Foreign exchange is a financial asset, and investors choose it because it can bring some benefits to people. When people choose to hold one country's currency or another country's currency, they should first consider which currency brings the greatest benefits, which is determined by the interest rate in its financial market (for example, the interest rate of US dollar 1 year time deposit is 4%, while the interest rate of RMB 1 year time deposit is 3%).
Will give up the renminbi and choose the dollar, and finally reach Ri=Rj (exchange rate parity condition), where R stands for yield, and I and J stand for different countries. Different interest rates will affect the exchange rate, such as when R US >; When R is neutral, that is, when the interest rate in the United States is higher than that in China, people will choose dollars and sell RMB, which shows that the demand for dollars in the foreign exchange market increases, which leads to the expectation of appreciation of dollars against RMB; When R >:R is in the United States, people will buy RMB and sell USD, which shows that the demand for USD in the foreign exchange market has increased, leading to the expectation of RMB appreciation against USD.
We already know that a country's interest rate has an important influence on the exchange rate. So, what determines the interest rate? Interest rate is the product of the relationship between money supply and demand. For example, if a country increases the amount of money, there will be more money in the market, and the oversupply will lead to a decline in interest rates. On the contrary, if a country reduces money supply, there will be less money circulating in the market, demand will be in short supply, and interest rates will increase. Or in China and the United States, for example, China increased the amount of money, and the interest rate dropped, while assuming that the interest rate in the United States remained unchanged, which led to the depreciation of the RMB against the US dollar in the foreign exchange market; Or conversely, Dallas went to the auditorium and we came to the conclusion that the increase or decrease of a country's money supply will directly affect its exchange rate through interest rates.
Degree of political stability
In today's society, politics and economy are inseparable twins. A country's unstable political situation will lead investors to lose confidence in its economy, thus affecting its currency exchange rate, and even the currency exchange rates of neighboring countries and countries with close economic and political ties with the country will not be spared. In terms of specific forms, political risks mainly include: general elections, wars, coups, border conflicts, etc. An interesting phenomenon is that since the United States is the largest military power in the world today and its economy is still in a leading position, after the general political turmoil, the US dollar will play the role of a "safe haven" and will immediately strengthen. The following illustrates some laws of the influence of political events on the foreign exchange market through the Soviet Union's 8. 19 incident.
Since the second half of 199 1, the US dollar has weakened against almost all foreign exchange. However, the Soviet Union's 8. 19 incident completely changed this trend. Let's take a closer look.
8. Before the Kloc-0/9 incident, rumors of political instability in the Soviet Union were already circulating in the foreign exchange market, and the US dollar rose slightly for seven consecutive days. By 1991August19, all foreign exchange traders knew that when the Soviet coup, there was a phenomenon of snapping up dollars in the market immediately. Take the pound as an example. In just a few minutes, the exchange rate of the pound against the US dollar plummeted from 1 to 1.6633 US dollars, a decrease of 3. 1%. The next day, the foreign exchange market rose and fell with the news that Gorbachev had lost contact and the initiator seemed unable to control the situation. On the third day, the 8. 19 incident failed, and the foreign exchange market immediately threw out dollars. The dollar immediately fell sharply in the market.
This incident shows that the fluctuation of foreign exchange prices has its inherent laws. Short-term emergencies will cause the spot price of foreign exchange to deviate significantly from its long-term equilibrium price. However, after the incident, the trend of foreign exchange moved to its long-term equilibrium price.
The influence of news media on the exchange rate of foreign exchange market
The influence of news media is very important in today's society Investors often decide whether to buy or sell some foreign exchange according to the economic news broadcast by news media and the change of supply and demand, thus affecting the exchange rate.
Changes in foreign exchange prices largely reflect the expectations of foreign exchange market participants on foreign exchange fluctuations. In other words, if there is no external participation, the foreign exchange rate will slide towards people's expectations. However, once the news media publish the speeches of officials of the national monetary authorities or the research reports of research institutions, it may cause violent fluctuations in the foreign exchange market. In the foreign exchange market, news media often play a catalytic role in people's reasonable predictions.
A typical example is 199 1 year. The American newspaper published an article about the possibility that the American economy might fall into recession, and the market kept throwing out dollars, which made the foreign exchange rise against the dollar.
This shows that in today's information age, news media often play an early warning role, and cultivating sensitivity to news plays a great role in grasping the changes in the foreign exchange market in advance.
The influence of central bank intervention on foreign exchange market
At present, the floating exchange rate system implemented by the international community is not a complete floating exchange rate system, but a managed floating exchange rate system. The central bank not only intervenes through indirect means such as monetary policy, but also often intervenes directly when the foreign exchange market fluctuates abnormally.
The goal of the central bank's intervention in the foreign exchange market: there are three reasons for the central bank's intervention in the foreign exchange market.
A, abnormal exchange rate fluctuations are often inevitably related to international capital flows, which will lead to unnecessary fluctuations in industrial production and macroeconomic development. Stabilizing the exchange rate helps to stabilize the national economy and prices.
B, the central bank for the needs of domestic foreign trade policy, direct intervention in the foreign exchange market. The low price of a country's currency in the international foreign exchange market is bound to benefit the country's exports. The purpose of the central bank's intervention in the foreign exchange market is manifested in two aspects: 1. In order to protect exports, it will directly intervene in the foreign exchange market when the domestic currency continues to strengthen. The performance is to throw foreign currency to buy local currency. 2. The case of China Bank in Japan is another example. Due to years of trade surplus with the United States, domestic trade protectionism against Japan in the United States is very serious. In order to alleviate this situation, the Japanese government needs the appreciation of the yen. In the foreign exchange market, BOC has repeatedly sold its local currency to buy foreign exchange.
C. In order to curb domestic inflation, the Bank of China intervened in the foreign exchange market. The macroeconomic model proves that under the floating exchange rate system, if a country's currency exchange rate is lower than the equilibrium price for a long time (that is, currency depreciation), it will stimulate exports in a certain period of time, but it will eventually lead to an increase in domestic prices and wages, resulting in inflationary pressure.
Two conclusions can be drawn about the influence of the central bank's intervention in the foreign exchange market:
A. If the abnormal fluctuation of the foreign exchange market is caused by factors such as poor information efficiency, unexpected events and artificial speculation, and the distortion of the foreign exchange market by these factors is short-lived, then the intervention of the central bank will be very effective, or the direct intervention of the central bank may at least make this short-term distortion end early.
B, if the long-term level of a country's currency exchange rate is determined by the country's macroeconomic level, interest rate and government monetary policy, then the intervention of the central bank is ineffective in the long run.
Market psychological expectation
People's psychological state plays a vital role in the foreign exchange market. Aftali, a French scholar, puts forward a kind of "exchange psychology", which holds that the value of foreign exchange does not follow any laws, but depends on the subjective evaluation of the marginal utility of foreign exchange by both foreign exchange supply and demand sides.
The trading activities in the foreign exchange market provide people with an experience, that is, people's psychological expectation of the market is the most important factor to determine the short-term exchange rate trend.
For example, in 1989, a stock market scandal broke out in Japan, which affected the political situation and people were very worried about Japan's economic prospects. In the foreign exchange market, the fluctuation of exchange rate is completely opposite to the economic forecast. In the case of Japan's strong economic growth and foreign trade surplus, there has been a landscape of selling yen and buying dollars, pushing the exchange rate down.
Source: [Cai Zhi. com]