Why Would Countries Devalue Their Currency?Why Would Countries Devalue Their Currency?
Currency devaluation is a nuanced aspect of fiscal policy with profound implications globally. This article demystifies the strategic reasons and consequential effects when nations choose to devalue their currency. From influencing trade balances to adjusting economic strategies, understanding these dynamics is crucial for traders and investors alike. Dive into the complex world of currency devaluation and its far-reaching impact on global economics.
Devalued Currency Definition
So, what is currency devaluation, and how does a country devalue its currency? Currency devaluation is a deliberate downward adjustment of a country's currency value relative to another currency, group of currencies, or standard. This monetary policy decision is typically made by a national government or its central bank. Devaluation is distinct from depreciation, which is a market-driven decrease in currency value.
In a practical sense, devaluation reduces the cost of a country's exports and increases the cost of imports. For countries with fixed or semi-fixed exchange rates, this involves officially lowering the exchange rate by the revaluation of the peg or a change in the pegged currency.
Countries with a free-floating currency system can influence devaluation through monetary policies like lowering interest rates, which can decrease investor demand for the currency, thereby reducing its value. Also, central banks can intervene by buying foreign currency and selling domestic. These fluctuations are visible across many currency pairs in FXOpen’s free TickTrader platform. Additionally, governments might engage in expansive fiscal policies or public statements to sway market perceptions, indirectly impacting the currency's market value.
Devaluation of Currency Example
In 1994, Mexico experienced a notable devaluation of its currency, the peso. This event is often referred to as the Mexican Peso Crisis. Prior to the devaluation, Mexico maintained a fixed exchange rate regime, pegging the peso to the US dollar. However, due to a combination of political uncertainty, economic pressures, and dwindling foreign exchange reserves, the Mexican government found it increasingly challenging to maintain the peso's value.
In December 1994, the government decided to devalue the peso by around 15%. The immediate effect was a dramatic fall in the peso's value, plunging nearly 50% against the dollar within months. This devaluation led to significant economic turmoil, including high inflation and capital flight, but it also eventually helped to make Mexican exports more competitive in the international market.
Why Might a Country Choose to Devalue Its Currency? 3 Reasons
Why would a country devalue its currency? While this move can have widespread implications, there are strategic reasons behind such a decision. Understanding these reasons is crucial in comprehending global economic dynamics.
Reason 1: Boosting Exports
One of the primary reasons for a country to devalue its currency is to make its exports more competitive in the global market. A weaker currency lowers the price of a country's goods and services in foreign markets, making them more attractive to international buyers. This increase in demand for exports can stimulate the country's manufacturing sector and, in turn, boost economic growth. For instance, a country heavily reliant on exports might use devaluation to gain a competitive edge, especially if its major trading partners have stronger currencies.
Reason 2: Reducing Trade Deficits
Devaluation can be a tool to address trade imbalances. A country with a significant trade deficit – where imports exceed exports – might devalue its currency to make imports more expensive and exports cheaper. By doing so, it can reduce the volume of imports as they become costlier for domestic consumers and businesses, while simultaneously increasing exports due to their lower prices on the international market. This adjustment can help in narrowing the trade deficit, bringing more balance to the country's external trade.
Reason 3: Managing National Debt
Countries with high levels of debt denominated in foreign currencies may resort to devaluation as a strategy to reduce the real value of their debt. When a currency is devalued, the amount owed in the local currency increases, but the actual value in terms of foreign currency decreases. This may ease the burden of debt repayment for the government, particularly if the country is facing fiscal challenges. However, this approach can be risky, as it might lead to loss of investor confidence and increased cost of borrowing in the future.
Devalued Currency Effects
The effects of devaluing a currency ripple through various sectors of an economy. In the short term, it often leads to increased inflation. As the cost of imports rises, domestic prices generally increase, affecting the purchasing power of consumers. This inflationary pressure can be particularly challenging for economies that heavily rely on imported goods.
On the business front, while export-oriented industries may thrive due to increased competitiveness abroad, import-dependent businesses face higher costs, which can lead to reduced profit margins or increased prices for consumers. Additionally, the immediate aftermath of devaluation often includes volatility in financial markets, as investors may react to perceived risks by pulling capital out of the country.
