Did you know that equity markets can also be used to help gauge currency movement? In a way, you can use the equity indices as some kind of a forex crystal ball. Based on what you see on the television, what you hear on the radio, and what you read in the newspaper, it seems that…
A quick recap: So far, we’ve discussed how differences in rates of return can serve as an indicator of currency price movement. As the bond spread or interest rate differential between two economies increases, the currency with the higher bond yield or interest rate generally appreciates against the other. Fixed income securities (including bonds) are…
The bond spread represents the difference between two countries’ bond yields. These differences give rise to carry trade, which we discussed in a previous lesson. By monitoring bond spreads and expectations for interest rate changes, you will have an idea of where currency pairs are headed. Here’s what we mean: As the bond spread between two economies widens,…
A bond is an “IOU” issued by an entity when it needs to borrow money. These entities, such as governments, municipalities, or multinational companies, need a lot of funds in order to operate so they often need to borrow from banks or individuals like you. When you own a government bond, in effect, the government has…
Historically, the price of oil is inversely related to the price of the U.S. dollar. The explanation for this relationship is based on two well-known premises. A barrel of oil is priced in U.S. dollars across the world. When the U.S. dollar is strong, you need fewer U.S. dollars to buy a barrel of oil. When the U.S….
Let’s talk about the other kind of gold… the black one. As you may know, crude oil is often referred to as the “black gold” or as we here at BabyPips.com like to call it, “black crack.” One can live without gold, but if you’re a crack addict, you can’t live without crack. Oil is…
Before we detail the relationship between the comdolls and gold, let’s first note that the U.S. dollar and gold don’t quite mesh very well. Usually, when the dollar moves up, the gold falls and vice-versa. The traditional logic here is that during times of economic unrest, investors tend to dump the greenback in favor of gold. Unlike…
Ever wonder why the U.S. dollar strengthens both in times of tough luck and when the economy is booming like a Beyoncé single? Currencies tend to fall when their country’s domestic outlook worsens, but the U.S. dollar’s unique global role makes it special so when the U.S. economy isn’t doing great, the currency may still…
The Bloomberg Dollar Spot Index (BBDXY) tracks the performance of a basket of 10 global currencies against the U.S. dollar. Its composition is updated annually and represents a diverse set of currencies that are important from a global trade and liquidity perspective. Since other dollar indices (ahem…DXY) do not update their composition and are comprised of…
There is also another kind of U.S. dollar index. It was created by the Federal Reserve and is now used widely by lots of sexy people, like economists and currency analysts. It is called the “Trade Weighted U.S. Dollar Index“. You can find it on the Federal Reserve Economic Data (FRED) website here. Their website is probably one…