All markets are in some way related to forex. Because of the interconnected nature of finance in our day, events in one financial field will sooner or later have an impact on developments in another. Still, the connection between the bond and currency markets is immediate, significant, and easy to understand and evaluate. In this we’ll take a look at the various ways in which signals from the bond market can be used to understand and predict price action as you trade forex online.
1. The yield curve: The yield curve is a term that describes the slope of interest rates on government paper at different maturities. It is created by plotting the 3, month, 6 month, 1 year, 2 year, 5 year, 10 and 30 year yields, and then connecting the dots to create a curve. The yield curve is crucial to the market because it gives a good idea on market confidence, conditions in the banking system, and the profitability of financial firms, all of which have clear implications for growth and economic health. Indeed, a rising yield curve is generally thought to signify that the economy will keep growing in the medium term, while an inverted yield curve suggests that a recession is being anticipated by the markets.
2. Money is liquid: Since in the markets of the modern age money can move in an instant from one market or asset to another, any amount freed from the bond market is likely to inflate stock prices, which then causes carry trades to gain in popularity affecting forex trends. Conversely, if bond prices rise, implying that there is greater demand for government paper, the money leaving the stock market can cause turmoil for carry trades and influence currency prices on a long term basis.
3. Central Bank Policies: Currency traders care a lot about central bank policies, and bond demand is both reflective and predictive of central bank policies. As such, there is a clear relationship between the two which often makes the bond market very useful for fundamental analysis.
4. Financial Speculation
Let’s finally note that bonds are a tool of financial speculation, and don’t just reflect the supply-demand conditions among real investors (those who buy to hold for the long term). As such, the relatively small amounts entering into and leaving the bond market every day play a significant role in determining forex prices, as investors and speculators buy and sell currencies to conduct transactions.
Of course, the issue would require a much deeper study than what is offered in this brief examination, but we hope to have made it clear that the bond market can be a useful guide for evaluating and predicting forex price action. Some forex brokers offer the services of news providers that report daily, and sometimes on developments in the forex market. If you prefer fundamental analysis, be sure to seek such firms as you diversify your trading activity.
Author Resource:-
ForexTraders.com has provided is an informative portal that offers free information to all of its visitors. Make sure to visit http://www.forextraders.com/forex-broker-reviews.html for thorough analyzes of brokers, as well as countless articles on strategies, fundamental and technical analysis.
Print This Article
Add To Favorites
