Points for consideration

  • Capital flows estimates money moving in and out of a currency
  • Changing rates will result in money flow between currencies
  • Traders adhere to rates to maximise yields

There are several fundamental factors to mull over when trading Forex pairs. While many traders may quickly dismiss fundamentals under such underlying factors, the ability to produce shifts in purchase and selling patterns of traders are not as easy as many would think. As demand increases, so does currency as with value. Likewise as money flows out of a currency, its underlying value proportionately decreases.

What does capital flow mean?

Capital flows are basically the necessary element of Forex fundamentals. Just as the name itself implies which is descriptive of the flow from the funds which are designated currency to another. Generally, this flow is directed to capital investments inside of a specific country. One very close example is investments on the S&P 500, which typically would require Dollars to do so. In this case, money would flow into the USD from another currency in order to make purchases.

The reason behind here is that of supply and demand. Should capital inflows surpass outflows, this would mean that there is a demand for countries currency. This can later provide fundamental trading opportunities as for traders as with price increase in order to accommodate the new demand. This is very true with net capital outflow. As there is fewer demand for a particular currency, this would be an anticipatory fundamental opportunity to place new sell orders in the market.

Significance of Interest Rates

Interest rates are basically one of the fundamental reasons for the international flow of capital and as speculators, traders and investors alike all risk to maximise their returns, they all tend to look towards higher yielding investments. This means that countries with the largest interest rates along with strong economic data will tend to consider countries currency to bulk up and consolidate its assets to capital flows.
Keeping a close eye on things especially on the economic calendar can assist traders in becoming aware of the possible changes in interest rates. Central banks are basically charged with setting the banking rates and will often times hold meeting to make any changes to the said policy. As these changes take place, demand for a specific currency can erratically fluctuate based on decisions made every day thereafter.
Finally, learning from the market is very elementary as it is very crucial in order to know the different events to substantially affect the valuation of a given currency,