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The 6 Factors That Influence Exchange Rates

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Every day, close to $5 trillion of currency gets exchanged on global markets.

It’s a market that’s running continuously for 24 hours per weekday around the world – and transactions can happen using different mechanisms, such as spot transactions, outright forwards, foreign exchange swaps, currency swaps, or the use of other types of options.

But what fuels changes in this extremely liquid and busy market, and why are the exchange rates between countries constantly in flux?

Key Market Factors

Today’s infographic comes to us from Hiwayfx and it highlights six of the major factors that can impact currency exchange rates.

6 Factors That Influence Exchange Rates

As with many things in macroeconomics, it’s important to note that many of these factors are related and can feed off each other.

For example, a high rate of inflation can lead to central bank intervention, such as raising interest rates and buying or selling domestic currency. This could lead to an increase in government debt, and so on.

What Influences Exchange Rates?

Here are the six factors summed up again:

1. Government Intervention: Central banks can influence rates by buying or selling the domestic currency.

2. Inflation: Countries with consistently high inflation rates tend to have lower currency values. This is because purchasing value decreases relative to other countries.

3. Interest Rates: A rise in interest rates in a country can offer investors a higher rate of return than other countries. As a result, the currency can appreciate relative to other countries.

4. Current Account Deficits: If a country has a current account deficit, it means that it’s spending more than it’s earning in foreign trade. To make up this deficit, countries may borrow capital from other external sources, which in turn will help make the domestic currency depreciate.

5. Government Debt: Countries with high amounts of debt are less attractive to foreign investors due to the chance of default as well as possible high inflation rates. This can decrease the currency’s value.

6. Speculation: Most trades in the forex markets are speculative trades, which means that sentiment and momentum can play big roles in market activity. Even if the fundamentals don’t align, the market for a currency can continue soaring or depreciating if traders and governments perceive it should.

For a related topic, see a map of the countries with the most foreign currency reserves.

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Markets

Mapped: The State of Small Business Recovery in America

Compared to January 2020, 34% of small businesses are currently closed. This map looks at the small business recovery rate in 50 metro areas.

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Mapped: The State of Small Business Recovery in America

In the business news cycle, headlines are often dominated by large corporations, macroeconomic news, or government action.

While mom and pop might not always be in focus, collectively small businesses are a powerful and influential piece of the economy. In fact, 99.9% of all businesses in the U.S. qualify as small businesses, collectively employing almost half (47.3%) of the nation’s private workforce.

Unfortunately, they’ve also been one of the hardest-hit sectors of the economy amid the pandemic. From the CARES Act to the new budget proposal, billions of dollars have been allocated towards helping small businesses to get back on their feet.

Small Business Recovery in 50 Metro Areas

During the pandemic, many small businesses have either swiftly pivoted to survive, or struggled to stay afloat. This map pulls data from Opportunity Insights to examine the small business recovery rate in 50 metro areas across America.

So, has the situation improved since the last time we examined this data? The short answer is no—on a national scale, 34% of small businesses are closed compared to January 2020.

San Francisco is one of the most affected metro areas, with a 48% closure rate of small businesses. New York City has spiralled the most since the end of September 2020.