In the long term, if managed well, devaluation can lead to a more competitive export sector, potentially resulting in economic growth and job creation. However, the benefits depend on the elasticity of demand for exports and the country's ability to capitalise on the weakened currency.
Finally, devaluation can impact a country's global reputation. Frequent or large-scale devaluations might lead to a loss of investor confidence, affecting foreign investment and the country's ability to borrow money on international markets. Such decisions, therefore, must balance immediate economic needs with long-term fiscal stability and credibility.
The Bottom Line
Understanding currency devaluation's complex dynamics is vital in today's interconnected world. Whether to boost exports, manage debt, or address trade imbalances, nations employ this strategy with varied outcomes. For those looking to take advantage of forex trading, consider opening an FXOpen account to access comprehensive resources and trading opportunities in this dynamic field.
This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.
USDMXN
All-Time Low and All-Time High Trading StrategiesAll-Time Low and All-Time High Trading Strategies
In the volatile world of trading, mastering all-time high trading strategies and understanding how to navigate all-time lows are key. This FXOpen article delves into the nuanced tactics and insights that may help you navigate the peaks and troughs of market conditions, offering comprehensive insights if you are looking to leverage these critical areas for trading opportunities.
Understanding All-Time High and All-Time Low Market Conditions
Understanding the dynamics of all-time high and all-time low market conditions is crucial for traders aiming to navigate these pivotal points effectively.
All-time low trading refers to the scenario where an asset has reached its lowest price level in history, often triggering a heightened interest among investors looking for undervalued opportunities or signalling a potential reversal point. Conversely, all-time high trading occurs when assets are trading at their highest historical prices, indicating strong market optimism or potentially overvalued conditions ripe for a correction.
These extremes in market conditions represent significant psychological thresholds for the market participants, as they may lead to increased volatility and liquidity. Traders scrutinise trading at all-time lows to identify the potential for recovery, while those at all-time highs are monitored for signs of sustained momentum or impending pullbacks.
Below, we cover three all-time high and low trading strategies. Consider applying them to live charts in FXOpen’s free TickTrader platform.
Breakout and Consolidation Strategy
When engaging with the market, traders often explore the dynamics of stocks trading at all-time highs or nearing all-time lows. This approach is anchored in the principle that these assets can exhibit significant momentum, potentially setting the stage for trading opportunities.
In learning how to trade all-time-high stocks, one strategy stands out: the Breakout and Consolidation strategy. Its essence lies in monitoring assets that are not only at their all-time high or low but also exhibit a distinct consolidation pattern post-reaching these levels.
Traders typically look for the price to close beyond the all-time high or low, usually on timeframes ranging from 1 hour to daily charts. A subsequent period of sideways movement just beyond the high or low signals a consolidation phase. This phase is crucial as it suggests a potential accumulation or distribution, with traders able to potentially capitalise on a further breakout or upcoming reversal.
Entry
Traders may place a buy-stop order just above the high of the consolidation range if anticipating a continuation of the uptrend.
Alternatively, a sell-stop order can be set just below the low of the range for those expecting a downtrend.
Stop Loss
A stop loss is typically positioned on the opposite side of the consolidation range to manage risk effectively.
Take Profit
Given the absence of a predefined exit point, traders often rely on a specific risk/reward ratio to determine when to exit the position.
Others may prefer using technical analysis tools, such as Fibonacci extensions or momentum-based indicators, to identify potential exit points.
Breakout Retest Strategy
The Breakout Retest strategy offers a nuanced approach for traders looking to understand how to trade all-time high forex pairs. This method is favoured by traders who seek to capitalise on the momentum immediately following the breach of an all-time high or low without waiting for a consolidation phase to confirm the breakout.
In this strategy, the initial step involves identifying a decisive break of the all-time high or low. Unlike the Breakout and Consolidation strategy, which requires a period of sideways movement for confirmation, the Breakout Retest strategy allows traders to act swiftly.
Upon witnessing the break, traders can place an order directly at the level of the broken high or low. This newly established level is now expected to serve as a foundation of support or resistance, guiding future price actions.
