The 3 Ms of Forex Trading

11/24/2011 12:01 am EST

Focus: FOREX

Kathy Lien

Managing Director and Co-Founder BKForex LLC, BK Asset Management

Many different factors can move currencies but most of them boil down to one of the 3Ms?Macro, Micro, and Monetary policy.

Elections, wars, and environmental and geopolitical risks are some of the few headline-grabbing events that can impact the price action of a currency. The sovereign debt crisis in Europe was a perfect example of how politics and economics can affect currencies.  These types of uncertainties almost always cause investors to sell first and ask questions later and can cause big lasting movements in currencies. Some macro events like elections can be expected, while others like Japan's earthquake come as a surprise.  Macro factors tend to determine a broad trend of a currency but can oftentimes have a greater impact on the general market.

The second "M" is micro, which refers to economic data released on a daily basis. This can cause large or small reactions in the currency but the impact usually does not last for more than a few hours. If you have ever invested in equities, it shouldn't be a surprise that the same economic releases that matters for stocks, matters for forex, for the same reasons.

The third and probably most important "M" is monetary policy, because we live in a yield hungry world where investors shift money from around in search of the highest yield with the lowest risk. The prospect of higher yield is generally positive for a currency whereas lower yield is negative.
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