4 Ways in Which Weather Can Affect Forex Market

Currency trading can be approached using many different ways. Math purists will tell you that technical analysis is the only way to go, swearing that they can see the future by poring over a chart after chart after chart. Others glance at the trends, ruminate for a minute or two, then go with a hunch and ride a pair wherever it wants to go. Some Forex traders, however, attempt to accumulate as much information as they possibly can before investing in a currency pair. These thorough individuals stay apprised of politics, trade and investment, interest rates, consumer trends, the housing market, inflation, capital markets, industry indicators, and the latest economic theory. But even these studious individuals can overlook a resource that offers great insight into developments in the Forex market. This important font of knowledge is, of course, your local weatherman.

While this comment is made at least partially tongue-in-cheek, the idea that the weather could affect the currency markets is not at all far-fetched. Weather conditions have a profound effect on local economies, on energy consumption, and on the all-important agricultural industry. A change in the weather can have a tremendous impact on the economy, causing currency values to fluctuate. This guide examines the effects of North American weather on the US dollar, though the observations herein can easily be applied to most developed countries and their currencies.

So, without further ado, here are the four ways in which weather affects the US dollar — a must-read list for the truly obsessive FX trader.

1. Tornadoes, hurricanes, floods, and the like: Hurricane Katrina is a prime example of how natural disasters can affect the greenback, but these incidents don't need to be on the scale of Katrina to have an influence on the foreign exchange market. Any weather event that damages property or impacts citizens to the point that they require assistance from local or federal government agencies can put a strain on the dollar. Sizable disasters can also affect national morale, causing unease or even panic, neither of which is ever good for the currency.
2. Droughts and deluges: Anyone who has ever watched the local news in Iowa knows where the agricultural industry's priorities lie. By the sixth appearance of the weatherman in the first fifteen minutes of the broadcast, it is evident that the weather is a major economic concern. Any conditions that cause crop failure or harm livestock not only hurt farmers, but they drive up prices and force food retailers to look abroad for substitute products. When this occurs, the trade deficit increases and the dollar takes a hit.
3. Cold cold winters: An extraordinarily cold winter results in unexpected increases in energy costs for both industries and consumers. As the bulk of the gas and oil used in the USA is imported, the dollar suffers as Americans try to stay warm.
4. Hot hot summers: An abnormally hot summer also leads to higher energy costs for consumers. The summer months are normally spending months, when Americans travel and shop for big-ticket items. If Americans have less disposable income because of increased electricity bills, then everyone is more likely to stay home and enjoy the AC rather than venture out into the heat to buy a new car and start that cross-country trip. In this way, a hot summer can slow the economy and have a deflating effect on the dollar.

If you want to ask some questions or share your ideas on how weather can affect currency trading, please feel free to do so using our Forex forum.