Trading in highly liquidable markets like Forex is often difficult as the prices get affected by a number of factors. Geopolitics is one of the major factors that affect investment prices and of major importance to the methodology we follow at FXGEOMETRY.
The simple reason is that the forex market touches the economy of every country and therefore forms an interconnected market place that is extremely sensitive to events such as, but not limited to:
In recent decades, the primary means by which geopolitical events affected the markets was through their impact on the production and delivery of oil.
However, this impact has been muted with the decline in oil prices in the past year and a half. Other commodities and financial assets are also affected directly and indirectly by geopolitical events including:
There are three basic guidelines to follow when it comes to assessing the investment implications of geopolitical events:
IN GENERAL, THE WIDER THE CONFLICT
INVOLVING MAJOR DEVELOPED NATIONS, THE HIGHER THE RISK THAT IT MAY AFFECT:
like gold and Treasuries, by raising their value
like corporate bonds & stocks, by lowering their value
Based on our analysis of geopolitical developments over the past 35 years, stocks have not always declined in response to developments that heighten geopolitical conflict.
More recently, Treasury bond yields have generally moved lower as the safety of Treasuries bid up bond prices in response to threats.
However, over the longer-term bond yields rose more often than they fell in response to the threat of higher inflation from a rise in oil prices, pushing up the yield by an average of 10 basis points.
THE IMPACT ON COMMODITIES, EX-PRECIOUS METALS, IS MORE COMPLEX AND DEPENDS ON
If the conflict has the potential to slow the pace of global economic growth, then the potential decline in demand may pull prices lower. However, if there is the potential for supply disruption in the region that produces the commodity, either directly or indirectly through logistical bottlenecks, that conflict may lead to higher prices.
THE IMPACT ON EXCHANGE RATES IS MOST OFTEN DEPENDENT UPON THE
DEMAND FOR TREASURIES.
If a flight-to-qualify takes place, the demand for dollars to buy U.S. Treasuries may lift the dollar price when compared to other currencies.
On the other hand, a conflict with China or another major holder of U.S. debt, could weaken demand for dollars as those investment flows are curtailed or reversed. Geopolitical conflicts have often lead to a rise in the value of the U.S. dollar, whilst the average rise observed was + 2% over 11 days.
So always keep in mind that the value of
Depend on the stability and economic strength of the nations. When trading it is vital that you have a clear understanding of
Geopolitical events across the world as well as the possible impact they would have on your chosen pairs.