How Taxation Impacts the Foreign Exchange Market (Forex)?
The Forex Exchange (Forex) market is impacted by a wide range of data from countries around the world. But perhaps you didn’t realise that tax policies impact the demand and supply of a currency in relationship with other currencies as well.Today’s article reviews what impacts the price moment in the Forex market and how taxation policies can play a substantial role in multiple ways.
What Provides a Currency with its Value?
There are multiple factors that impact the value of a currency relative to other currencies. Ultimately, the main factors are connected to:
1. Monetary policy
2. GDP to debt ratio
3. Trade balance
4. Fiscal policy, including taxation
Monetary policy: This is conducted by the Central Bank and refers to (control of) the money supply and interest rates. The currency becomes less valuable if there is an increase of the supply or decrease of the rates. With a supply decrease or rate hike, the currency becomes more attractive.
GDP to debt ratio: The next aspect is the strength and size of the economy which is measured via the GDP (gross domestic product) in relationship to the nation’s debt to GDP ratio. Ultimately investors are relying on a government to raise taxes to pay back its debt. A currency would quickly drop in price if investors believed that a government was unable to pay back its debt.
Trade balance: Thirdly, the goods and services imported and exported between two currencies will impact supply and demand as well. A country with larger exports will see the demand for its currency boost, as businesses and consumers from other countries exchange their local currencies to buy abroad.
Last but not least, fiscal policy has a substantial role too, including taxation.
How does Fiscal Policy Impact Currencies?
Fiscal policy is based on the ability of a government to increase or decrease spending, investments, or taxation. An increase in investment will have a positive impact on the economy and hence GDP but it could also increase the debt in the long run.
Tax policies set by the government also impact economic demand in the short-term. Tax cuts raise disposable income, which could boost consumption and business activity. Tax increases have the opposite effect.
How much will demand be impacted? It mostly depends on two factors:
1. The division between consumption and saving for consumers and between dividends and business expansion (investing/hiring) for business.
2. The over all strength or weakness of the economy: tax cuts boost demand more if the economy is far from its maximum potential.
An increase in economic activity could lead to lower unemployment and inflation, which in turn could trigger a response from the Central Bank to increase interest rates thus making a currency more attractive.
The drawback is that there is less tax income available for the government, which could either lead to an increase of the budget gap or a spending decrease. The first increases the total debt whereas the second has a negative impact on demand.
What Is the Net Impact of Taxation on Currencies?
Besides income tax, there is also the question of other taxes such as value added tax, capital gains tax, real estate tax and others. It’s time to discuss their impact on the currencies.
Providing an exact account of how taxation impacts the currencies now or in the near future remains difficult because tax policies ultimately impact government spending, government budgets and potential debt, the overall economic growth, economic demand, and indirectly interest rates and monetary policy. All of these factors influence the currency demand, supply and its value in supportive or opposite forces.
A study called ‘Tax Effects on the Real Exchange Rate’ was published by Wiley on May 2007. The authors Stacie Beck and Cagat Coskuner examine the impact of taxes on the real exchange rate as they review marginal effects on the economic activity of a country or currency bloc. Their hypothesis is that an increase in the capital interest tax rate leads to real domestic currency depreciation while an increase in wage or consumption tax rates leads to a real domestic currency appreciation.
How Can You Analyse Currencies?
Every day and week there are dozens of data, statistics, and other fundamental data that are being released. There are news reports literally around the clock. How can traders judge all of this data and information? How can traders judge what information will have the most impact?
The short answer is: they can’t. Unless you have an entire team of researchers to your disposal, it’s virtually impossible to analyse and interpret all of this data and make proper trading decisions based on this overload of data.
What is the solution? We at Elite Curren Sea use technical analysis as a “shortcut”, because price is the ultimate measurement of all these factors.
The price chart shows the development of price from the past till now. By analysing price, traders can analysis the actual, real live result. This provides much more precise analysis when compared to guessing about how economic data impacted the market.
The news reports always explain the market movements after the fact. Price analysis, called technical analysis, offers traders a way to analyse the charts pre-fact.
By using the charts of the currency pairs, traders can simplify their approach, understand the market sentiment quickly and prepare trading plans based on solid information.
How much will demand be impacted? It mostly depends on two factors:
1. The division between consumption and saving for consumers and between dividends and business expansion (investing/hiring) for business.
2. The over all strength or weakness of the economy: tax cuts boost demand more if the economy is far from its maximum potential.
An increase in economic activity could lead to lower unemployment and inflation, which in turn could trigger a response from the Central Bank to increase interest rates thus making a currency more attractive.
The drawback is that there is less tax income available for the government, which could either lead to an increase of the budget gap or a spending decrease. The first increases the total debt whereas the second has a negative impact on demand.
What Is the Net Impact of Taxation on Currencies?
Besides income tax, there is also the question of other taxes such as value added tax, capital gains tax, real estate tax and others. It’s time to discuss their impact on the currencies.
Providing an exact account of how taxation impacts the currencies now or in the near future remains difficult because tax policies ultimately impact government spending, government budgets and potential debt, the overall economic growth, economic demand, and indirectly interest rates and monetary policy. All of these factors influence the currency demand, supply and its value in supportive or opposite forces.
A study called ‘Tax Effects on the Real Exchange Rate’ was published by Wiley on May 2007. The authors Stacie Beck and Cagat Coskuner examine the impact of taxes on the real exchange rate as they review marginal effects on the economic activity of a country or currency bloc. Their hypothesis is that an increase in the capital interest tax rate leads to real domestic currency depreciation while an increase in wage or consumption tax rates leads to a real domestic currency appreciation.
How Can You Analyse Currencies?
Every day and week there are dozens of data, statistics, and other fundamental data that are being released. There are news reports literally around the clock. How can traders judge all of this data and information? How can traders judge what information will have the most impact?
The short answer is: they can’t. Unless you have an entire team of researchers to your disposal, it’s virtually impossible to analyse and interpret all of this data and make proper trading decisions based on this overload of data.
What is the solution? We at Elite Curren Sea use technical analysis as a “shortcut”, because price is the ultimate measurement of all these factors.
The price chart shows the development of price from the past till now. By analysing price, traders can analysis the actual, real live result. This provides much more precise analysis when compared to guessing about how economic data impacted the market.
The news reports always explain the market movements after the fact. Price analysis, called technical analysis, offers traders a way to analyse the charts pre-fact.
By using the charts of the currency pairs, traders can simplify their approach, understand the market sentiment quickly and prepare trading plans based on solid information.
