Examples of forex market moves

The thinking patterns of forex traders includes logical statements of the form: If X, then probably Y. Here is an example:

If the US Federal Reserve (the US equivalent of a Central Bank) surprised the forex market by reducing the interest rate by 50 basis points (0.50%), then the dollar will likely turn down. Records, of course, show that it is more likely that a big portion of the move will most likely have already happened at least several days before the official announcement of the interest rate cuts because rumors leak and prepare the market, in which case the price move will be smoother.

If the price of oil reaches record highs (as it did in the first half of 2008), the Canadian Dollar (CAD) will, in all likelihood, also be going up since Canada is rich in tar sands from which oil is pumped out, and Canada is the largest supplier of oil to the US. In general, exceedingly high oil prices reflect badly on countries like USA and Japan, whose economies are more dependent on oil prices. Therefore, a good way to play rising oil prices in the forex market is to put in a long position in CAD/JPY or a short in the USD/CAD pairing.

If gold heads for the skies, the US dollar typically plummets in the forex market. (The converse is also true.) Seen in historical perspective, gold is a safe haven for investors as it is an alternative to the US dollar and an investment vehicle whose value does not depend on the decisions of the central bank of any country. In times of turmoil and risk-aversion, investors prefer to "park" their money in gold.

That is to say that the price of gold is inversely related to that of the dollar. For example, if gold breaks through a significant price level, you can expect it to go even higher. So you could start selling dollars and buying euros. Another idea would be to open a long position in the AUD/USD pair, because Australia is the third exporter of gold in the world. You could also buy AUD/JPY or sell GBP/AUD, but given that these pairs are very volatile (especially GBP/AUD), you should place your stop loss farther from your entry.