It’s no secret that the world’s economy is in big trouble. Although some people try to paint everything in a positive way, I’ve little doubt that we’re in store for some major bad news in the coming months.
I’m no pessimist, but the financial “wizards” which are responsible for all the mess we’re in are slow to admit defeat and acknowledge losses. Therefore I predict that we haven’t seen the last of the write offs.
One key factor which spells big trouble for the economy is the rate of inflation increase. Inflation simply spells out higher prices for everyone, right down to the very basic necessities like gas and food prices.
The important thing about inflation for us Forex traders is that there’s a direct correlation (up to a point) between inflation and currency values.
Why?
The answer is simple: the only weapon central banks all over the world have to attempt to fight off inflation is interest rates. By raising interest rates, central banks try to make people spend less and save more because it’s possible to earn more on their savings. By squeezing money out of the economy, the hope is that inflation will slow as a result.
But interest rates don’t just influence the amount of money people save, they also make the currency of that country more attractive to us traders. The reason is the same one which theoratically causes inflation to halt.
Because people can now get a higher return on savings of that particular currency investment money will generally flow towards the country in which the interest rates have risen and this will force the value of that currency up.
Of course, this is something which is only good for the short term. If a country suffers from a long duration of high inflation, it is facing serious problems and it’s best to avoid investing in for the long term.
However, if you want to get a quick short time profit, consider looking for countries in which inflation is just starting to rear its ugly head (but those which don’t seem to have it too bad) and think about buying into their currency. It can be a quick way to make an additional fast profit.
Of course, the entire responsibility for any transaction you make is entirely your own. I only voice my opinion in general. This is a strategy which may not work in all cases, so, as always, do your own analysis and decision making.
