Currency market and politics. Any correlations?

Have you ever noticed that political events affect markets even more than the economic data? Why does it happen and what political events traders should take into consideration?

Why does politics affect the currency rate?

The answer is simple: investors put their money in stable countries with a strong economy and a stable political system. Any political uncertainties pull down the domestic currency. As a result, investors withdraw their assets and invest them in stronger currencies. Hence, all these lead to the suffering of the economy and a greater depreciation of the currency.

However, it doesn’t mean that political risks are negative for traders. The big advantage of trading is that you can get profit not only on the strong currency but on the weak as well. The most important thing is to forecast accurately how the political event will affect the currency.

What political events can affect the markets?

It’s time to look at the events and their impact on the markets.

1. Elections. Elections are one of the most important events that affect the domestic currency. No matter what new authorities will bring to the country and the currency, the market considers the election a risk. Any delays in elections pull the currency down because delays mean uncertainty. Unexpected results have the biggest influence on the market creating high volatility.

Example. Up to now, the US president Mr. Trump is one of the most important political events in the world. And it started with his election. After the victory of Mr. Trump was announced, the US dollar and financial markets crashed. First of all, few people believed that Mr. Trump will really become the president. Secondly, markets didn’t know what to expect from the businessman in politics.

2. Social instability. When locals are unhappy with the government, it may lead to power clashes and, as a result, a disinvestment. Capitals are always scared of social disruption. 

3. Cross-country disputes represent another negative political event. It is one of the most dangerous events for the markets as it affects at least two currencies.

Example. The worst stage of the cross-country dispute is sanctions. One of the examples is the US sanctions on Russia that caused a great plunge of the Russian ruble.

Another recent example is a break of diplomatic relations between Saudi Arabia and Canada after the conflict about human rights. As a result, Saudi Arabia kicked out the Canadian ambassador, planned to pull out thousands of students and medical patients from Canada and suspended Saudi state airline flights to Toronto. The Canadian dollar lost positions on such negative news.

4. Referendums. When something threatens a unity of a country or a political bloc, there are no doubts that it will affect the currency market.

Example. In September 2014, Scotland decided to hold a referendum to leave the United Kingdom. The British pound was under great pressure during the whole period before the referendum took place. News on the possible results of the referendum had been pulling the pound up and down.

Up to now, the Brexit deal is the most important event that affects the British pound more than any economic data. Although the referendum took place more than 2 years ago, it still has a great impact on the GBP. Any uncertainties on the agreement between the UK and the EU pull the GBP down.

5. International summits and meetings.

Meetings of officials of different countries are always significant. Traders may get clues on relationships between countries and on the whole world situation as well. Meetings on the critical issues such as the Greek crisis or Italy’s further participation in the EU affect markets the most.

For example, speculation that Italy may leave the EU caused a medium-term bearish trend for the euro.

6. Speeches and comments of political officials.

The market closely follows comments and speeches officials give. Sometimes these comments can turn upside down all expectations of the market.

For example, in January when the USD was already weak and the market anticipated steps from the Fed to support it, Treasury Secretary Steven Mnuchin said that a weaker dollar was good for the US. After such comments, the USD dipped and hit a session low.

Making a conclusion, we can say that political events are good drivers of the currency market. An experienced trader can take an advantage of any event: positive or negative. Just follow the news at fbs.com to make the right predictions on the impact that the event will have on the currency.

Note: It not often recommended to enter the market during an important event. The best strategy is to trade on market’s expectations. Check what the market anticipates and trade in this direction!

Author: FBS Analyst Team

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