The year that ended was horrible for many currencies. The global star, the US dollar, has lost value against many currencies, especially after the troubled presidential elections. However, it was not the only one to suffer the effects of the economic crisis caused by the pandemic.
It is a case to ask: what determines the value of a currency? Balance between the quantity of that currency and the quantity of goods or services that can be bought with it, that is, the so-called purchasing power parity model. If the amount of currency in circulation increases, allowing people to buy the same type of goods or services several times, their value will increase, causing inflation. On the contrary, if the quantity of money is constant, but the production of goods and the supply of services continues to grow, people start to give more value to money, leading to a general fall in prices (deflation) and consumption.
Second question: who decides the amount of currency in circulation? Monetary policy is one of the “weapons” used by countries to stimulate their economies. As a result, central banks, such as the FED (United States), the ECB (European Union) or BOJ (Japan), determine the amount of currency that is issued and the interest rate at which they lend money.
For example, an expansionary monetary policy (more supply) leads, in theory, the value of that currency to fall. It is, therefore, necessary to make the right combination with the interest rate, so that, in case of a decrease and the growth of the economy is high, there will be no price increase (inflation). Thus, indicators such as inflation, unemployment and gross domestic product are implicit in the capacity of demand, thus influencing the value of the currency.
Of course, in a global world, this value is also driven by external factors (exports, foreign investment, tourism) and demand at the international level. There are also countries that, as a rule, set their exchange rate to other strong currencies, such as the US dollar or the euro. In a very simplistic way, it means that the central bank of these countries buys and sells its own currency in exchange for the currency to which it has set parity. But the fixed exchange rate regime is an exception.
Investment for adventurers
The small introduction we have just made to the world of currencies allows us to conclude that the reasons for the fluctuations in the value of currencies are not that complex, but the variables to be analyzed are many. In addition, it is a market that operates 24 hours a day, seven days a week. Thus, it is not enough to understand the possible implications of an increase in the interest rate and to master a set of data (current and future) about a country. You must always keep your eyes open, because it is possible to trade currencies anytime and anywhere in the world.
The best strategies
Within the volatility associated with this type of investment, there are several ways to do so with greater or lesser risk. One of them is the forex, an international market that allows the purchase and sale of foreign exchange. In the past, it was restricted to financial entities. Today, it is an open market not only for any investor, but for traders and brokers, who sometimes take advantage of different regulation between countries.
Getting started is very easy. Just follow these steps:
Register with a reliable broker such as Click Here
Open a live chart for binary options.
Become familiar with a simple and successful strategy.
Another solution for investing in foreign currency is investment funds, either through treasury funds (we do not recommend it) or through medium-term bonds, taking into account our prospects for the evolution of the currency against the euro. In fact, we have some of these bond funds in our portfolio with the most defensive strategy.
The advantage of investing through a fund is to diversify across multiple currencies and to have someone who manages the investment for you.
In the midst of this forex exchange adventure, the question that arises is to know which currencies are worth betting on. The forecast is not easy.
In our forecasts there are positive outlooks for the Swedish krona, the Japanese yen, the Norwegian krone, the Canadian dollar, the Brazilian real, the Swiss franc and the pound sterling.