Singapore is a densely populated city-state with nearly 6.5 million people living in an area of just over 700 square kilometres – making it one of the most crowded countries in the world. Despite its small size, it is also one of the most affluent cities in Southeast Asia, which explains why many are interested in trading currencies here.
Understanding inflation
Simply put, inflation refers to the value of money decreasing due to an increased supply of goods and services. As more money enters into circulation while demand remains relatively constant, prices will naturally rise because more units compete for the same number of items on offer. This phenomenon affects trading because investments are often pegged to inflation rates.
What is CFD trading?
The term “contract for difference,” often referred to as a CFD, is used to describe an instrument that allows you to bet on the movement of prices without owning those assets. A derivative product is one in which the value of the asset being predicted does not change hands.
Interest rates influence the economy
The government uses interest rates to influence the economy, where high-interest rates tend to discourage spending and encourage saving – therefore curbing demand for goods which could lead to lower prices. Low-interest rates have the opposite effect, encouraging more consumption among consumers who expect their money’s value to increase in the future due to inflation, causing an immediate need for slightly more expensive items that they don’t mind paying a little extra for.
Of course, this also means that lenders can charge higher interest rates when there is high inflation since their money will be worthless after being lent out and earning them progressively less with each repayment instalment. If inflation becomes too unsustainable, it encourages people to invest in commodities that are more likely to retain their value over time rather than risk losing everything when the currency is inflated out of existence.
When does inflation affect CFD trading?
Airlines and hotels tend to be affected by inflation since they need to constantly change prices depending on how many people wish to fly or stay at their establishments. It means that they can increase costs while still maintaining a steady level of demand because everyone needs to travel and sleep somewhere at some point.
However, financial brokers like Saxo Bank usually do not have this problem since their costs remain relatively fixed. Therefore, while there will still be an increase in the value of their money over time, they are not likely to raise prices unless necessary. It is also not uncommon for traders to pass on inflationary increases to their customers. Ultimately, the consumer has the final say in whether or not they are willing to pay more for a product or service – meaning that brokers will usually keep their margins reasonably low.
Use of commodities
People often use commodities to hedge against inflation because there are only so many precious metals and other assets available worldwide. If demand outstrips supply, the price naturally rises, encouraging people to buy before everyone else does or sell once these items start unaffordable. However, commodities tend to be very volatile because even minor changes in market sentiments can significantly impact supply, which might have little or nothing to do with inflation.
Bottom line
Even though there are so many different factors involved in how inflation affects trading here, it is still one of the most important things to consider when deciding whether or not you would like to invest your money into something with relatively stable value instead. Understanding what makes inflation increase and how it affects specific markets will allow traders in this tiny island nation to make more informed decisions about their investments while reducing risk wherever possible.
