A nation’s currency rate rises and falls against other currencies from second to second in the Forex Markets. If the currency is in a fixed exchange rate system, it is referred to as devaluation and revaluation. As the terms imply, devaluation is a drop in the currency value and revaluation is a rise in the currency’s value. These fluctuations are officially sanctioned changes that are mandated by governments or central banks. In the global economy, though, more and more nations are moving away from a fixed exchange rate system in favor of a floating exchange rate system.
In a floating exchange rate system, the same rising and falling action takes place, but it’s referred to as depreciation and appreciation. Instead of the price action being governmentally controlled, it’s controlled by market forces. This is a more open and realistic exchange rate system and reflects the country’s actual market status.
Regardless of whether a nation is using a fixed or floating exchange rate, Forex traders can use the exchange rate system as an indicator for which currencies will be on the rise and which ones will be declining. It means traders have to keep their fingers on the pulse of what’s happening internationally and ensure they are updated on the currency markets as well as the economic health of the countries whose currencies can be traded on their Forex platforms. Watching these trends can be highly profitable.
Currency devaluation or depreciation has an initial negative affect on a nation’s economy, because it often results in a decrease in imports due to the increased price of goods. Over time, the devalued currency leads to increased exports and a rise in the nation’s currency against other currencies. These rising and falling trends mean potential money in the bank for traders.
Forex traders can use this information to their advantage as they take a “sell” position on national currencies that are experiencing devaluation. When the nation regains its footing, traders can “buy” the currency again and profit from both moves in the market.
By using this fundamental analysis, traders can trade multiple currency pairs and potentially execute several successful trades at the same time. For example, if the US Dollar was depreciating, you could sell the USD/CAD, USD/JPY, and USD/CHF. At the same time, you could buy the EUR/USD, GBP/USD, and AUD/USD, profiting six times from a single piece of analysis. Potentially, you have six winning trades from one declining currency.
The opposite is also true. When the currency starts to appreciate, traders simply reverse their actions. They buy the USD/CAD, USD/JPY, and USD/CHF. And they sell the EUR/USD, GBP/USD, and AUD/USD.
Using this fundamental analysis golden nugget, you have the potential to make multiple successful trades simultaneously. Combined with other fundamental, sentimental and technical analysis, you could ride the Forex market trends all the way to the bank. Your return on investment (ROI) is squarely in your hands. Happy Trading.