Country Profiles: Currencies, Policies & Risks

When considering trading or investing across borders, the first thing that comes to mind is usually the currency exchange rate. Foreign currency exchange rates could be from another planet, given their importance in trading and investing, which should be thoroughly covered. What if I told you that only considering exchange rates when trading or investing is similar to only reading the cover of a book? If you want to make sense of how the economy of a country - and therefore the currency of that country - will behave, you have to look way beyond exchange rates. Behind every currency are masses of governmental policies, economic ambitions and growth aspirations, geopolitical positioning, and risk. The objective of this article is to guide you in how to read a country, similar to the way an experienced trader reads a chart. Changes to respective fees in currencies, directionality of governments, and specialized risk with each country count in the strategy for a global view.

1. Currency Behaviors: More than a number on a screen

Think of currencies as the heartbeat of a country. Currencies respond to changes in interest rates, inflation, changes in national politics, and even people's attitudes. Each currency will react differently based on the economic structure and health of the respective nation.

Consider this:

• The US dollar (USD) is generally aspirational in global uncertainty because it is the safe-haven currency.

• The Japanese yen (JPY) will typically rise in risk aversion; however, there is no surge in the Japanese economy because of it.

• Currency from an emerging market such as the Turkish lira and Argentine peso will generally have a more solemn vigil in terms of domestic political issues related to every global capital flow and beyond.

Looking up these country considerations will help you to view currency movements as not just surprise aberrations, but rather measures of national internal health!

2. Monetary Policy & Central Bank Activity: The Heartbeat of Currency

If currency is your heart, think of your central bank as your brain.

Sound monetary policy, including rate decisions, inflation targets, and currency interventions, has a significant impact on a country's performance. For this reason, so much attention is put on anything central bank governors, etc., have to say.

Three areas to focus attention on are:

• Interest rate changes: A move up in rates tends to bring foreign capital, which pushes the currency up.


• Quantitative easing/tightening: Affects liquidity and hence, momentum.


• Currency management: Some central banks (China or Switzerland) actively manage to peg their currencies, while others, like the US and Canadian currencies, are freely floating.

You should always consider a country's credibility. Suppose you look at this currency from an investor's perspective. In that case, it matters if the central bank operates in a compromised political environment, and this will factor into your valuation of a country's currency.

3. Fiscal Policy & National Stability

The fiscal policy of the government and its leaders has enormous impacts on the currency value. The elements of how a government uses budgets are significant and will affect the confidence of investors.

Some indicators to look for are:

• Budget deficits or surpluses: Budget debt always causes currency depreciation, especially if budget debt plus debt has attached future obligations.


• Debt to GDP ratio: Countries that have unsustainable debt are typically downgraded, or markets sell that currency.


• Tax and spending policies: Stimulus drives increased growth, but stimulus due diligence is essential as stimulus becomes debt and leads to inflation.

Suppose there is political instability, such as a lot of elections, government or political party corruption scandals, political agenda spin or shifts in direction from one quarter to another. In that case, you stand to have a lot of instability with capital movements. Even a rumour about underlying security can lead to significant capital outflows, resulting in poor stock market prices, which, by correlation, negatively impact the local currency.

4. Country Risk: The Underlying Factor Behind Investor Choices

Country risk refers to the uncertainty that political, economic, or social factors will adversely affect a country's ability to perform and meet its obligations and keep the country solvent.

Country risk factors include:

• Sovereign credit risk (Is the country going to default on its debt?)

• Geopolitical risk (Is it possible there are regional conflicts, are there trade wars, are there sanctions?)

• Regulatory uncertainty/uncertainty of the speed of legislation (How quickly may laws become amended, especially about capital controls, etc.?)

For example, a country may have very high yields on its bonds or significant economic growth, but if there is political unrest or a lack of rule of law, investors may avoid it. Navigating country risk often involves balancing between opportunity and caution.

5. Real-world case studies: what the profiles expose

Let us look at a few examples to see how these factors come together:

A. Brazil

• Currency: Brazilian Real (BRL)

• Policies: Historically high interest rates to fight inflation, but also erratic fiscal policy.

• Risk: Political instability and corruption usually lead to currency volatility.

Insight: BRL can be very profitable when commodities are booming, but very volatile and sensitive to domestic politics and global sentiment.

B. Switzerland

• Currency: Swiss Franc (CHF)

• Policies: Low interest rates, safe-haven status, frequent currency interventions by the Swiss National Bank.

• Risk: Very low. One of the most stable financial environments on the planet.Key Takeaway: CHF is a hedging currency because it often appreciates during global frictions.

C. South Africa

• Currency is the South African Rand (ZAR)

• What is their policy: Variable interest rates are implemented, and a challenging environment makes it challenging to attract steady amounts of foreign investment.

• What is their risk: High exposure from commodity cycles and a higher degree of politically challenging internal friction.

Key Takeaway: The high volatility provides traders with numerous opportunities, but long-term exposure would necessitate a hedge for sustainability.

6. Building Country Profiles

To comprehensively assess a country, data and context will provide you with a complete picture of the country:

• Economic Indicators: GDP growth, inflation, trade balance, total employment data

• Policy context: Statements from the Central Bank, government budget, political climate

• Market sentiment: Bond yield, credit default swaps (cds), the country has issued, flows of foreign direct investment

• General news and reports: Publications from the IMF, World Bank, and local financial press sources

• The critical factor is not just the collection of data but your acute understanding of how data connects. A country may have a high inflation number that turns off investors, and in the meantime, a country may have the same inflation number. It is vilified in the media, but to a seasoned investor it is merely shrugged off because of the recent history or trend of the country and/or the credibility of the central bank chairman.

7. Practical Applications for the Country Profile: For Traders and Investors

The country profile is not purely book smart; these are working documents for everyone who operates in:

• Forex traders: to have a greater sense of policy direction and risk sentiment as it relates to currency and trading movement.

• International investing: country fundamentals will usually have something to do with equities, and even bonds for swaps/derivatives.!

• Portfolio hedging: how does a trader hedge while having a sense for the stability of a country ( like Switzerland) or a country that is potentially volatile (like Turkey)? If your portfolio is going to have some of the same or similar exposure, you might have a hedge in line.

• Business planning: many companies conduct business in various geographies, making understanding your exposure to currency and the policy environment much clearer.

Developing these profiles does not require being an economist or a number crunching machine; instead, it involves being inquisitive, following a thought-out process to build a framework, and being willing to think beyond the headline.

Conclusion: The Country Behind the Currency

Every sovereign country has a story, not just in terms of their culture or politics, but also in how they manage their economy, policies, and their administration of risk. And for those who are operating in global markets, these country stories matter.

No matter if you are using the country profile for currency trading, investing globally, or for managing business exposure to markets, being complete in your country profile provides you with a more strategic foundation as a trader and investor. It is not about trying to be perfect at predicting the outcome/direction; it is about connecting the dots, managing risk, and driving decisions with as much clarity as you see fit.

So with every news headline related to interest rate hikes, a country with a newly elected political leader. This currency is rallying — ask yourself — what's the whole picture behind that country? They have a story to tell, and the more information you have, the closer you come to fulfilling your goal and knowing that comes satisfaction.