How Do Politics and Central Banks Impact FX Markets?

For foreign exchange traders, the constant background noise that politics represents is an inescapable blackhole. Traditional media drowns in punditry, while social media drowns in puns. It doesn’t matter what asset class you’re trading either.In recent years, even a single tweet from a politician has had the capacity to move not only currencies but also bonds,commodities, and equities.

In the early-1960s, economists Robert Mundell and J. Marcus Fleming each produced improvements on the incomplete IS-LM model. Developed independently from one another but eventually synthesized into one unified idea, the IS-LM-BP model incorporates capital flow into the equation.we will look at the Mundell-Fleming model through the lens of high capital mobility economies only

In other words, when viewed through the framework of the Mundell-Fleming model, when both fiscal and monetary policy are expansionary, or when both fiscal and monetary policy are restrictive, that currency is unlikely to see a significant directional move in the nearfuture. Investors began to lose confidence in the ability of these governments to service their debt and demanded a higher yield for incurring what appeared to be a higher risk of default. The Euro was in pain amid the chaos and suffered as doubtsemerged about its very existence in the event that the crisis would force the unprecedented departure of a member state from the Eurozone.

The subsequent restoration of confidence and recovery in share prices was reflected investors’ shifting preference for riskier, higher-returning investments from comparatively safer alternative . This reallocation of capital sent yields higher despite the central bank’s monetary easing. The BOC then began to raise rates anew and brought them up to 1.00 percent, where they remained for the subsequent five years.

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