Global events have a ripple effect across financial markets and foreign currency exchange. Learning to anticipate the impact on global trade/forex trading will help you adapt your investing strategy and can help mitigate some of the risks associated with international investing.
How Global Events Impact Global Trade/Forex Trading
Global trading and foreign exchange (forex) trading are two of the biggest ways that investors take advantage of international markets. In fact, in terms of sheer volume, the forex market is the largest trading market in the world — accounting for $6.6 trillion in daily trading volume.
Becoming a global forex trader has an advantage. These foreign markets are not influenced by the same kinds of events that impact the American stock exchange, creating an opportunity for diversification.
But that doesn’t mean that global markets (including the forex market) are immune to geopolitical events. Here are some specific ways that global events have a direct impact on global trade/forex investing.
Politics
Several political events can have a direct effect on the value of a country’s currency. The largest changes typically occur during an election cycle, depending on the ideology of the winning party. For example, a currency’s price will typically rise when countries elect fiscally responsible leaders or individuals who deliberately set out to seek economic growth.
Conversely, global forex traders may see a drop in price if a country shrinks away from strong economic development. And that’s to say nothing of scandals and other circumstances that may prompt an unexpected election.
Again, the point remains clear: investors should watch political situations carefully as they can serve as major economic indicators of a country’s future economy and currency value.
War
War can have a destabilizing effect on a nation’s economy during and after the conflict. During the conflict, disruptions to a nation’s infrastructure present major economic challenges. While wartime production may cause a slight increase in select industries, this is offset by widespread disruptions in business and trade.
After the conflict ends, a nation will commonly fuel rebuilding efforts by lowering interest rates. This may assist in financing but can lead to a devaluing of a nation’s currency, at least until the economy rebounds.
It’s also worth noting that war can have a destabilizing effect on other countries that may not be directly involved. For example, the Russia-Ukraine war affected crude oil prices around the globe, which impacted manufacturing and distribution on a wider scale.
Natural Disasters
Natural disasters such as floods, fires, and hurricanes can have a major impact on the country’s citizens and economy. Physical damage to the nation’s infrastructure can bring manufacturing and commerce to a grinding halt, which can be devastating for international stocks.
Additionally, a nation’s currency will drop drastically due to the uncertainty that comes from natural disasters. There will also be a drop in consumer spending and even government spending, as the nation invests in rebuilding efforts rather than investing in new economic projects.
Health Crises
Health crises, such as the COVID-19 pandemic, have similar impacts as natural disasters. But rather than damaging the infrastructure in a direct way, pandemics divert resources away from commerce and industry and toward combating widespread illness.
The degree to which this impacts the economy and currency value depends on the magnitude of the health crisis. When businesses are forced to stop entirely, a nation’s economy is in significant jeopardy. This means that individual businesses fail to thrive, and it also means that the nation’s economy spirals downward, leading to a drop in currency.
Economic Crises
There may be times when a country simply goes through an economic crisis. This can happen due to any of the reasons listed above, but in still other cases a nation’s economy can be directly disrupted by financial events.
For example, the 2008 world economic crisis was driven by many factors, including predatory lending, investment risk, and the collapse of the U.S. housing bubble. As a result, multiple nations saw declines in their overall economy as well as the value of their currency.
Adapting to Current Events: Tips for Investors
Globalization, economics, trade practices — these are just some of the elements that make up the complex web of international investing. Given the sheer size of the international market, there may be wisdom in pursuing international markets or forex trading. Should you choose to do so, you might consider the following tips to help you navigate shifting global events.
Stay Informed
Staying informed is important for any type of investing. But on the international stage, it’s all the more important to stay on top of geopolitical events that can cause a rise or drop in a nation’s economy or currency.
For example, you might pay attention to a nation’s election cycle. A nation whose change in leadership is coupled with a renewed interest in economic development may provide global forex traders a new opportunity to invest and see their investment grow alongside the nation’s economy.
Adopt a Diversification Strategy
Technically, forex trading and international investing is already a type of diversification strategy. That’s because investors can pair domestic and international investments to build a well-rounded portfolio, one that’s not subject to any one nation’s economy or events.
However, a forex/international investing portfolio should also adopt some diversification within that asset class. For example, you might consider multiple forex investments alongside international stock trading. By spreading your investments across multiple industries, you’ll likewise invest more broadly in the international market, shielding you from a drop in any one industry.
Pay Attention to Investor Sentiment
International economies are impacted by investor sentiment just as much as geopolitical movements. Uncertainty following a war or natural disaster can create economic instability within a nation. In some cases, even the threat of a war or political scandal can result in major downturns in the overall economy as investors are less likely to sink their money into the nation’s economy.
Additionally, investor sentiment may serve as an important economic indicator. When investors are more freely putting their money into the national economy, it could indicate that the nation is experiencing something of an upswing — or that its citizens expect an economic rebound.
Choose the Right Global Trading Platform
Perhaps more foundationally, investors should choose the right global trading platform to make their investments. Consider things like brokerage fees or other costs that may impact each trade. And make sure that the trading platform you choose even has options for global trades and forex trading.
Some trading platforms will also allow you to make paper trades so you can practice your trading strategy before using real-world dollars. Regardless of your system, you’ll need a broker that empowers you to make international trades, including forex transactions.
Be Patient
If you’re adopting a forex trading strategy in order to capitalize on geopolitical movements, you’ll need to learn patience and discipline. None of the above events happen overnight, nor are these events desirable.
That’s why forex and international trades might be part of a larger trading system, in which you include global trading as a way to balance your investing portfolio. Having the patience to wait for the right set of circumstances can ensure that you get the most from international trades and you don’t simply make decisions based on impulse or others’ investing advice.
Stay Up to Date
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