Exchange-Traded Funds and Currency Movements
July 30th, 2010 | 
Author: 
In order to understand the relations between the exchange-traded funds and the currency movements, a forex trader and investor willing to put the money into the forex market should be aware of the forces that stand behind the currencies. Being aware of the currency movement driving forces will allow to take great advantage of using the currency exchange-traded funds in order to maximize the profits and minimize the risks in forex trading.
To start with, currencies often take a long time to channel. Currency pairs can trend as well as the stocks, but the factors influencing their value and movement are different from those that drive the stocks. In comparison, it should be said that stocks are driven by economic and business growth, while currencies are driven not only by the economic growth, but also by the government policy, interest rates, stock market yields, and, what is more, important, by supply and demand. The majority of these factors can be predicted and thus direct the forex traders in their risk hedging and making profit in forex.
Every currency reflects an individual economy of its country. If this country is exporting commodities, then its currency values will be commodity-driven (that is, will currency prices will be dependent on commodity prices). There are three main commodity currencies in the world that have strong correlations such commodities as oil and gold. They are Canadian, Australian and New Zealand dollars. The most popular currency pairs to trade in this respect are CAD/USD, AUD/USD and NZD/USD. A forex trader can profit if either of the currencies from these pairs loses or gains value (a forex market provides a great possibility of profiting in both falling and rising markets).
As far as using exchange-traded funds (ETFs) is concerned, such ETF as CurrencyShares Canadian should be paid attention at. A forex trader or investor can profit from CAD/USD movement in this case. When the oil prices are rising, Canadian dollar will pull the ETF up, and vice versa, if the oil prices are falling, it will pull ETF down. Certainly, there are many other contributors to the currency value, however, energy prices have the main impact on them. Thus, they can be rather reliable in the trend forecasting.
Other forces that make a dramatic influence on the currencies value are interest rates and bond yields. Especially strong correlations in this respect are observed in the currency pair CHF/USD. An exchange-traded fund that can be used to profit in this respect is the CurrencyShares Swiss Franc. When the Swiss Franc gains in value, ETF gains in value too and vice versa.
The relationships between the exchange-traded funds and the currency movements are useful not only in the way of finding new trading opportunities in the forex market, but also a means of hedging against falling stock prices in the stock market (which is especially important for the investors). A lot of profit-gaining options are available in relation to the majority of currency ETFs.
The content provided by the forex system developers at forexeasystems.com
Posted in Business News