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Part III. Fundamental Analysis / Chapter 2. Gaps and Other Non-Specific Forex Events
"Knowledge is power," as the well-known saying goes. In relation to the foreign exchange market, it can be rephrased as: "Those who possess information profit in Forex." In this chapter, we will discuss how knowledge of the non-specific market reaction to certain events can help in executing a series of profitable currency transactions.
Unlike stock and futures markets, the foreign exchange (Forex) market does not have a centralized location or specific trading hours. Forex trading takes place round the clock and worldwide, as we have discussed before. Gaps are quite common occurrences in exchange markets, where the opening price of the next trading period for a specific instrument differs from the closing price of the previous trading period. Gaps happen because events can influence the price of an exchange instrument (stocks or futures) while the market is closed. For example, a natural disaster that devastates a large-scale agricultural harvest can lead to a sudden drop in the stock prices of affected companies and, at the same time, result in higher prices for agricultural products in the commodity market due to the resulting scarcity. However, gaps are not characteristic of the Forex market because trading in Forex is conducted continuously. Nevertheless, they can still occur.
Usually, trading activity in Forex decreases over the weekends as experienced traders try to close or hedge their open positions to protect themselves from unforeseen losses caused by events during the upcoming weekends. It is precisely the news during the weekends that often leads to gaps in the Forex market from Friday to Monday. The reasons for the occurrence of gaps can vary, but they share common characteristics of unpredictability and suddenness.
From May 17 to May 18, 2003, a meeting of finance ministers from the world's most developed countries, including Russia for the first time, took place in Evian-les-Bains as part of the preparations for the G8 summit. During the meeting, U.S. Treasury Secretary John Snow stated that the recent decline in the value of the U.S. dollar was relatively moderate, indicating that the U.S. government was not concerned about the weakening of the U.S. dollar on the foreign exchange market. As a result, on Monday, May 19, the Forex market opened with a significant gap caused by a sharp drop in the value of the U.S. dollar against other currencies. This occurred because many Forex participants started selling dollars rapidly, as the U.S. government had no intention of stabilizing the dollar's exchange rate, as stated by Mr. Snow.
On Saturday, July 19, 2003, news broke of the suicide of David Kelly, an arms specialist and advisor to the UK Ministry of Defense. The suicide was linked to his involvement in the military conflict in Iraq. On Monday, July 21, the Forex market for the GBP/USD currency pair opened with a significant gap below the Friday closing price due to increased distrust in the policies implemented by UK Prime Minister Anthony Blair.
On Monday, December 15, 2003, the Forex market opened with a large gap, indicating a sharp rise in the value of the dollar against other currencies, due to the news of the capture of former Iraqi dictator Saddam Hussein.
When forecasting currency rates, it is also important to consider other non-specific events in different countries that may not be immediately apparent. For Internet traders dealing with the USD/JPY currency pair, an important event is the end of the financial year in Japan, when companies report their financial activities. There are two reporting periods: the end of March and the end of September. Prior to reporting, most Japanese corporations are required to convert their capital into yen, resulting in increased demand for the currency during this period.
Another non-specific event that influences currency rates is presidential elections, especially when the incumbent president is running for a second term. In such cases, the president's administration needs to demonstrate a strong economy and, consequently, a strong currency in order to win the elections. Therefore, in the run-up to elections, the value of the national currency can increase, which should be taken into account when trading on Forex.
During national holidays such as New Year, Christmas, and Easter, all financial centers around the world are closed, resulting in minimal significant changes on the Forex market.
Meetings of government leaders, held within the framework of the G8 summit or other forums, are typically held on weekends. During these summits, decisions are often made that can significantly impact currency quotes in the Forex market. It is important to be prepared in advance for such meetings and preferably not have open positions on currencies whose prices may undergo substantial changes after the summit concludes.
Indeed, a number of important financial indicators have predetermined publication dates. Prior to these dates, the exact value of the indicator is considered insider information. Sometimes, there are instances of information leakage, making it available to the public before the officially scheduled release. In such cases, the Forex market can react in advance to the event. It is important to be prepared for this possibility while engaging in currency trading.
As we can see, the Forex market can hold many surprises. To avoid unexpected losses in Forex, it is crucial to have a clear understanding of which planned events on a global scale can influence currency exchange rates. This requires constant analysis of news provided by information agencies and mass media. Sometimes, currency exchange rates can be significantly affected by unforeseen events. Therefore, it is important to have access to a trading platform 24/7 in order to timely react to fresh information when necessary. For such purposes, it is desirable to use a trading platform that allows trading from mobile terminals, among other features.