GEOPOLITICS


What are Geopolitics?

Trading in a highly liquid market like forex is often difficult as the prices get affected by a number of factors. Geopolitics are one of the major factors that affect investment prices, and are 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 marketplace that is extremely sensitive to events such as, but not limited to

ELECTIONS
NATURAL DISASTERS
WARS
CIVIL DISTURBANCES

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

GOLD
US TREASURIES
EXCHANGE RATES
CORPORATE BONDS
STOCKS

There are three basic guidelines to follow when it comes to assessing the investment implications of geopolitical events.

01

IN GENERAL, THE WIDER THE CONFLICT
INVOLVING MAJOR DEVELOPED NATIONS, THE HIGHER THE RISK THAT IT MAY AFFECT:

SAFE HAVENS

like gold and Treasuries, by raising their value

ASSETS

like corporate bonds and 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.


fell
futures rose

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 long 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.

02

THE IMPACT ON COMMODITIES, EX-PRECIOUS METALS, IS MORE COMPLEX AND DEPENDS ON

SUPPLY
DEMAND

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.



Oil is known to often rise in value in response to geopolitical developments. The average move in oil prices during these periods was + 13% over 17 days.
Similarly, copper and wheat futures prices moved up modestly in 50% of the cases involving geopolitical factors.

03

THE IMPACT ON EXCHANGE RATES IS MOST OFTEN DEPENDENT UPON THE DEMAND FOR TREASURIES.

If a flight-to-quality 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 led to a rise in the value of the U.S. dollar, while the average rise observed was + 2% over 11 days.



So always keep in mind that the value of

CURRENCIES
COMMODITIES
ENERGIES
INDICES

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 and the possible impact they would have on your chosen pairs.

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