U.S. Metro Area% Change in # of
Small Businesses Open
(As of Sep 25, 2020)
% Change in # of
Small Businesses Open
(As of Apr 23, 2021)
7-month change (p.p.)
Albuquerque-23%-34%-11
Atlanta-26%-35%-9
Austin-32%-38%-6
Bakersfield-31%-35%-4
Baltimore-28%-35%-7
Boston-33%-47%-14
Charlotte-18%-28%-10
Chicago-27%-38%-11
Cleveland-26%-34%-8
Colorado Springs-23%-28%-5
Columbus-21%-28%-7
Dallas-Fort Worth-21%-28%-7
Denver-25%-29%-4
Detroit-28%-38%-10
El Paso-25%-26%-1
Fresno-26%-30%-4
Honolulu-41%-25%+16
Houston-30%-34%-4
Indianapolis-25%-34%-9
Jacksonville-18%-28%-10
Kansas City-15%-26%-11
Las Vegas-22%-30%-8
Los Angeles-27%-34%-7
Louisville-23%-35%-12
Memphis-21%-24%-3
Miami-23%-34%-11
Milwaukee-22%-27%-5
Minneapolis-21%-29%-8
Nashville-21%-26%-5
New Orleans-45%-39%+6
New York City-21%-42%-21
Oakland-32%-35%-3
Oklahoma City-26%-35%-9
Philadelphia-24%-31%-7
Phoenix-19%-31%-12
Portland-34%-36%-2
Raleigh-16%-29%-13
Sacramento-33%-34%-1
Salt Lake City-18%-23%-5
San Antonio-34%-40%-6
San Diego-28%-38%-10
San Francisco-49%-48%+2
San Jose-35%-44%-9
Seattle-28%-30%-2
Tampa-22%-40%-18
Tucson-27%-28%-1
Tulsa-23%-32%-9
Virginia Beach--36%0
Washington DC-37%-47%-10
Wichita-15%-28%-13

Data as of Apr 23, 2021 and indexed to Jan 4-31, 2020.

On the flip side, Honolulu has seen the most improvement. As travel and tourism numbers into Hawaii have steadily risen up with lifted nationwide restrictions, there has been a 16 p.p. increase in open businesses compared to September 2020.

Road to a K-Shaped Recovery

As of April 25, 2021, nearly 42% of the U.S. population has received at least one dose of a COVID-19 vaccine. However, even with this rapid vaccine rollout, various segments of the economy aren’t recovering at the same pace.

Take for instance the stark difference between professional services and the leisure and hospitality sector. Though small business revenues in both segments have yet to return to pre-pandemic levels, the latter has much more catching up to do:

Small Business Recovery Supplemental - Business Revenues

This uneven phenomena is known as a K-shaped recovery, where some industries see more improvement compared to others that stagnate in the aftermath of a recession.

The Entrepreneurial Spirit Endures

Despite these continued hardships, it appears that many Americans have not been deterred from starting their own businesses.

Many small businesses require an Employer Identification Number (EIN) which makes EIN applications a good proxy for business formation activity. Despite an initial dip in the early months of the pandemic, there has been a dramatic spike in EIN business applications.

ein business applications

Even in the face of a global pandemic, the perseverance of such metrics prove that the innovative American spirit is unwavering, and spells better days to come for small business recovery.

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Markets

Pandemic Recovery: Have BEACH Stocks Bounced Back?

BEACH stocks—bookings, entertainment, airlines, cruises, and hotels—were pulverized at the beginning of the pandemic. Here’s how they’ve bounced back.

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Pandemic Recovery: Have BEACH Stocks Bounced Back?

The travel and entertainment industries have had a volatile ride over the last year.

During the initial stages of the pandemic, when panic and uncertainty ran rife, BEACH stocks–booking, entertainment, airlines, cruises, and hotels—were left scrambling. Collectively, $332 billion in market cap washed away.

Now, it appears the tide might be turning for these companies, buoyed by vaccine breakthroughs and glimmers of hope for a return to normalcy.

This infographic looks at the growth in market cap value across BEACH stocks one year from when the WHO officially declared COVID-19 a pandemic.

Washing Back to Shore?

BEACH stocks have gained a collective $376 billion in market cap in the year since the pandemic was declared, with about half the companies trading at their respective all-time highs.

In fact, about 70% of BEACH stocks have actually outperformed the S&P 500, which returned 43.7% during the same period.

