Since the forex market is a global market, different global events – like political events and disasters—can have huge effects on the market. In this age of globalization, it’s important to know which events have the largest effects on the currency you are trading.
Political Events
Elections
Elections take place in almost any country, and they almost always cause disruptions in the financial markets and the local currency. Elections can trigger political instability, which can then trigger higher volatility.
Usually, forex traders will just follow polls ahead of the election in order to know what may happen come the day of the results. If the country is expected to be changed after the political event, this may mean new fiscal policies and political ideologies. This can be a strong driving force for the movement of the currency.
Unexpected Elections
An unexpected election can occur as a result of a non-confidence vote, corruption allegations, or other political happenings. Regardless, when unexpected elections take place, they have the ability to spur chaos in the currency market, economic uncertainty, loss of rating, and even further political instability.
The currency may experience a massive selloff. On the other hand, these situations are almost always expected to ease, while the national currency may stay near to exchange rates that may reflect the country’s short-term economic outlook.
Natural Disasters
Natural disasters, along with wars, have a massive influence on the value of currencies. The morale and infrastructure of a nation can be severely damaged by natural disasters. Floods, earthquakes, tornadoes, and hurricanes can all damage on any currency.
Japan and New Zealand Calamities
Two of the most solid examples are the calamities that occurred in Japan and New Zealand, which saw their currencies in a chaotic period.
Initially, the Japanese yen and the New Zealand dollar softened because of the damages on their countries. Then, the currencies strengthened because of economic aids and insurance funds the countries received for fixing the damages.
However, the currencies weakened again after the deeds of their respective central banks, which attempted to promote economic recovery by providing markets with additional funding and lowering interest rates. These actions negatively affected the values of the currencies.
Japan Triple Calamity
In the year 2011, Japan experienced yet another blow to its economy in the form of not one, not two, but three calamities that knocked local economy down and influenced global economy. In that year, the Asian country experienced an earthquake, a tsunami, and a nuclear meltdown. As expected, the disasters damaged and destroyed the country’s basic infrastructure and greatly restrained the economic output of the country.
Wars
Just like natural disasters, wars have a tremendous impact on the economy. Again, damaged infrastructure also damages the country’s economy. An economy that’s ravaged by wars typically needs recovery through the use of low-cost capital and this comes from lower interest rates. As you may have guessed, lower interest rates lead to the weakening on the local currency.
Overall, total uncertainty over the future outlook and the daily development of the situation exists. The currencies of countries involved in wars have higher levels of volatility than those countries that are not involved in any conflict.
