Predicting Forex trends is often the key to how to trade Forex. In this case we are not talking about minute by minute or hour by hour variations in the Forex markets. Rather we are talking about large shifts in the relative values of various currency pairs that take place over weeks, months, and years. Accurately predicting Forex trends can result in substantial gains in trading currencies directly or trading via the futures or options markets for foreign currencies. A lot of attention these days is given to the Euro and the US dollar because of the twin debt crises on opposite sides of the Atlantic. Both currencies are weighed down by the size of their debts and the consequent fallout onto both of their economies. In predicting Forex trends many choose to believe that the Euro and US dollar will both continue their gradual slides in relation to other currencies. For example, trading in Asian currencies and the Australian dollar in relation to the US dollar has be active of late as traders exit US dollar positions in favor of the Aussie, Yen, Yuan, Rupee, Taiwanese dollar, or Singapore dollar.
In predicting Forex trends a trader is well advised to consider the effects of a rise or fall of a currency on its nation’s economy. Japan is a case in point right now. A recent rise in the Yen was coupled with a fall in a number of Japanese stocks. The fact is that Japan wrote the book on supporting the US dollar in order to make their products economically competitive in US markets. As the Yen goes up so does the price of products manufactured in Japan and exported to the USA or Europe. Over the long term a steady devaluation of the US dollar and Euro will result in fewer sales of Japanese, Chinese, Taiwanese, and other Asian products to the world’s two most lucrative consumer markets, North America and the European Union. Although Japan’s ongoing monetary policy is to support dollar it could become too costly in light of the reconstruction costs in Japan after the earthquake and tsunami. The amount of Yen repatriation after the earthquake helped to drive to price of the Yen up as well. The economic effects of a rise in Asian currencies could work, later on, to support the dollar and Euro.
Things have a way of balancing themselves out in the Forex markets. Traders have tendency to drive prices based upon the short term. Companies doing business internationally seek to protect profits by trading Forex, especially with options. Thus Forex trading and foreign currency risk are closely connected. A US company that purchases machine parts from a German company concerns itself with the relative values of the dollar and Euro over the term of the contract for payment and will trade accordingly. These traders may be fully capable of predicting Forex trends in the longer term but do not concern themselves with the long term in their day to day trading. Thus the market may seem to have a rather short focus. In predicting Forex trends over the longer term a trader needs to do his own fundamental and technical analysis based upon his own time horizon.
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