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# Foreign exchange basic analysis theory

1. purchas cashbackforexpipcalculatorg power parity (PPP)  PPP theory states cashbackforexcalculatorOnline the cashback forex cashbackforexprofitcalculator is determined by the relative prices of the same group of goods changes in the rate of inflation should be offset by changes in the exchange rate in equal but opposite directions to give a classic example of hamburgers, if hamburgers are worth $2.00 a piece in the United States cashback forex calculator Online 1.00 British pounds a piece in the United Kingdom, then according to the purchasing power If the prevailing market rate is$1.70 per pound, then the pound is said to be undervalued and the dollar is said to be overvalued This theory assumes that the two currencies will eventually change to a 2:1 relationship  the main shortcoming of PPP theory is that it assumes that goods can be traded freely and that transaction costs such as tariffs, quotas and taxes are not taken into account Another shortcoming is that it applies only to goods, ignoring services, which can have a very significant value differential. In addition, besides inflation and interest rate differentials, several other factors influence exchange rates, such as: economic releases/reports, asset markets and political developments. After the 1990s, the theory seemed to apply only to long cycles (3-5 years) in which prices eventually converged to parity  2. Interest rate parity (IRP)  Interest rate parity states that the appreciation (depreciation) of one currency against another must be offset by changes in interest rate differentials if U.S. interest rates are higher than Japanese rates. If the U.S. interest rate is higher than the Japanese interest rate, then the dollar will depreciate against the yen by the amount that would prevent risk-free hedging, depending on the future exchange rate that is reflected in the forward rate specified on that date. Contrary to this theory, currencies with high interest rates usually do not depreciate, but rather increase in value due to the forward suppression of inflation and being a highly beneficial currency  3. Balance of Payments Model  This model assumes that the foreign exchange rate must be at its equilibrium level - that is, an exchange rate that produces a stable current account balance Countries with trade deficits will see their foreign exchange reserves decrease and eventually lower (devalue) the value of their national currency. A cheaper currency gives the countrys goods a price advantage in international markets and also makes imports more expensive after a period of adjustment, forcing imports down and exports up, thus stabilizing the trade balance and currency toward equilibrium  As with the PPP theory, the The balance of payments model focuses primarily on traded goods and services and ignores the increasingly important role of global capital flows In other words, money chases not only goods and services but, more broadly, financial assets such as stocks and bonds Such capital flows enter the capital account item of the balance of payments and can thus balance the deficit in the current account The increase in capital flows gives rise to the asset market model  4. The asset market model  The rapid expansion of trade in financial assets (stocks and bonds) has led analysts and traders to look at money in a new light Economic variables such as growth rates, inflation and productivity are no longer the only drivers of currency movements The share of foreign exchange transactions originating from cross-border financial asset transactions has dwarfed currency transactions generated by trade in goods and services  The asset market Approach to currency as the price of assets traded in efficient financial markets Therefore, currencies are increasingly showing their close correlation with asset markets, especially stocks  Enter the foreign exchange market gold, these essential introductory foreign exchange basics to must master