Five Key Factors that Move the Forex Markets -- and How to Profit from Them

Key Factor 5. Mergers and Acquisitions

While merger and acquisition activity is the least important factor in determining the long-term direction of currencies, it can be the most powerful force in staging near-term currency moves. Merger and acquisition activity occurs when a company from one economic region wants to make a transnational transaction and buy a corporation from another country.

If, for example, a European company wants to buy a Canadian asset for $20 billion, it would have to go into the currency market and acquire the currency to affect this transaction. Typically, these deals are not price sensitive, but time sensitive because the acquirer may have a date by which the transaction is to be completed. Because of this underlying dynamic, merger and acquisition flow can exert a very strong temporary force on FX trading, sometimes skewing the natural course of currency flow for days or weeks.

If you keep abreast of international merger and acquisitions, you may be able to predict short-term fluctuations in FX. In late 2006, for example, Canadian economic data showed a great deal of weakness. Yet large demand for Canadian corporate assets from the Asia, Middle East, and Europe overrode the financial reports and kept the USD/CAD at all-time lows*.

*USD/CAD trades inversely

Although economic data indicated USD/CAD should rally, the pair stayed at all-time lows due to a large number of foreign investors acquiring Canadian dollars to purchase Canadian equities.

In November of 2006, we made our Forex Advisor team a healthy profit by predicting a backward acquisition effect: After a surprising government announcement, money that had been used to purchase equities in Canada, reversed flow and headed out of the country.

Canada Loses Investors, Inspires Big Forex Gains

Merger and acquisition activity can be a powerful but sometimes stealthy driver of demand in the currency market. When a country’s capital assets such as equities, suddenly find favor from the rest of the world, they indirectly affect pricing in the foreign exchange market as dealmakers first have to buy the country’s currency before they can buy the stock. However, woe unto any currency when this situation reverses. Such was the case with USD/CAD in November 2006.

In the fall of 2006, Stephen Harper's newly elected conservative government made a shocking announcement that the very popular Canadian income trusts which enjoyed certain tax advantages would be taxed just like other Canadian securities. The Harper government exacerbated the situation by not grandfathering any of the long-term investors who already held positions in income trusts.

We thought the impact of this news would be highly negative to the Canadian dollar as foreign capital would quickly flow out of the country. Despite lackluster US economic news at the time, we thought a USD/CAD trade would be profitable because news that affects immediate investment flows typically overwhelms any day to day economic data. Therefore, on November 1, 2006 we went long USD/CAD at 1.1290 and were able to bank 45 points in just a few hours.

United States dollar vs. Canadian dollar, November, 2006. As investment dollars flowed out of Canada, the USD/CAD trade earned us 45 points.

At 10 to 1 leverage you could have profited $450 on a $10,000 investment on the November USD/CAD trade -- that's a 4.5% profit in a matter of hours.


The basic building blocks of Forex analysis are relatively simple to understand. Interest rates, economic growth, politics, trade and capital flows, and merger and acquisition activity are the five primary forces that move prices in the currency market. However, while the factors that drive trade are straightforward, actual currency trading can be very tricky.

To forecast the Forex market, you must be able to predict the endless interplay of each of the five forces affecting a currency pair. A currency pair typically driven by economic growth may suddenly be overtaken by influences in trade flows or short-term acquisitions. A pair that seems sure to fluctuate with interest rates may unexpectedly be held back by investors' response to political unrest.

Five Key Factors that Move the Forex Markets..
..and How to Profit from Them!

1.Interest Rates 2.Economic Growth 3.Geo-Politics
4.Trade and Capital Flows 5.Mergers and Acquisitions

GOOD LUCK AND HAPPY TRADING!