Why It Pays To Keep Watch on Currency Trends Even If You Don’t Trade Forex

For a lot of people, forex is simply a word they hear on the news every now and then or see on a website when they’re flicking through articles. Not everyone is aware that they are constantly affected by fluctuations in the world’s currencies, regardless of whether or not you actually actively trade in the forex markets. Because of this, especially for business owners, it pays to keep up to date with the currency markets and have at least a general idea of where things are estimated to be heading.

Just to make sure everyone is on the same page, it will be useful right now to give a brief explanation of the currency markets and forex trading in general. The name itself is combination of two words, foreign and exchange. Foreign exchange is the practice of trading one currency for an amount of another currency and at its core enables trade between different countries, such as Australia buying rare metals from China with Australian dollars.

As with all things economic, if there is a way to make money from something, someone will try to do it. Due to this, the forex market has evolved to become the mechanism by which currencies are valued against each other due to supply and demand for those currencies. If a currency is in demand at a particular time it will rise in value, while those experiencing less demand will experience a drop in value. In this manner, the market decides just how valuable any currency is compared to another. In the trade these comparisons are called currency pairs, an example of which would be AUD/USD, which would be comparing the value of the Australian dollar to the United States dollar.

How does this affect your average person in their day to day life?

The increase in global trade has meant that essentially every country on Earth is importing and/or exporting product to and from other countries, to be sold on to the citizens of that country. Electronic goods will be sold and shipped from Japan to Australia, or coal will be mined in Australia then shipped to China. Each and every day the fluctuations in currency value will have a direct effect on how much is paid for those items when they are sold in the target country.

For instance in Australia recently, they have experienced a drop in the value of the AUD which will have to significant effects on trade. The first will be that imported goods will now cost more for consumers to purchase, such as electronic goods, imported foods and petrol. The second is that exported goods will now effectively generate a higher income return for the Australian seller, as the same amount of foreign currency will turn into a larger amount of AUD at the end of the purchase.

A real world example of how this can help a business owner is that of a company in Australia who sells insulation overseas. By keeping an eye on currency fluctuations, the manager of that company was able to add a good 5% to the bottom line, simply by buying their raw materials when the Australian dollar was (relatively) high, and finalizing overseas sales contracts when the $AUD was lower compared to the paired currency.

Even if you don’t own a business though, you can take advantage of these effects simply by timing your purchases to coincide with when the market predicts a certain rise or fall in your home country’s currency.

Author: Richard Casteel

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Richard is the chief author of this blog. He worked as a financial advisor in money market form last 10 yrs. His financial sense in Share trading and any other trading is just outstanding. He just shares his knowledge and experience through this blog. You can contact him directly though CFD-Providers.com.

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