Entry
An order may be set at the broken high or low, anticipating it to now act as support (in case of a high break) or resistance (in case of a low break).
Stop Loss
A stop loss may be strategically placed beyond a nearby swing point, offering enough leeway for the price to fluctuate slightly before potentially moving in the anticipated direction.
Take Profit
Profit-taking may be based on a predetermined risk/reward ratio that aligns with the trader's objectives.
Alternatively, traders may employ technical indicators as a signal for exiting the trade.
Candlestick Pattern Reversal Strategy
A Candlestick Pattern Reversal may be particularly effective as part of an all-time low trading strategy. This technique hinges on the premise that a significant price level, such as an all-time low, may mark a turning point where selling pressure exhausts and buying interest begins to dominate. By focusing on candlestick patterns that signal a reversal, traders can identify moments when the market sentiment shifts from bearish to bullish.
The theory states that it’s best to use higher timeframes here, like the daily or weekly chart. Traders watch for specific candlestick formations that indicate a potential reversal. The hammer or morning star patterns are key figures in this analysis, suggesting that sellers have capitulated and buyers are starting to take control.
Once such a candle closes, traders have the option to enter the trade at the closing price or at the opening of the next. Another approach is to wait for a breakout beyond the high or low of the identifying candlestick for confirmation.
Entry
Traders may initiate a position at the close of the reversal candle or upon a breakout of the candle's high or low.
Stop Loss
Setting a stop loss just beyond the extremities of the reversal candle may help in managing risk. Traders consider the risk/reward ratio as they trade on high timeframes, so price fluctuations may be significant.
Take Profit
As this is a reversal strategy aimed at capitalising on a shift in market dynamics, identifying notable support or resistance levels may provide logical targets for exiting the trade.
Evaluating Fundamentals Around All-Time Highs and Lows
Navigating the terrain of all-time highs and lows in both forex and stock markets demands a keen understanding of fundamental analysis. This approach enables traders to assess an asset's intrinsic value and anticipate future movements.
Economic Indicators: For forex, interest rates, inflation, and employment data can help set a bias. In stocks, understanding earnings reports, industry health, and economic conditions can be valuable in analysing direction.
Market Sentiment: Investor sentiment and market trends can significantly impact prices at extreme levels.
Global Events: Political events, economic policies, and global crises can influence market movements, especially at pivotal highs and lows.
Financial News: It may be a good idea to stay updated with financial news and reports that can affect asset valuations and investor behaviour.
The Bottom Line
Mastering how to trade all-time lows and highs is essential for any trader looking to navigate market extremes effectively. By applying the strategies outlined, traders can potentially capitalise on the opportunities these highs and lows present. For those ready to apply these insights in real-world trading scenarios, opening an FXOpen account offers a gateway to the markets, providing the tools and platforms necessary for engaging with all-time high and low trading strategies.
This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.
WHAT IS A PIP AND HOW TO MEASURE IT?WHAT IS A PIP?
The pips is the unit with which we measure the price movement of a pair.
Example: If the USD/MXN pair is used. If the dollar is worth 20.7 and rises to 20.8, it is said to rise to 1 cent but in FOREX it is not measured with cents, it is measured with pips.
The price of the USD/MXN chart has 3 extra decimal places 20.8 000 those 3 extra decimal places are what the pips are measured with: the pip is the fourth number after the point . If the price changes from 20.8100 to 20.80101 the price moves 1 pips, if the price moves from 20.80100 to 20.80110 the price moves 10 pips and if the price moves from 20.80100 to 20.80300 the price moves 200 pips.
Pips are calculated differently depending on the pair, pairs with Japanese YEN and pairs WITHOUT Japanese YEN
PAIRS WITH YEN
Triangles PatternsWe have 3 different main types of triangle patterns.
Symmetrical
Ascending
Decending
Breakout Of A Triangle On USDMXNHello traders,
In this analysis we will talk about a triangle pattern. Those who are familiar with them, will know that these are one of the most popular patterns. The reason why they are so interesting is because while they are unfolding, momentum is decreasing, volume is low, therefore everyone wants to catch the breakout, because we know that sooner or later every correction comes to an end. And very often moves out of a triangle are sharp and fast!
