August 12, 2022

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How does inflation affect forex trading in Singapore?

The foreign exchange market is one of the most liquid markets globally, with a daily turnover exceeding $4 trillion. This figure compares with an average of $40 billion per day for the New York Stock Exchange (NYSE) or $200 billion per day for trading on the New York Mercantile Exchange (NYMEX).

During the last few years before 2006, interest rates were at historic lows, creating unfavourable scenarios for many individuals looking to invest money while earning a return on their savings. However, this scenario changed dramatically due to several factors, including increasing interest rates drastically over time, making investments attractive again. First-time investors and even long term investors had a golden opportunity to make profits by earning more than their currencies.

With rising inflation in Singapore, consumers have seen their spending power rise. Both wage-push inflation and government legislated price levels have been used to stimulate the economy, leading to a growth in GDP. 

How does inflation affect Singaporean traders? 

When interest rates rise, market participants will be less willing to hold deposits in the domestic currency. The central bank must increase interest rates further or allow growth of the money supply, which leads to more inflation and a looser monetary policy stance (which in turn makes it easier for banks and other lenders and borrowers to get loans) 

The government may also pass legislation that increases price levels to meet revenue targets. A good example would be how Singapore raised the Goods and Services Tax (GST) by 2% points in 2007. By increasing GST twice within the same year (raising it from 5% to 7%), consumers pay higher prices on goods such as food, transport and even healthcare services 

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In developing economies like Singapore, there is a higher likelihood that inflation will be more frequently used as a medium to stimulate growth. When wages grow faster than productivity, wage-push inflation makes it harder for companies to retain profits compared with labour costs, thus resulting in firms passing these increased costs onto their customers and increasing inflation and interest rates. This makes it harder for people to save less and spend more and further stimulates demand, leading to an increase in GDP (gross domestic product).

At the flip of a coin, an upswing in investment which seemed like a good idea could turn into something disastrous due to sudden changes brought about by various factors. These factors include unexpected interest rate hikes, economic changes, market conditions and others. 

Currencies such as US Dollar (USD) or Japanese Yen (JPY) fluctuate significantly daily, making it difficult for new traders to predict future trends accurately without any experience. This scenario leaves them at risk of holding on to losing positions until they come out on top. At the same time, professional traders take advantage of this discrepancy between price and value and earn profits from both sides simultaneously.

To avoid this phenomenon, currency traders look for a safer haven in their investment plans. In 2010 two of the most profitable currencies were US Dollar (USD) and Euro (EUR). Although there is no guarantee that these currencies will continue to yield positive results going forward, investors need to remain vigilant while choosing which currency pairs they want to trade. 

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Professionals rely on both fundamental and technical analysis when deciding where to put their money to earn profits from both rising and falling markets, so take your time before investing your hard-earned savings. The lack of proper knowledge can cost you dearly, so do your research before putting your money at risk by trading foreign exchange Singapore.

Finally

 As you can see, inflation affects forex trading in Singapore by decreasing your buying power every month. It also makes it harder for you to save and earn a decent return on your savings. And finally, simply earning more won’t help since inflation will decrease its value by eating into your extra salary or income that was not subject to any inflationary increases. Before investing your money, we recommend contacting an experienced online broker from Saxo Bank.