Politics Weigh More Than the Economy in Forex
It is a forex adage that when speculating currency movements we should take into account the relationship of politics and economics to currency values. But in some cases, political factors outweigh those that affect the economy, and sometimes even stand alone as the sole reason for a currency movement.
What happened to the Japanese yen in 2006 is a case in point. Back then the Japanese economy was as healthy and bouncing as ever. Unemployment rate was at an all-time low. Exports were astounding and business investments were spectacular. In fact, a good currency movement predicted for the yen was that it would have promising interest rates, a first time ever and a major departure from its traditional zero-interest rate.
But in spite of all these positive remarks about the Japanese economy the fact was that the yen was weakening. It was because of a major political crisis developing that time in Japan - its central bank governor figured in a financial scandal. Though not directly linked to a fund insider trading, the governor had his name stained by the controversy. That time, the Japanese governor, Fukui, was considered a stalwart in the world currency market affecting currency movements.
Why was the yen weak in the face of superb economic performance? Well, traders were anticipating a Fukui ouster. And if this happened there might be a major shift in politics and governance. No matter how strong the economy was the value of the yen still hung on the political outlook of speculators. This is the reality in currency movements.
But Governor Fukui didn't budge even a bit. Unfazed by political pressure he held on to power. When forex speculators saw that Fukui was determined to stay in power foreign investors returned to the investment tables and the yen started gaining in strength. Note that the yen only gained power when the political scene stabilized, not when the economy was at peak performance - evincing that politics often takes precedence over the economy in currency movements.
Thus, it is a great forex tool to be adept at noting, analyzing, and forecasting political developments. Others may just watch out for economic developments - which are often wavering as far as pinpointing currency movements are concerned. Seeing where political developments would lead to can improve our forex trading and earn us lots of profits.
Remember to gain as much political acuity as possible, in both the local and global scenes. Forex profits may just be a news development away.