The foreign exchange or “forex” market can be regarded as the most prominent financial market in the world that is home to trillions of foreign exchange transactions carried out by a multitude of traders from across the globe.
Just like other financial markets, the forex sector is also subject to changes arising from global phenomena and current affairs. It is worth noting that even an international event from any part of the world can trigger spontaneous volatility in the forex market.
How do international events affect the forex market?
An international event can mean anything from natural disasters to political affairs to warfare. Fundamentally, any event that has a large-scale global impact and reach can prompt changes in the financial markets, including forex.
A political election can have a significant effect on currencies as they usually entail changes to monetary policy. This in turn creates substantial uncertainty and instability in the markets. Revisions in monetary policy are also determined by how passionate a political candidate is about economic growth. For example, when a political leader championing the country’s fiscal development runs for the office, it can potentially strengthen a currency’s relative value. In contrast, a different political candidate could possibly plunge the value of the state’s currency if they were to take office. It is also important to highlight that unexpected elections can cause chaos in the forex market.
War can also have lasting effects on currencies. The price of war — both human lives and property damage - can spell devastating consequences for a country’s economy as it can cost governments billions of dollars, thereby hampering the state’s near-future financial goals. In order to meet post-war demands and facilitate recovery efforts, countries often lower interest rates to gain cheap capital which will further plunge the value of the state currency.
Similarly, natural disasters can also doom a country’s currency, spurred by the damage to infrastructure, loss of life, and the accompanying turmoil and uncertainty that are detrimental to the state’s economy. The resulting drop in consumer confidence and consumer spending can wreck domestic currency. As is the case with war, cleaning up and restoring a country to its pre-calamity state is costly in terms of time and money.
Natural disasters, war, and unexpected political elections are often sudden and unanticipated, leaving markets and investors on the edge. However, strategic planning and investment practices can help traders hedge some of the resulting losses on the forex and other fiscal markets. This makes it vital to partner with the right financial companies and advisors so as to ensure security even in times of uncertainty.