• By Learn CFDs

  • January 1, 2019
  • 9:27 am BST

Forex trading requires a thorough understanding of geopolitical and socioeconomic events, and traders can accomplish this effectively by watching the news and keeping themselves updated about what is going on around the world. The type of understanding that a trader needs, according to experts, should be at a macro level, as seeing the big picture is necessary for them to make sound decisions. This is because currencies move regularly as international and domestic affairs affect them.

One good example is the movement of the AUD in the past few days due to what is happening in the United States. As Wall Street stocks plummeted, the Australian dollar suffered. Those who were unable to pay attention to the news recently will not know that Patrick Bennett, a strategist from Canada, told CNBC that buying Australian currency is actually a good idea. According to Bennett, the AUD will have a stronger position in 2019, and those who have the currency should keep holding onto it. He noted, however, that traders need to get the AUD/EUR pair instead of the AUD/USD. This is just an example of how important the news is when it comes to currency trading.

Australian stocks and the news

Like stocks in other countries, Australia’s stock prices see the effects of the nation’s economic climate. According to experts, the news is an important source of knowledge, both at the micro and macro level, to ensure that the conditions are right to buy or sell a particular share.

CFD trading

With CFD trading, prices move based on socioeconomic and geopolitical events. Traders expect some of these but do not expect others, according to experts. Apart from monitoring seasonal movements, it is also important to note that asset price movements occur daily. Keeping track of socioeconomic events will make it easier for traders to make informed decisions. In this sense, reading or watching the news is a form of fundamental analysis.

Why fundamental analysis is so important

Considering what has been happening in the markets, particularly in the United States, China, and the Eurozone, paying attention to the news is more vital than ever. One political event that illustrates the importance of fundamental analysis is Brexit. UK Prime Minister Theresa May has been making headlines in the past few weeks because of a proposal that will likely not go through the House of Commons. Traders get daily updates about Brexit to see if the positions that they are holding are still relevant based on the most recent reports. When May’s Commons speech was not well received, the British pound suffered a few hits.

There are a number of Brexit-related examples that show the importance of fundamental analysis, but one of the best ones occurred in 2016, when the results of the referendum became known. The announcement resulted in a devaluation of the pound against the American dollar. The fact that the UK decided to leave the EU resulted in a currency plunge of over 12%.

Watching out for instability

Paying attention to the news is important, but some traders question what they should be looking for. The simplest answer, according to Wall Street’s bigwigs, is instability. No financial market wants instability of any kind, and the suspicion of it looming can cause stocks and currencies to plummet.

A recent example is what happened to Wall Street on Christmas Eve. Stocks plummeted because of the rate hike announced by the US Federal Reserve, and issues became worse when President Donald Trump blatantly blamed the Fed and its chairperson for single-handedly causing America’s economic slowdown. Opinions varied at the time, but when US Treasury Secretary Steven Mnuchin announced that all major banks were liquid, Wall Street experienced a bit of panic. The timing, experts said, was suspect. Mnuchin’s method of calming down investors backfired and stocks fell some more.

Asian stocks suffered afterwards, and the AUD’s value also declined because of the situation. Adding to the chaos is the trade-related tension between China and the US, the uncertainty of Brexit and May’s government and the contraction of the German and Japanese economies. This mix also takes into account the fact that many member nations of the Eurozone have high deficits.

Experts noted that the news can have varying effects on currencies and currency pairs. A GBP/EUR pairing, for example, is more volatile now because of Brexit, while the AUD/USD pair is also suffering because of the trade problems between China and the US. The AUD is a proxy for the Chinese yuan, as the latter does not trade freely. China is also Australia’s largest trading partner in Asia, and the Chinese buy many of their raw materials from Down Under.

For traders thinking of using the AUD as a safe haven, trading it against the EUR is advisable, according to Bennett.