Let's start with a little story.

Suppose there are two countries, Country A raises chickens and can produce 100 chickens a year; Country B raises ducks, producing 100 ducks annually.

Judging by productivity, the value of a chicken is equivalent to that of a duck, meaning one chicken can be exchanged for one duck.

Country A has issued a total of 100 pieces of currency, while Country B has issued 200 pieces of currency.

Without considering other factors, the purchasing power of Country A's currency is such that one piece of A's currency can buy one chicken or one duck, and two pieces of B's currency can buy one duck or one chicken.

At this point, the exchange rate between Country A and Country B is 1:2.

Now, Country A suddenly increases the issuance of currency by 100 pieces, changing from the original 100 to the current 200.

With productivity unchanged, the purchasing power of Country A's currency has decreased, and it now takes two pieces of A's currency to buy one chicken or one duck, which is equivalent to an increase in prices.

Additionally, at this time, 200 pieces of A's currency are equivalent to 200 pieces of B's currency, and the current exchange rate has dropped to 1:1.

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Originally, one piece of A's currency could be exchanged for two pieces of B's currency, but now one piece of A's currency can only be exchanged for one piece of B's currency.Relative to Country B, the currency of Country A has depreciated; for Country A, the currency of Country B has appreciated.

1. What is foreign exchange?

In simple terms, foreign exchange refers to the currency of another country.

The exchange rate is the ratio between one country's currency and another's.

Due to international trade, countries need to handle international settlements, so one country's currency has an exchange rate against the currencies of other countries.

Currency trading involves exchanging the currency of one country for that of another, with the exchange ratio calculated according to the exchange rates between the two parties.

For example, when traveling, if Xiao Ming goes to Europe and the euro strengthens, 100 Chinese yuan can only be exchanged for 10 euros. However, if the euro weakens to a one-to-one ratio, then 100 Chinese yuan can be exchanged for 100 euros. Therefore, if the euro depreciates against the Chinese yuan, traveling to Europe becomes cheaper.

2. What are the characteristics of foreign exchange investment?

First, there are many trading instrument options in foreign exchange, including spot, foreign exchange ETFs, leveraged foreign exchange, and futures.

Second, there is no bull or bear market in the foreign exchange market because foreign exchange is relative; when one currency rises, the other falls.Thirdly, the foreign exchange market operates 24 hours a day from Monday to Friday, with highly flexible investment hours.

Fourthly, the foreign exchange market has a very large trading volume and high liquidity, making it the largest and most liquid market in the world. There is almost no occurrence of monopolistic pricing, and the currency is almost always in line with the general direction of economic data, making it impossible for individuals to manipulate the market.

3. What factors affect exchange rates?

(1) Trade

We often hear terms like trade surplus and trade deficit. When country A's exports exceed its imports, suppliers in country A will demand payment in their currency from country B. The more goods exported, the greater the demand for the currency, and the stronger the exchange rate. This is a simple supply and demand relationship; a strong economy leads to a strong currency exchange rate.

(2) Interest Rates

For example, if country A has higher interest rates than country B, you can borrow money from country B to invest in country A to earn the interest rate differential.

Country A's interest rate rises —— Arbitrage capital inflow —— Increased demand for country A's currency —— Currency value appreciation

(3) Inflation

Every country experiences inflation. If country A has a higher inflation rate than other countries, its currency loses value, leading to a devaluation of country A's currency against foreign currencies and an increase in the foreign exchange rate.(4) Economic Growth

If a country's economy grows rapidly, then the exchange rate of its currency will be high.

In addition to these, there are many factors that affect the exchange rate, such as fiscal deficits, foreign exchange reserves, investor psychological expectations, and political factors, among others.

For example, the United States' quantitative easing, which is also a form of money printing, increases the money supply, and thus the exchange rate will tend to decrease.

4. Appreciation and Depreciation of Exchange Rates

If the currency of Country A depreciates relative to the currency of Country B, it means that imports of products from Country B become more expensive for Country A.

Conversely, for Country B, importing products from Country A becomes cheaper, which theoretically should benefit Country A's foreign trade exports.

For individuals, a devaluation of their home country's currency means that goods purchased overseas become more expensive, and families of students studying abroad also have to pay higher tuition and living expenses.

At this point, you might wonder, is it better for a currency to appreciate or depreciate?

There is no definitive answer to this question. Exchange rate fluctuations have complex impacts on different regions, industries, employment, and consumption, and it cannot be simplistically understood as good or bad.If you want to compete for business, it's good for the currency to depreciate; if you want to travel abroad, it's good for the currency to appreciate.

5. Classification of Currencies

To a certain extent, currencies can be categorized into different types, such as carry trade currencies, safe-haven currencies, and commodity currencies.

Carry Trade Currencies

Xiao Ming is a professional investor who specializes in borrowing currencies from countries with low interest rates, such as the Japanese yen, to invest in high-return assets like stocks. However, when the market faces risks, Xiao Ming will repay the yen, causing the yen's exchange rate to strengthen.

If the entire market shares this sentiment, leading to a repatriation of yen, such low-interest currencies are referred to as carry trade currencies.

Safe-Haven Currencies

When there are uncertainties or events in the world, such as the 9/11 terrorist attacks, the European debt crisis, Brexit, etc., to hedge risks, Xiao Ming will invest funds into countries with more stable economies, like Switzerland.

Because Switzerland is a neutral country that does not participate in global political and economic issues, its exchange rate is relatively stable and less prone to significant fluctuations. Therefore, the Swiss franc has become one of the choices for capital to seek refuge.

Commodity CurrenciesSome countries are commodity exporters, such as Australia exporting iron ore and New Zealand exporting agricultural products. The relationship between the currencies of these countries and commodity prices is very close. When economic data and commodity prices create trends, Xiao Ming will invest in these currencies.