On USDMXN we see a break out of a triangle that can still continue towards the target. But if you dig deeper into the Elliott Wave triangles then you will know that a new reversal may show up in a few weeks, as this breakdown can be a final leg withing a higher degree of a trend as I described below.
However, not all of the triangles are easy to be recognized, and that is where Elliott Wave shows its strength. Theory suggests that triangle form in five waves, A-B-C-D-E , so if you know the wave principle and you see five sub-waves, then you can already be one step ahead of others because it indicates that potential breakout is coming. Another thing that is very important is that triangle occurs within an ongoing uptrend, so you know in which direction the breakout is most likely going to happen.
Also, it is good to know in which position of an Elliott Wave cycle do triangles occur. It can occur in wave 4 of an impulsive structure, wave B, and in a wave X. By understanding the Elliott Wave theory you know that once a triangle is complete the market is very often going to make a final move within a higher degree of a trend. So, not only that you spot the direction of a breakout but also understand that after that breakout, the market can be in final part of a higher degree structure.
Trade well!
USDMXN - HOW TO TRADE WEEKLY SIGNALS WITHOUT BREAKING THE BANKThe weekly trade signals are very powerful to trade but the weekly stop losses are so large it makes you trade very small size positions.
It takes a long time for a weekly entry to hit it's first target.
This technique takes that built up explosive energy in a huge weekly pattern.
But to trade a size that will make it worth while and to get in and out of the trade more quickly.
The weekly chart shows the week of Dec. 9th is the candle that triggered the trade.
It closed on Dec 13th at an ATR of .3457.
This pair moves a hugh amount of pips every day.
Weekly ATR = .3457
Weekly candle close entry @ 19.00
Weekly SL is 1.5 x ATR (.3457) = .5186 pip SL or SL @ 19.5156
Weekly 1st TP is 1 x ATR = .3457 pip TP or TP @ 18.65
Use the free trade size calculator at our TSG website under free tools.
Demo Acct Size $10,000 Risk Percentage 1% (open two positions of 1% each) & SL of 5186 pips =
You can trade 3.62 Micro Lots or 3 micro lot trade size.
You still watch weekly chart for breakout setup but use 1st Daily chart for SL & TP.
Your alternative option is to use the Daily SL & TP for the daily breakout candle close.
Dec. 9th Daily Close breakout candle.
Daily ATR = .1361.
Daily candle close entry @ 19.24.
Daily SL is 1.5 x ATR (.1361) = .2041 pip SL or SL @ 19.44.
Daily 1st TP is 1 x ATR = .1361 pip TP or TP @ 19.1039.
Free Trade Size Calculator - Demo Acct Size $10,000 Risk 1% with SL of .2041
You can trade 9.59 Micro Lots or 9 Micro lots.
Your Daily 1st TP is closer now also at 19.1039 which your are trading with 9 miro lots.
1st TP was hit on 4th day.
USDMXN 1W trade was tied up for 5 weeks with 6 micro lots without hitting 1st TP.
Use Weekly Chart Pattern Trade set.
But use 1st Day Candle Breakout Close for Trade Management data.
No reason to use full week numbers on a weekly trade signal.
This applies to all markets that you trade.
We often see big patterns on indexes and metals where you can use this technique to shorten your trades.
This also allows you to use a bigger size.
Much better to see your TP hit in a day or two.
Tutorial del uso de una plataforma de Trading para FOREXEste video es para los nuevos traders que quieren incursionarse a invertir en el mercado de divisas. Muestro cuales son los modulos de inversion, divisas, historial, operaciones abiertas y un ejemplo de la apertura de una operación.
Elliott wave Analysis: Triangle on USDMXN Points LowerHi everybody,
USDMXN made a nice drop in impulsive fashion, down from 20.657 level which can be a five-wave development in the making. We can see waves 1,2 and extended wave 3 completed at the lows, so current sideways activity can be a temporary pause within the downtrend. We see this pause as a triangle correction within wave 4, which can now be trading in final stages. Once this correction finds resistance, that is when final wave 5 as part of the trend may start to develop, and take price below the 18.90 area.
