Currency, a Business Card of a Nation

A currency represents a country's creditworthiness. Compared with stocks, bonds and other markets, the Forex market is more susceptible to national and international political factors.

The main reason is that the forex market is mainly composed of liquid assets, which are referred to as currencies. The daily trading volume of the forex market has exceeded 6 trillion US dollars. Under the turbulent political situation, the Forex will have greater risks than other assets; when faced with risks, speculators will liquidate certain currency to avoid risks. So the rapid exchange from one currency to another and the acceleration of the flow rate will exacerbate the volatility of the forex market. Generally speaking, the results of political events are often difficult to predict. Most of them are accidental and sudden. Therefore, the market is more sensitive to such events. The short-term fluctuations in the exchange rate of the forex market are driven by the possibility of exaggerating the economic impact, the true impact.

Generally, political events include wars, border conflicts, elections, political scandals, changes in government leaders, terrorist incidents, political instability, and consequential financial crises. Due to the different locations, causes, and affected regions of emergencies, the volatility reflected in various forex currencies is also different. Therefore, forex investors need to analyze specific issues for such important factors that affect exchange rate changes.

On the day of the 1992 British election, the pound fluctuated drastically in the forex market. From the perspective of the exchange rate of the British pound to Deutschmark, the fluctuation range is 2%, reaching 600 points, and the fluctuations throughout the day are dramatic. Two days before the election, the forex market began to buy forex such as the British pounds and Deutschmark after hearing the rumors that Major was close to Kinnock in the polls. On the day of the general election, Kinnock‘s votes and poll results were still ahead of Major at the beginning, and the market began to sell the pound drastically again. But before long, Major’s votes began to rise steadily, and a whirlwind of selling foreign currency to buy the British pound was immediately blown up in the forex market. The exchange rate of the pound to the Deutschmark rose rapidly, from the 2.8477 marks to 2.9053.

The price movement of GBP before and after the British general election shows that the excessive fluctuation of the exchange rate may be sustained for a long time due to the support of market expectations. Before this expectation is broken, the market may sometimes think that the short-term equilibrium price is reasonable. However, if expectations of the forex market remain unconfirmed, the exchange rate trend distorted by unexpected events will return to the original trend.

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