Geopolitics and intervention
Elections, conflicts and central bank intervention, and how they jolt exchange rates.
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Lessons
- 01Geopolitical risk and forex.Geopolitical risk is the chance that elections, conflicts or sanctions change a country's economy or its links with the world. Currencies reprice when that risk shifts, often in sudden jumps. Money tends to leave risk-sensitive currencies such as the Australian dollar and move into safe havens such as the US dollar, Japanese yen and Swiss franc.
- 02Currency intervention.Currency intervention is when a government or its central bank buys or sells currency in the market to push its exchange rate. Buying its own currency with foreign reserves props it up, and selling its own currency weakens it. For traders it means sudden large moves, and stops that can fill far from their price.
- 03Country risk and currency value.Country risk is the chance that a country's debts, deficits or politics make its assets less safe to hold. Large current account deficits, heavy debt owed in foreign currency, thin reserves and unstable politics tend to make investors demand higher interest rates or sell the currency. These forces work slowly and give little help with timing trades.