Factors that Influence Exchange Rates

Other than factors like inflation and interest rates, the currency exchange rate is an important determinant of a country’s relative level of economic health. You should note that exchange rates play an important role in a country’s level of trade that is critical to any free-market economy. That explains why exchange rates are most watched, analyzed, and manipulated by the government. Also, the exchange rates matter on a small scale too. For instance, the impact on the investor’s portfolio has an effect. You can find an online Currency Converter Canada. These are some of the forces behind exchange rates.

Differentials in Inflation

changing currencyA country that has a lower inflation rate exhibits rising currency value because its purchasing power increases relative to other currencies. Some of the countries with low inflation include Canada, USA, Germany, Switzerland, and Japan. Countries that have high inflation see depreciation in their currency. That is also accompanied by high interest rates.

Differentials in Interest Rates

You should note that inflation, exchange rates, and inflation rates are highly correlated. When you manipulate interest rates, the banks exert influence over both exchange rates and inflation. That means changing interest rates will have an impact on currency values and inflation.

Current Account Deficits

This is the balance of trade between the country and its trading partners. Ideally, it reflects all payments between countries for services, goods, dividends, and interest. A deficit in the current account shows that a county is spending more on foreign trade than what it is earning. In such a case, borrowing capital from other foreign sources makes up the deficit. That means a country requires more foreign currency than what it gets from the sale of its exports.

Public Debt

Some countries engage in deficit financing to pay for government funding and public sector projects. Although such activities stimulate the domestic economy, countries with large public debts and deficits are less attractive to foreign investors. That is because a large debt stimulates inflation, and if inflation is high, the debt will be serviced and paid off by cheaper real dollars. In worst scenarios, a government may print money to pay off such debts. In this way, it will increase the amount of money in supply resulting in inflation.

Terms of Trade

Terms of trade are regarded as the ratio that compares export prices to the import prices. If the price of exports rises by a greater rate than those of imports, its terms of trade are improved. That shows a greater demand for the country’s exports.

forex trader

What To Look For When Choosing A Forex Broker

There has been an influx of forex brokers on the market due to the rapid rise in forex trading in the recent past. Most forex traders tend to scratch their heads when it comes to finding a reliable forex broker to trade with. Unless you are a large financial institution or bank, you will need a broker for trading in the forex market. It is important to take this step before you begin your journey as a forex trader.

Not all brokers, however, are the same. You should find a broker who meets your specific needs. This is what makes it difficult as not all brokers have the same policies or offer the same services. Below are some things to look for in a forex broker.

Spread

forex brokersSpread refers to the transaction cost. Currencies, unlike stocks, are not traded through a central exchange. Therefore different brokers will quote different spreads. This is a major consideration in every trader’s mind since choosing brokers with very high spreads is a way to kill off your account.

Additionally, you should check if the spread is variable or fixed. A fixed spread implies that it will always be the same regardless of the time of the day. Some brokers use variable spreads meaning the spread depends on the market conditions. This implies a wide spread when the market heats up and a smaller one when the market is quiet.

Regulation

Regulated forex brokers are usually accountable to the authorities. They follow specific rules. With these brokers, most of their information is available online. You can easily check their past performance. To know if a forex broker is regulated, you need to find out the country in which they are registered. Choose brokers conducting business in the country where regulatory agencies monitor their activities.

Trading Software and Platform

forex trading chart

The best way of getting to learn a broker’s software is by trying out the demo account that is readily available. Select one that you will be most comfortable with when trading. The software needs to have basic features like direct trading from the chart and trailing stops. Some features may be available at a cost, therefore, ensure you understand what you are getting and the charges for additional services.

Support

The forex market is usually dynamic. A lot of money is traded every day. The broker needs to offer twenty-hour support ideally. Check out the avenues of support they provide. Most reputable brokers have live chat functions where traders can engage the customer service officer directly anytime. You also need to check if you can close positions over the phone. You can check out forex broker reviews to see what other traders say about a given broker.

Finding the best forex broker may take time. Looking out for these things will speed up the process of getting the right forex broker. Remember a forex broker is there to serve you, and they have to be willing to explain everything and give detailed communication.