In many ways, the forex market is the backbone of international trade, as it is where all major and minor currencies are exchanged, usually by professional forex traders on a trading platform. This has a massive effect on both international trade, in terms of importing and exporting, along with domestic business, as it can affect the price of construction, production and much more. There are many factors which affect the forex market, and which the forex market itself impacts upon, that are important to be aware of for all sorts of businesses.
Major Political Events
Elections can have a huge impact on a country’s currency, whether they are expected or come as a shock. These introduce a lot of political uncertainty in many cases, which usually results in periods of high volatility for the value of its currency. After the election, if there is a change in power, it can see the currency value increase or decrease depending on its financial policies.
For businesses based in a country with an upcoming election, whether it is a general election or any other political vote (such as for independence, local councils etc.) trade is likely to be affected in the run-up to it. Often elections lead to a fall in currency value, which can see businesses importing from abroad suffer, for example, until there is a recovery.
Impact on Importing and Exporting
The forex market is vital for the support of the importing and exporting industries. Global economic growth would struggle if there was no ability to trade in different currencies, as the transfer of goods and resources is pivotal in creating supply and demand for goods and services that uphold economies.
Differences in currency values, which can be impacted by high and low levels of demand by forex traders, can make importing or exporting cheaper or costlier between nations. This can lead to great importing opportunities for businesses in countries with a strong currency, while offering better exporting ones for those in a nation with a struggling currency.
One issue with the forex market which can affect businesses is that of supposed market manipulation. Forex fixes are essentially the benchmark set, with the main ones done in London, to help best reflect the value of one currency relative to others. These forex rates are used by many companies to value assets, liabilities and more.
A potential effect of market manipulation not only throws scandal into the financial world but many other businesses. Should this happen then companies will realise their orders have not been treated fairly, valuations are off, and trade can be disrupted.
Further Effects on Businesses
Foreign exchange rates are also important for all importing and exporting businesses when it comes to paying suppliers, workers abroad, logistics partners and more. The political effect which can impact currencies could see your payments increase or decrease depending on the events. Sales forecasts can change along with any trading plan as well.
SMEs should take great notice of political events that could affect the forex market and vice-versa, to best prepare for any issues that could occur.