When trading the Forex markets, the most important thing to pay attention to is the way money flows from one region of the world to another. Forex is simply a marketplace that expresses how money flow is happening at the moment. Because of this, it is your job to understand which direction the money is flowing from and where it’s flowing to.
Fundamental factors will determine the flow of money around the world. Under normal circumstances, money will travel to wherever it is treated the best. Corporations, wealthy individuals, and even governments will transfer money from one slowing economy to one that is more expensive and supportive of growth. The economies that are expanding typically will have higher interest rates, and as such their bonds tend to pay out a higher coupon. It’s a simple matter of, “If you were running a sovereign wealth fund for the country of Saudi Arabia, would you rather buy bonds that are paying 3% or 7%?” This is how many large corporations, sovereign wealth funds, and super rich individuals make their decisions.
A lot of times you can figure out which country is doing better by such fundamental indicators as the CPI, PPI, and GDP. When these are rising, or are at least strong, the country is more likely to raise interest rates which will in turn raise the amount of interest that the government is willing to pay in the bond market. This is because in situations where economic strength is prevalent, most people will throw money into the stock market and forgo buying bonds. In this environment, the host country will have to pay a higher percentage interest rate in order to attract the large buyers that are so important.
By paying attention to where money is going to be treated the best, you begin to understand how the super wealthy are thinking. Remember that a simple 7% bond yield might be very exciting to some of these people, as 7% of massive amounts of money in a relatively safe environment are much more exciting than risking large amounts of money in the stock market or Forex markets. Because of this, it is very important to pay attention to bond yields when assessing which one of two economies is most likely to strengthen. When you figure that out, you know which direction a pair “should move”.