Currency Exchange Part 1

    Thank to the globalization, we can invest around the world freely. However, one thing we still could not change is that when we invest in other countries, we still need to exchange the currency. Surprisingly, currency exchange market is one of the best "market detectors". From my experience, currency market and stock market are among the very first detectors of macro economy.

    Before I have gone too far, let me explain the general definition of market detectors first. The market detector is the data we track to acquire the "signal". There are two types of signal: positive and negative signal. I will give you some examples to clearly see my point.

Example: The country X was in the period of election for new government and there were only 2 parties: party A and party B. Assume that a few days before the election day, the national poll came out that party A's score was ahead of party B. Consequently, after the poll, the country's X stock market went down sharply. What does this mean?...........It means party A might have some policies or something that can harm the country's A economy in the investors' view. In this case, the stock market of country A detected the situation and sent the "negative signal" out.

    If you understand the idea of stock market detector from the example above, I believe you can also understand the idea of currency market detector.

   Above all, let me teach you some fundamental of currency market because I need you to understand the news in the real world and the jargon people use in this market.

    Currency can have three movements: increase, decrease, and stay. I will just mention about increase and decrease. It is not necessary to talk about "stay"  at this point.

    It will be easier to give an example and remember than try to understand the text definition of currency exchange.

Example: Assume that today 1$=1.42 Euro, one month later 1$=1.5 Euro. This means $'s value increases because 1 $ can exchange for more Euro than one month ago. When any currencies increase in value, we call it "appreciated". On the other hand, when the currency's value decreases, we call it "depreciated".

Test!.....If today 1 Euro=0.8$ and one month later 1 Euro=0.75$. We call this situation depreciated or appreciated?...................In this case, Euro depreciated, $ appreciated because Euro can exchange for less $ (0.8>0.75)

    The rule of thumb is any pairs of currency, if one is depreciated, another one will definitely appreciated. I mean they are always opposite to each other.

   Next time we will start discussing how to use currency market as "market detector".