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Ensconced as they may be in air-conditioned offices, watching the markets with plenty of coffee on hand, forex traders might feel oblivious to the sun or rain beyond their windows. But forex depends on the economy, and the weather can influence the economy. So, should we turn to The Weather Channel for the outlook on the markets?
Well, maybe. Let’s go over some of the ways the weather can drive currencies. However, these are perhaps different from the ways you might expect.
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Cycling and the Extremes
The weather is not the same all across the globe. Moreover, this can cause some differentiation between currencies, as countries have different weather effects. One of them is the offset between summer and winter. Evidently, the economy behaves differently between those two seasons.
However, the seasons are inverted for the Southern Hemisphere. This means that Australia, New Zealand, and South Africa are affected inversely by seasonal trends. These trends include tourism, heating fuel needs, electricity demand, agricultural exports. And all of them can move the currency.
Some countries are also affected by more significant swings in the weather because they are closer to the poles. Canada and Norway are good examples of this effect. Here, there is a shortening of outdoor production time due to extreme cold and increased demand for fuel.
While both countries produce enough of their own fuel, and even excess to continue exporting, this does affect their citizens’ spending patterns. Contrast this with Turkey, for example, where there is a higher demand for energy during the summer for air conditioning.
However, since a lot of these are known factors, they are usually priced in ahead of time. Typically, for example, the NZD will strengthen in October and November in the lead-up to the expected demand for the currency due to tourism and exports at the start of the next year. The effect is enough to see annual “humps” in a long-term graph, despite other factors influencing the Kiwi.
The Irregularity of the Cycles
While the seasons are regular, weather changes due to the seasons is not. In other words, sometimes winter comes earlier, sometimes later. Aside from leaving authorities unprepared, with the consequent traffic jams from early snow, it can also catch businesses off guard. This can influence their hedging positions. It can also drive up energy prices, strengthening currencies that are dependent on crude exports.
Mind that a spike in oil and natural gas prices because of an early cold snap doesn’t necessarily mean that prices will go higher later when the “usual” price rise happens. Instead, it means that the increase hadn’t been priced in yet and is happening earlier than expected. Speculators might even be jumping on the bandwagon. This can give the price an extra boost that will correct later in the winter.
The weather is famously unpredictable and therefore can catch the markets unprepared. A series of hurricanes moving into the Gulf will shut down production and drive up fuel prices in the US, leading to currency distortions. Unexpected snowfall in Canada or Russia can lead to a jump in agricultural commodity prices. This will support the currencies of agricultural suppliers such as Australia and New Zealand, while affecting countries that import foodstuffs, like Japan, China, and the UK. Heavy rains in Australia, especially Queensland, can flood mines and railways, cutting commodity exports and depressing the AUD.
Weather conditions can move the stock market, which in turn can affect currencies. Rising prices in food due to poor weather can affect inflation. This can even go so far as to influence the outlook of central banks and their monetary policy decisions.
Keeping an Eye on the Weather
While the weather outside your window might not be terribly relevant to how your trading will go, you might want to keep an eye on broader weather phenomena in the world. What you see there can help to explain why a currency might be behaving somewhat unexpectedly.