in 1998 the Federal Reserve System of the USA took part in it.

If at some level of economic development it is necessary to devaluate the national currency, then the government increases the supply of their currency at the international market. It often occurs by means of additional emission of current money. If it is necessary to raise the national currency, the central bank buys its own currency at the international exchange market. Such purchase can be executed for account of available foreign currency which banks have.

For example, the Swiss National Bank (SNB) has followed the policy of cheap Swiss franc. So when it significantly rises in price, the Swiss National Bank enters the market and increase the liquidity (i.e. raise the supply of the Swiss franc at the market at the lower interest) and this way decrease the rate of the national currency.