Fundamental Analysis

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  Introduction to the fundamental analysis

  The most important and complex component of foreign exchange dealing is the ability to analyze trends of the market, and thus anticipate what factors and how to affect the currency exchange rates. In the movement of prices set as quick profit or otherwise - the possibility of a rapid and substantial losses. Therefore, the correct prediction of the market movements, the assessment of events, as well as the manipulation of rumors and expectations - a necessary part of the broker or dealer and the pledge of his success. There are quite a number of factors that impact the entire foreign exchange market as a whole as well as on the individual currencies).

  There are two basic ways to analyze the situation on the market - a fundamental and technical. The first is assessing the situation in terms of political, economic, financial and credit policies. The second is based on the methods of graphic research and analysis based on mathematical principles.

  As part of fundamental analysis examines the various reports of the monetary and financial developments in the world, the phenomenon of political and economic life of both individual countries and the world community as a whole, which may have an impact on the development of the foreign exchange market, the analysis, to a change in exchange rates are may result. This is important information on the markets and major companies such market-makers, interest rates of central banks, government economic policy, possible changes in the political life of the country, as well as all kinds of rumors and expectations. Fundamental analysis - one of the most difficult parts - and at the same time, one of the key parts of the work in the foreign exchange market. Conduct fundamental analysis is far more complex than any other, because the same factors in different circumstances different value on the market, or may become a critical absolutely insignificant. You must know the relationship and mutual influence of two different currencies, reflecting the linkages between the various States, the history of currencies to determine the combined effect of various economic measures and to establish a link between totally unrelated at first glance events. In addition to some original and most formal rules, it is most needed experience in the foreign exchange market.

  Fundamental factors are usually estimated from two points of view:

  • in terms of the impact on the official interest rate;
  • from the viewpoint of the country’s national economy.
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  Data of Economic Development of a Country

  The principle of this sub-group impact is based on the axiomatic statement that the rate of any currency is the derivative of this country economic development. Stability of economic development specifies foreign investors interest in the capital expenditures to the country and, correspondingly, demand on the national currency. The data of economic development of a country include such key indicators as balance of trade and balance of payment, inflationary rates, unemployment rate, GDP etc.

  In the Forex market a unified system of currencies quotation through the US dollar was elaborated. Thus, the US economic development and the dollar rate are the key factors, which specify market movement, common to the main currencies. That is why the US dollar and its behavior are in the limelight, as they trigger some specific reaction of other currencies. Frankly speaking, it doesn't eliminate other factors impact, such as policy of the national banks or influence of the related markets, which will be described briefly a bit later. In the USA the main indicators of economic development are released monthly or quarterly.

  Table 1. Impact of the most important economic indicators on the national currency exchange rate

  Indicator	Market importance	Indicator changing	Changing of the national currency exchange rate
  Trade deficit	1	increase	decrease
  Payment deficit	1	increase	decrease
  CPI and PPI	1	increase	decrease
  Official interest rates	1	increase	increase
  GDP	1	increase	increase
  Unemployment	1	increase	decrease
  M4, M3, M2, M1, M0	1	increase	decrease
  President or Parliament elections	1	increase	-
  Retail sales	2	increase	increase
  Housing starts	2	increase	increase
  Orders	2	increase	increase
  Industrial production	2	increase	increase
  Productivity	2	increase	increase
  Forward currency rates	3	-	-
  Futures currency rates	3	-	-
  Effective exchange rate	3	-	-
  Deposit repos	3	-	-
  Index shares (DJI, NIKKEY, DAX, FTSE)	3	increase	increase
  State bonds prices (T-bills, T-bonds)	3	increase	increase

  
  
  

  Trade negotiations

  Trade negotiations are the important part of economic policy of any country. In particular, such the important economic indicator as trade balance represents the difference between export and import. In case the sum of exported goods and services exceeds the price of imported ones Trade Balance is positive (surplus), in case import surpasses export it is negative (deficit). The trade deficit is the main problem for the USA within the last years. It is one of the reasons of the dollar fall against the major European currencies. Results of trade negotiations have an immediate impact on the market.

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  Central Banks Meetings

  The main duty of the central banks is regulation of the internal economic situation in the country and regulation of internal and external currency value. Thus, any meetings of the central bank, or rather operating committee, draw forex participants’ attention. The interest rates regulating is one of the main means of economic growth stimulation or deceleration and foreign funds attraction. Treasury bonds and as a result currency value become more attractive due to the interest rates regulating.

  Monetary policy changes

  Such the measures are rarely taken for the currency value regulating. The central banks and government more often prefer to take other measures of influence on the market. However one of the examples may be a recent set of measures made by Japanese government to decrease the yen value in the world market (it is also called an extra budget). The main task of the extra budget was decreasing investment into the Japanese economy, encouragement of Japanese funds outflow abroad, tightening of rules for foreign clients who have accounts in Japanese banks, etc.

  On the back of this set of measures expectations the yen fell by 400 points within 2-3 days. Once the expectations were not met the yen growth exceeded its initial fall.

  Meeting of G7, Trade and Economic Unions

  One of G7’s duties is to regulate the world economy, in particular, the specific situation in the world currency market. There is a special agreement between G7 members called SWAP. The decision about collective intervention in the world currency market through several central banks or other measures for currency growth clamp or boost may be resulted from G7 meeting. Lately such the agreement may be made not by the G7 members only. Quite often agreement about collective policy between Japan, USA and Germany is made.

  Meeting of the trading unions that regulate trading relations between countries or determine the policy of this or that region may also influence on the particular currency. Appeal of the USA and Japan to WTO (World Trade Organization) left the yen unmoved for about the whole week after the ineffective finish of a regular tour of the trade negotiations. The International Monetary Union meetings estimate the condition of the world economy development, distribute loans, but don't have direct impact on currencies.