How can Foreign Direct Investment (FDI) and International Reserves of a Country affect the Exchange Rate?

How can Foreign Direct Investment (FDI) and International Reserves of a Country affect the Exchange Rate?

2023-11-15 • Updated

For a more assertive speculation in the foreign exchange market, it is necessary to use different tools and analyzes that can predict, to some extent, the movement of currencies and the sentiment of investors in a given country. Generally, day traders tend to make more use of technical analysis indicators to predict these movements. However, for traders who look more to the long term, it is interesting to also take into account macroeconomic indicators of the countries (the so-called 'fundamental analysis'), such as Foreign Direct Investment (FDI) and the level of International Reserves, which can be useful tools in forecasting exchange rate movements. In this article, we will talk precisely about these two topics.

FDI and Foreign Exchange

One way of analyzing the degree of external vulnerability of a country and its relationship with the exchange rate can be found in the need for external financing, which is equal to the deficit in current transactions – (minus) the flow of Foreign Direct Investment (FDI) to the country. Whenever the flow of direct investment from abroad is greater than the current transactions deficit, this demonstrates a situation of tranquility and, therefore, large variations in the exchange rate should not be expected. Otherwise, whenever the flow of foreign direct investment is not enough to cover an eventual deficit in current transactions, the country's currency will tend to devalue against its international peers.

International Reserves and Foreign Exchange

Another important issue to be observed is the Net International Reserves, which represent the amount of foreign currency that the country holds and that are readily available to meet the financing needs of its external accounts or for occasional intervention in foreign exchange markets, for example. Governments can use their foreign exchange reserves as a form of protection in times of crisis, when usually foreign capital leaves the country, exports tend to drop and exchange rates devaluate. In summary, a healthy state of International Reserves tends to be a factor that can reduce large variations in the exchange rate, because the Central Bank can use them to intervene in the market and avoid sudden fluctuations in the exchange rate of a currency.

Data about FDI and International Reserves

Similar

Short-Term Trading Strategies That Work
Short-Term Trading Strategies That Work

While some traders find comfort in longer timeframes that allow them to check positions less frequently and have ample time to make decisions, others get an adrenaline rush from more aggressive, day-to-day trading.

Imbalance Trading Strategy
Imbalance Trading Strategy

This article introduces you to a trading strategy that doesn’t require volumes, technical indicators, and price patterns. All you need to do is to be attentive to the price action. Welcome to the Imbalance tutorial.

Frequently asked questions

  • How to start trading?

    If you are 18+ years old, you can join FBS and begin your FX journey. To trade, you need a brokerage account and sufficient knowledge on how assets behave in the financial markets. Start with studying the basics with our free educational materials and creating an FBS account. You may want to test the environment with virtual money with a Demo account. Once you are ready, enter the real market and trade to succeed.

  • How to open an FBS account?

    Click the 'Open account' button on our website and proceed to the Trader Area. Before you can start trading, pass a profile verification. Confirm your email and phone number, get your ID verified. This procedure guarantees the safety of your funds and identity. Once you are done with all the checks, go to the preferred trading platform, and start trading.

  • How to withdraw the money you earned with FBS?

    The procedure is very straightforward. Go to the Withdrawal page on the website or the Finances section of the FBS Trader Area and access Withdrawal. You can get the earned money via the same payment system that you used for depositing. In case you funded the account via various methods, withdraw your profit via the same methods in the ratio according to the deposited sums.

Deposit with your local payment systems

Data collection notice

FBS maintains a record of your data to run this website. By pressing the “Accept” button, you agree to our Privacy policy.

Callback

A manager will call you shortly.

Change number

Your request is accepted.

A manager will call you shortly.

Next callback request for this phone number
will be available in

If you have an urgent issue please contact us via
Live chat

Internal error. Please try again later

Don’t waste your time – keep track of how NFP affects the US dollar and profit!

You are using an older version of your browser.

Update it to the latest version or try another one for a safer, more comfortable and productive trading experience.

Safari Chrome Firefox Opera