David Waring

In our last lesson we began a new module on the fundamentals of the forex market with a look at how traders who have an understanding of both technical and fundamental analysis are in the best position to be successful in the foreign exchange and other markets. In today's lesson we are going to continue our free forex trading course with a review of what we have learned up to this point so we can make sure that everyone has an understanding of the basics which they will need throughout the rest of this course.

As we now have a basic understanding of how trade flows and capital flows move the forex market, the next step is to look at each of the individual currencies we will be focusing on so we can gain an understanding of their backgrounds, and the makeup of their economies. Once we have an understanding of this it will become clear what fundamental factors are the most important drivers of individual currencies, and therefore what we as traders should watch for.

Before we get into this however it is very important that everyone has a sound understanding of how trade flows and capital flows move the forex market (which is covered in module 3 of this course) as well as the following concepts, all of which are covered in module 8 of our free basics of trading course located in the free course section of InformedTrades.com:

- We all need to understand what the business cycle is.

- The difference between monetary and fiscal policy.

- What a central bank is and how they go about changing interest rates. In module 8 of the basics of trading course we cover the Federal Reserve which is the central bank in the United States. While the central banks that we are going to be covering going forward may differ in how aggressive they are with monetary policy in relation to the Federal Reserve, the methods they use to conduct monetary policy, and the reactions of the forex market that monetary policy generates, is basically the same no matter what central bank you are looking at.

- The first currency we will be covering will be the US Dollar, so you should have a good understanding of the basic components of the US Economy.

I am going to give everyone 10 questions here that you should now have the knowledge to answer if you have been through module 8 of my free basics of trading course, and module 3 of this course. To help make it interesting for everyone, I will offer a free copy of Kathy Lien's excellent book Day Trading the Currency Market, to the first person that posts the correct answers to all 10 questions in the comments section of this lesson on InformedTrades.com. If you are watching this video on Youtube you can find a link to this lesson on InformedTrades to the right of the video. Ok so here we go:

1. If inflation is low and a Central Bank is concerned about recession, what would the expected monetary policy response be?

2. If inflation and growth are both high what would the expected monetary policy response be?

3. If a central bank raises interest rates, what affect if any is this expected to have on the currency of that country, all else being equal?

4. If a central bank lowers interest rates, what affect if any is this expected to have on the currency of that country, all else being equal?

5. If a country's imports grow and all other trade and capital flows remain equal, what affect would this have on the current account and what would be the expected affect on the currency if any?

6. If a country's exports grow and all other trade and capital flows remain equal, what affect would this have on the current account and what would be the expected affect on the currency if any?

7. If a country is a major exporter of gold and the price of gold moves up by 50% over the course of a year, what would be the expected affect if any on that country's currency all else being equal?

8. Japan is a major importer of oil and Canada is a major exporter of oil. If the price of oil goes up by 50% over the course of a year, then what affect if any should this have on the CAD/JPY currency pair all else being equal?

9. Traders who follow US Dollar fundamentals pay particular attention to any numbers which reflect the overall health of the consumer. Why?

10. The US Economy in the past was referred to as an Industrial Economy, now it is referred to more as a ________________ Economy.

Once the first person posts the right answers to all 10 questions I will send a private message to them via the forum to request the mailing address where they would like their free copy of Day Trading the Currency Market sent.

That's our lesson for today. In tomorrow's lesson we will begin a discussion on the fundamentals that move each of the main currencies we will be focusing on, starting with the US Dollar, so I hope to see you in that lesson.

As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading!

ATB1

1. If inflation is low and a Central Bank is concerned about recession, what would the expected monetary policy response be?

A:1 If inflation is low and the economy is scared of a recession, central banks are expected to decerease interest rates.

2. If inflation and growth are both high what would the expected monetary policy response be?

A:2 it is expected that the central banks will increase interest rates to maintain inflation.

3. If a central bank raises interest rates, what affect if any is this expected to have on the currency of that country, all else being equal?

A:3 If interest rates rise then the currency of that currency rises as well as well as the foreign investors.

4. If a central bank lowers interest rates, what affect if any is this expected to have on the currency of that country, all else being equal?

A:4 it would affected the currency negetivly the value of that currency would fall and and foreign investors would leave to find better opportunities elsewhere.

5. If a country's imports grow and all other trade and capital flows remain equal, what affect would this have on the current account and what would be the expected affect on the currency if any?

A:5 if imports grow then the value of the currency falls, because of deficit in the current account of that country

6. If a country's exports grow and all other trade and capital flows remain equal, what affect would this have on the current account and what would be the expected affect on the currency if any?

A:6 If a countries exports grow then it would affect the value of the currency positivly and the value would rise,in the currount account the outcome would be positive because exports have grown over imports.

7. If a country is a major exporter of gold and the price of gold moves up by 50% over the course of a year, what would be the expected affect if any on that country's currency all else being equal?

A:7 The affect on the countries currency value is that it would rise since their an exporter of gold over that period of time.

8. Japan is a major importer of oil and Canada is a major exporter of oil. If the price of oil goes up by 50% over the course of a year, then what affect if any should this have on the CAD/JPY currency pair all else being equal?

A:8 The effect on the CAD/JPY would be a rise for the CAD and a fall for the JPY since there would be a deficit in their account would cause them to fall. On the other hand the CAD would rise since their an exporter of oil.

9. Traders who follow US Dollar fundamentals pay particular attention to any numbers which reflect the overall health of the consumer. Why?