CompanyTickerCategoryMarket Cap: 03/11/20 ($B)Market Cap: 03/11/21 ($B)Change
American AirlinesAALAirlines7.214.296%
Southwest AirlinesLUVAirlines23.534.446%
Alaska Air GroupALKAirlines5.78.142%
United AirlinesUALAirlines13.017.233%
Air CanadaACAirlines5.97.933%
Delta Air LinesDALAirlines29.130.96%
Expedia GroupEXPEBooking12.024.6105%
Allegiant TravelALGTBooking2.04.198%
Booking HoldingsBKNGBooking64.096.051%
Caesars EntertainmentCZRCasino & Hotel2.220.8824%
Norwegian Cruise LinesNCLHCruise & Casino4.310.9151%
Royal Caribbean CruisesRCLCruise & Casino10.822.4108%
CarnivalCCLCruise & Casino16.431.893%
Penn National GamingPENNEntertainment & Live Events2.620.4661%
Six FlagsSIXEntertainment & Live Events1.74.1142%
Live NationLYVEntertainment & Live Events10.819.379%
The Walt Disney CoDISEntertainment & Live Events201.2357.177%
Cedar FairFUNEntertainment & Live Events1.82.857%
HiltonHLTHotels25.034.638%
Marriott InternationalMARHotels35.648.235%
Choice Hotels InternationalCHHHotels4.55.930%
Hyatt HotelsHHotels6.78.729%
Marriott Vacations WorldwideVACHotels & Resorts3.87.7103%
Vail ResortsMTNHotels & Resorts7.113.488%
Park Hotels & ResortsPKHotels & Resorts3.45.358%
Wyndham Hotels & ResortsWHHotels & Resorts4.26.451%
MGM Resorts InternationalMGMResorts & Casino10.219.389%
Wynn ResortsWYNNResorts & Casino9.715.964%
Las Vegas SandsLVSResorts & Casino40.748.218%

BEACH Stocks Leaders and Laggards

When dissecting this basket of stocks by industry, it’s clear that much of the recovery story is lopsided. One reason for this, despite the pandemic, is that there are more granular, idiosyncratic trends occurring within these sectors.

Let’s look at what’s propelling the leaders, and dragging down the laggards:

Leading: Online Betting

There’s reason to be bullish on gambling stocks. Since late 2018, some 20 states have legalized sports betting, with more expecting to follow. Relative to other areas, the pandemic has been kind to gambling stocks. Many of those with an online presence have witnessed a spike in traffic, as more people continue to flock towards online betting.

Within the BEACH stocks basket, Penn National Gaming and Caesars Entertainment are clear outliers, having grown an epic 661% and 823% respectively. In addition, the broader industry (measured by the BETZ ETF) has nearly doubled the performance of the S&P 500 since its inception.

Laggard: Airlines

The return to normalcy will be much more delayed for airlines. Global RPKs, an industry metric, are not expected to reach pre-pandemic levels until 2024.

Actions of insiders also seem to match this negative sentiment. Warren Buffett, once a staunch supporter of airlines, decided to call it quits during the pandemic—dumping his entire position.

Airline COVID RPKs

U.S. airline executives have collectively been selling their stakes much more aggressively than in the last few years. To add insult to injury, there’s significant shorting of airline stocks as well. At a short interest of 11.6%, American Airlines is most heavily shorted BEACH stock.

Laggard: Hotels

In a year where social interactions and gatherings have largely disappeared, so too has much of the business activity for hotels. For instance, Hilton sales suffered a 58% decline year-over-year.

But even without the pandemic, the hotel industry had their work cut out for them, through a growing and formidable competitor in Airbnb. Airbnb can scale its network beyond what any hotel can. This is evident in its room count, which is greater than the largest hotels combined.

Airbnb room count vs hotels

More Bumps On The Road Ahead?

The investing landscape today looks to be disconnected from reality, in part because of the forward-looking nature of markets. Even though things are dire today, there’s a belief that light exists at the end of the tunnel.

But the path to recovery isn’t quite so linear. When the dust settles, it’ll become more apparent which industries will “return to normal” and which have set out permanently on a new trajectory.

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