Mergers and Acquisitions may be the least essential factor in forecasting forex movement. However, it can still act as a tool that a trader can use to gain short-term profits.
But first, you have to know how mergers and acquisitions relate to the stock market. How do the two relate to each other? Read on to know.
When an equity market is strong, a significant amount of cash will flow into the economy of the country. After all, equity holdings are all about acquiring shares of a company. They are also practically an ownership.
The US markets, unlike others, allow the listing of foreign companies as American Depository Receipts (ADRs). They are listed autonomously as full-blown American divisions of foreign companies.
When an equity market is strong, it also pulls a lot of capital toward it. In other words, traders have to sell their country’s currency if they want to buy a stronger money. This will strengthen that country’s currency.
Otherwise, weaker equity means capital flight. Investors will replace the weaker currency with their own currencies.
Mergers and Acquisitions as Demonstrations
Merger and acquisitions demonstrate the inflow of foreign investment into a country. This translates into the acquisition of some of the stake in the other company.
Basically,when two companies combine to form a new entity, you call it a merger. On the other hand, when a company takes over another company, that’s an acquisition.
For acquisitions, one company buys some or all of the other company’s shareholding. You can make payments via:
- All stock deals
- All cash deals
- Varying combinations of stocks and cash
Any payment that involves cash must be cross-border in nature. It must also be significant enough to move the exchange rate of the two currencies. Lastly, it should be at least $1 billion.
In the year 2000, a paper was released. This paper showed the currency of the corporation to be acquired grew in value by 1 percent (average) over 50 days. It had an eventual peak of 5 percent. The 1-percent movement is considered highly substantial in the forex market.
UBS, a Swiss global financial services company, supported this finding. It cited Australia as an example.
Net inflows into the country have surged 25 percent in 2011. That was a huge jump from 10 percent in 1990s. A mining boom, along with trade partners who were relatively untouched from the 2008 financial crisis drove this. Ultimately, it has caused the Australian dollar to swell over 75 percent since 2008.
In order to paint a picture more vividly, we’ll show you two examples.
Example number 1: Germany’s Duetsch Telekom acquires Voicestream, a US company. The deal was worth $15 billion in cash and stock, with rumors first breaking on July 19, 2000. The euro dropped 1.06 percent, and fell 0.17 percent on July 24th, which was the deal announcement date.
They have settled everything by May 31, 2001. By this time, the euro had already lost 1.3 percent. It was a giant move for the EUR/USD.
This happened because Deutsch Telekom had to exchange billions of euros for US dollars. Usually, the forex market forces imply that currency E would lose value, while currency U would strengthen. This is possible when there is a large supply of E, while there’s strong demand for U.
Example number 2: Proctor and Gamble Acquires 77 percent of Wells AG. American company P&G acquired a 77-percent stake in Wells AG, a European company, for $4.5 billion. The EUR/USD increased 100 pips when the deal was known to the public.
Eventually, the move gave 200 more pips by the next week.
The explanation we gave, plus the two examples we gave, shows that mergers and acquisitions indeed influence the forex market. And if you understand those influences, you can predict currencies more efficiently.
However, keep in mind that there are other factors you can use to predict forex movement.
You can earn bigger profits and execute better trades here at Trade12 by reading the latest market updates. Striving to become the best forex broker for you, Trade12 reviews daily market events essential to your trading activities to help you improve your overall trading performance. Register an account now and enjoy a wonderful trading experience!