A:9 since there a very high rate for health insuarance in the US the tax payed to the goverment would increase or decrease since health insuarence is a must for every citizen.That would either affect the GDP positivly or negetivly depending on the results and since GDP and since it is very important the to the fundemental investors they are expected to pay special attention to it.


10. The US Economy in the past was referred to as an Industrial Economy, now it is referred to more as a ________________ Economy.

A:10 high tech

lezhek

1) lower interest
2) raze interest
3) more foreign investors
4) less foreign investors
5) deficit grows, currency depreciates
6) more money in current account, currency appreciates
7) currency appreciates
8) CAD currency appreciates
9) US economy is supported by consumer spending
10) service based

jaro g.

hi dave,

what a suprise - a video where the viewers have to think by themselves and not just (passive) consume all the information provided :-)

i liked it a lot ;-)

keep posting,
greetings from munich,
j.

David Waring

Hey Jaro,

Glad you liked it. Both of the above answers have almost all of them right but neither have them all right so the free book offer is still on the table if you or anyone else is interested.

Best Regards,
Dave

jaro g.

hi dave,

i do prefer trading commodities and do not trade currencies, so i don't need that book either :-)

why no currencies? i had sooo much misfortune when trading yen/usd certificates last time and got wiped out near the very top (i think it was at about 124 or 125 yen) before the former trend switched into 'my' anticipated direction ;-(( ... and few years earlier lost my father a huge amount of money trading usd and he then resigned from trading completely ...

well, this 'asset' class seems not to be predetermined to become my family's preference, isn't it?

did i mention before that i do not believe in paper money at all and i wish the gold/silver standard will come back to the planet earth? no? what a pitty! but anyway, it doesn't matter as it will not keep governments/central banks from printing sooooo much paper bills => cause inflation => destroy people's savings ...

bye ;-),
j.

David Waring

Hey Jaro,

Sorry to hear that you did not have good experiences with the currency market but it sounds like it has led you to markets that better fit you which is a big part of the battle I think.

Yes lots of talk out there about the long term viability of fiat currencies. I see my purpose as trying to help people figure out how to form their own opinions and then trade those opinions so I will not comment one way or another on fiat currencies. As you seem to be a proponent of the gold standard however you may find the below channel by the Mises Institute interesting if you have not already seen it:

YouTube - misesmedia's Channel

Best Regards,
Dave

rocketman7

1. The central bank would lower interest rates
2. The central bank would increase interest rates
3. The currency would increase in value
4. The currency would decrease in value
5. The deficit would increase and currency would decrease
6. The deficit would decrease and the currency would increase
7. The currency would increase in value
8. CAD would increase, JPY would decrease
9. A healthier consumer spends more than an unhealthy one
10. Service

rocketman7

Gaffa

1. If inflation is low and a Central Bank is concerned about recession, what would the expected monetary policy response be?
- Central Banks would lower interest rates to kick start the domestic economy by encouraging domestic investment. (Housing etc)

2. If inflation and growth are both high what would the expected monetary policy response be?
-Central Banks would raise interest rates to cool inflation.

3. If a central bank raises interest rates, what affect if any is this expected to have on the currency of that country, all else being equal?
-The currency should rise as foreign investors look for a place to park there money

4. If a central bank lowers interest rates, what affect if any is this expected to have on the currency of that country, all else being equal?
-The currency should fall as foreign investors look for better returns elsewhere

5. If a country's imports grow and all other trade and capital flows remain equal, what affect would this have on the current account and what would be the expected affect on the currency if any?
-Rising Imports without rising exports would cause a trade deficit and the currency would suffer.

6. If a country's exports grow and all other trade and capital flows remain equal, what affect would this have on the current account and what would be the expected affect on the currency if any?
-Rising exports without rising imports would cause a trade surplus and the currency would be stronger.

7. If a country is a major exporter of gold and the price of gold moves up by 50% over the course of a year, what would be the expected affect if any on that country's currency all else being equal?
-Mmm this one got me thinking... does price effect demand for this commodity.... ok I'll going against the grain here... the currency will FALL
(Gold confuses me because as I read once "all the Gold that has EVER been mined is still out there to be traded")

8. Japan is a major importer of oil and Canada is a major exporter of oil. If the price of oil goes up by 50% over the course of a year, then what affect if any should this have on the CAD/JPY currency pair all else being equal?
-Demand for oil is pretty consistent regardless of price.... Loonie to rise.

9. Traders who follow US Dollar fundamentals pay particular attention to any numbers which reflect the overall health of the consumer. Why?
-Consumer Confidence

10. The US Economy in the past was referred to as an Industrial Economy, now it is referred to more as a ______Service 79%__________ Economy.

jaro g.

hi dave,

i've read a lot about ludwig von mises' theories (especially in the daily market commentaries @ The Daily Reckoning, on the sites for german gold bugs @ GoldSeiten.de | Das Portal für Edelmetalle, Rohstoffe und Minengesellschaften | or in wikipedia), but i didn't know that youtube channel before ;-).

i've subscribed to it and if my free time allows it i will go through their looooong interviews ;-). but as for now i'm watching the 10-video-series (approx. 1 per day about the former chinese crimes in tibet YouTube - Cry Of The Snow Lion Part 1 and of course your youtube channel, because there is it much easier to find the new 'stuff' as @ InformedTrades | Free Videos for Learning to Trade Stocks, Futures, and Forex :-)

thanks + bye,
j.