Political surprises draw the attention of traders to news trading

From the textbooks on fundamental analysis, we know that the exchange rate is influenced by various groups of factors: economic, environmental, and political. And while the lion's share of the pages is devoted to theformer, as a rule, the authors are too lazy to write about politics. But in terms of the impact on the quotes of currency pairs it is hard to overestimate. Elections, referendums, crises, escalations and de-escalations of conflicts cause investors to look with caution at assets, often lead to a massive flight of capital and make the currency rates feverish.

The dates of important political events are known in advance, as well as the time of meetings of central banks or the release of important macroeconomic indicators. In this regard, the principle "Buy on rumors, sell on facts" is working. In contrast to the forecasts of experts on interest rates, GDP, inflation, etc., in the case of politics, the role of rumors is played by sociological surveys. Prior to parliamentary or presidential elections, various organizations conduct surveys, and exchange rates show increased sensitivity to the results. Typically, the markets are calm if, according to the polls, the party in power is in the lead. The uncertainty of the opposition's victory leads to an outflow of capital, an increase in the cost of borrowing, and potentially can slow GDP.

This was the case with the parliamentary elections in New Zealand in the autumn of 2017. On the eve of the voting, the markets almost believed in the victory of the national party in power. It actually received the majority of votes (44.5%), but could not agree on the coalition. As a result, the government was formed by the labor party (36.9%) for the first time in 9 years, and capital flight from the country became one of the key factors of the NZD / USD collapse by 8.7% within two months.

The market reacted to the unexpected outcome of an important event. The same was the case with the presidential elections in the US in the fall of 2016. Few people believed in the victory of the eccentric Republican candidate Donald Trump over the authoritative Democrat Hillary Clinton. However, most Americans voted for the businessman, which resulted in a rapid strengthening of the USD index. Investors seriously expected that a large-scale fiscal stimulus could accelerate GDP and inflation and force the Fed to aggressively raise the federal funds rate.
 

The referendums aren't much different from the parliamentary or presidential elections. Often, the destinies of entire peoples and economies are at stake. As, for example, in the case of Brexit. The vote on Britain's membership in the EU was held in the summer of 2016 and shocked the entire investment community. The exit from the European Union resulted for the Foggy Albion in a serious slowdown in GDP, an inflation rate of up to 3% and the pound drop to the lowest levels in more than four decades.

What happened in Italy in the spring of 2018 actually has a lot in common with the events of almost two years ago. Eurosceptics coming to power increased the risks of the republic's exit from the eurozone, which would be comparable to Brexit, and, perhaps, would surpass it in terms of economic effects. As a result, the euro collapsed to 10-month lows against the US dollar, and it's good that the situation was resolved.

In my opinion, political factors should be viewed through the prism of financial markets and the economy as a whole. Exchange rates change under the influence of capital flows, and if uncertainty inspires fear in investors, they take their money out of the country. Sales on the debt market lead to an increase in profitability, i.e. increase in the cost of borrowing, which puts a heavy burden on the economy, slows down GDP and worsens the financial position of the state.
 
Politics calls the shots on Forex

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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