Understanding the fundamental factors affecting the Forex market is possibly the most important step in properly assessing the behaviors of the foreign currency market. This article discusses the affects of economic indicators, the housing market and industry as key tools in the basis of market comprehension.

1. Foreign Goods vs. Local Goods. Cheaper goods become available and more attractive as the local currency drops, but the when the local currency is strong, the local industry often sees difficulties. These difficulties arise from one currency being up against another, being down. The “down currency” has cheap goods and labor available so the local industry has to face the competition.

2. Outsourcing and Company Growth. Think about the US outsourcing of jobs to Indians for cheaper labor—how does this affect the dollar? The employment of the outsourcing company suffers and so does the value of that country’s currency. On the other hand, the outsourcing companies become more successful on the bottom line and more attractive to foreign investment.

3. A Slow Housing Market. While a boom creates jobs for building homes and currency power in the market, the consequent bust creates the opposite reaction in defaulted loans, fewer borrowers and fewer foreign investments. With a weak housing market, the sellers lower prices and the economy suffers making the currency weak,

4. A Strong Housing Market Makes the Currency Grow Wildly. Housing is not like the textile industry, where people can live without buying new clothing. As everyone needs housing, when the market is on fire, the local currency usually correlates to quite a high level as well. The high currency has a snowball affect on consumers by building net worth, encouraging spending and bringing the economy up. This was demonstrated in the US before housing market crash in the late 2000’s.

When things are “good” in a specific country’s economy, the currency shows high’s that an in-the-know trader can capitalize on and make excellent profits. When such a currency is high, what makes it stay high and what makes the trending go downward?

  • Demand for Physical Currency. A double-edged sword because it forces countries to print more money, the demand for the currency should be enough to offset the inflation. This was demonstrated in the early 1990’s in the US as nations filled their reserves with cold, hand US dollars in cash when the value went up.
  • More Physical Money is Good and Bad. The US Fed Regularly publishes reports on what it believes is happening with the US money supply. Because 90% of the trading on the Forex is in USD, it is important to understand that as the US continues to irresponsibly print dollars, having more cash is a matter of more paper and not more value. This is something that every Forex trader needs to be aware of. Charts and hard data analysis are only as good as the information that builds it.