As a Forex trader, one of the first things I learned is how fast the market can move. Sometimes, even a small piece of news can make a currency's value shift dramatically. One of the most significant pieces of news that can cause these sudden shifts is trade agreements.
Trade agreements are deals made
between countries that set the rules for buying and selling goods between them.
These agreements are important because they affect a country’s economy and, in
turn, its currency value. I’ve watched how currency pairs, like the Euro/USD or
the GBP/USD, can change overnight just because of a new trade deal or an update
to an existing one. Let’s dive into how trade agreements work and how they can
influence currency trends, often in the blink of an eye.
What Are Trade Agreements?
Trade agreements are agreements
between two or more countries. These deals can cover things like tariffs (taxes
on imported goods), quotas (limits on how much of a product can be imported),
and the rules on how countries trade with each other. Trade agreements can also
set the terms for things like labor laws, environmental protection, and
intellectual property rights.
Countries make these agreements to
make trading easier. By lowering tariffs and removing other barriers, countries
hope to boost trade and make it cheaper for businesses to buy and sell goods.
It’s like when you buy a product in a store—you want to make sure it’s
affordable & that you can get it easily. Countries want the same thing for
the goods they trade.
How Do Trade Agreements Affect Currency Values?
Currency values are directly linked
to the strength of a country's economy. When an economy does well, the value of
the country’s currency tends to rise. But when things go badly, the currency
can fall in value.
Trade agreements play a huge role
in this. If a country signs a trade deal that will help its economy grow—by
selling more products to other countries, for example—its currency can increase
in value. On the other hand, if a trade agreement hurts a country’s economy—by
limiting its ability to trade or increasing costs—its currency may drop in
value.
Here’s how a trade agreement can
cause currency changes:
- Increased Exports: If a trade agreement
opens up new markets for a country's products, this can increase exports.
More exports mean more demand for that country’s currency, pushing its
value up.
- More Investment: Trade agreements can make a
country more attractive to investors. If investors see that a country has
strong trade agreements and is growing economically, they may want to
invest there. More investment means more demand for the currency, which
can drive its value up.
- Uncertainty and Risk: Sometimes, trade
agreements create uncertainty. For example, if a country pulls out of an
agreement or if the deal isn’t as good as expected, it can create
confusion in the market. Traders may panic and sell off the country’s
currency, which can cause its value to drop.
Why Do Forex Traders Care About Trade Agreements?
Forex traders, like me, care a lot
about trade agreements because they can have a huge effect on currency pairs.
As Forex traders, we make money by buying and selling currencies. But to do
that well, we need to understand what drives changes in currency values.
When a new trade agreement is
signed, it’s like a signal to us. The currency of the country involved can move
in one direction or another, sometimes very quickly. And because the Forex
market is always open, those changes can happen overnight. That means if a
trade agreement is signed while we’re asleep, by the time we wake up, the
currency might be worth more—or less—than it was before.
Take, for example, the North
American Free Trade Agreement (NAFTA), which was signed between the United
States, Canada, and Mexico in 1994. When NAFTA was created, it opened up a lot
of new trade opportunities between the three countries. As a result, the U.S.
dollar strengthened against the Mexican peso, as more trade with Mexico
increased demand for U.S. dollars. Forex traders noticed these changes right
away and were able to react quickly.
Real-Life Examples - How Trade Deals Moved Currencies?
Let’s look at a couple of examples
where trade agreements moved currencies. These examples show how big an impact
these deals can have.
1. Brexit (The UK Leaving the European Union)
In 2016, the United Kingdom voted
to leave the European Union in what was called "Brexit." The result
of this vote caused massive uncertainty, as the future of trade between the UK
and EU was unclear. As a result, the British pound dropped sharply. It lost
value against other major currencies like the U.S. dollar and the Euro.
Traders knew that the uncertainty
around Brexit would make the UK’s economy weaker, so they sold off pounds. This
is a perfect example of how trade deals—or the potential changes in trade
agreements—can cause a currency to fall quickly.
2. The U.S.-China Trade War
In 2018, the United States and
China started a trade war. The U.S. imposed tariffs on Chinese goods, and China
retaliated with its own tariffs. The news of the tariffs created a lot of
uncertainty about the future of trade between the two largest economies in the
world. During this time, the Chinese yuan weakened against the U.S. dollar.
Forex traders could see that the
trade war was hurting China’s economy, which made the yuan less valuable. At
the same time, the U.S. dollar strengthened because of the uncertainty
surrounding China’s economy. This is another example of how trade agreements—or
disagreements—can change currency values quickly.
Why Currency Pairs Move Fast with Trade News
In Forex, we always say that
"news moves the market." This is especially true when it comes to
trade agreements. But why does this happen? The answer lies in how fast traders
can act on new information.
The Forex market is open 24 hours a
day, five days a week. So when a trade agreement is signed, the news spreads
fast. And traders around the world react quickly, buying and selling currencies
in response to the news. This rapid reaction can cause currency pairs to change
in value almost overnight.
Take the U.S.-Mexico trade deal,
for example. When the agreement was signed in 2018, the Mexican peso
strengthened against the U.S. dollar almost immediately. Traders saw this as a
sign that Mexico’s economy would benefit from the deal, and they began buying
up pesos.
The Risks of Trading on Trade News
While it’s exciting to see how fast
currency values can move with new trade deals, it’s important to remember that
there are risks involved. Trade agreements don’t always have the effects we
expect. Sometimes, a trade deal can backfire, or the news might not be as big a
deal as traders think.
For example, when the U.S. and
China signed a partial trade deal in 2019, the market initially reacted with
optimism. But the deal wasn’t as comprehensive as many had hoped, and the
market quickly corrected itself. Currencies that had risen in value started to
drop again, showing that trade news can be unpredictable.
How Can Forex Traders Stay Ahead of Trade News?
If you want to make money from
these currency shifts, you need to stay informed. Here are a few tips to help
you stay ahead of trade news:
- Follow Trade Negotiations: Stay updated on
current trade talks between countries. This could include things like
NAFTA updates or Brexit news.
- Use Economic Calendars: Many Forex platforms
offer economic calendars that list important news events. These calendars
will show you when major trade agreements are being signed or updated.
- React Quickly: When trade news breaks, the
market can move fast. Being able to make decisions quickly is key to
success in Forex trading.
Conclusion
Trade agreements might seem like a
boring topic, but they can have a huge impact on the Forex market. These
agreements can change a country’s economy, which in turn changes the value of
its currency. And since the Forex market moves so quickly, even the smallest
change can cause currencies to rise or fall overnight.
As Forex traders, we need to
understand how trade deals can affect currency pairs. By keeping an eye on
trade news and being ready to react quickly, we can take advantage of these
shifts and make better trading decisions. So the next time you hear about a new
trade agreement, remember that it could be the key to predicting the next big
movement in the Forex market.