Lesson 11 – Fundamental Analysis

Written on 10 November 2008 by Staff

Fundamental analysis in Forex is almost the same as fundamental analysis in any other  futures market. It involves studying of the  economic situation of countries to trade currencies more effectively.

Fundamental Analysis also gives information on how economical and political events influence the currency market. Figures and statements given in speeches by politicians and economists are known among the traders as economical announcements that have great impact on currency market moves.

The most important announces to listen to, and keep and eye over, are the ones related to the United States economy and politics due to the fact that the US Dollar is still the currency that moves the world.

Important Speeches that Should be Tracked

There are hundreds of economical reports that come out each month, so it can become very confusing after a while.  Here is a list of suggested speeches to focus your attention on when trading Forex.

- Chairman of the Federal Reserve Bank of USA
- Secretary of the Treasury
- President of the Federal Reserve Bank of San Francisco.

Important Economical Reports to Look After

These are the most price moving currency reports according to a report in 2006:

Interest Rates

These can have either a strengthening or weakening effect on a particular currency. On the one hand, high interest rates attract foreign investment

which will strengthen the local currency. On the other hand, stock market investors often react to interest rate increases by selling off their

holdings in the belief that higher borrowing costs will adversely affect many companies. Stock investors may sell off their holdings causing a downturn in the stock market and the national economy.

Employment Situation

Employment basically represents the health of an economy. More workers mean more spending which helps businesses see higher revenue. Fewer workers mean less spending which eventually hurts businesses. Far fewer workers can bring recession to the economy. Employment data either tells investors to remove their capitals out to more favorable countries, or lure them to pour more capital into US economy.

Trade Balance

The trade balance reflects the difference between a nation’s exports and imports of goods. A positive trade balance, or a surplus, occurs when a country’s exports exceed imports. A negative trade balance, or a deficit, occurs when more goods are imported than exported.

A country that has a significant Trade Balance deficit will generally have a weak currency as there will be continuous commercial sellings of its currency.

Gross Domestic Product (GDP)

It represents the total value of the country’s production during the period and consists of the purchases of domestically produced goods and services

by individuals, businesses, foreigners and government entities.

Retail sales

It is the first real indicator of the strength of consumer expenditure.

Durable Goods

Rising Durable Goods Orders are normally associated with stronger economic activity and can therefore lead to higher short-term interest rates, which is usually supportive for a currency.

Consumer Price Index (CPI)

CPI is a measure of change in the cost of the consumer basket of goods and services.

CPI is the main inflationary indicator. It measures retail price changes in consumer goods and services, included into the fixed consumer basket, such as food, clothes, educational and health care services, expenditures, expenditures on transport, utility bills, rest etc. The set of goods and services, included into the consumer basket, reflects typical set of goods commonly purchased by the population of a country.

How do Traders Use These Reports?

Here are some useful tips that can be followed to trade fundamental reports:

1. Keep an economic calendar on hand. Watch for the events when data are due to be released.

Also, keep an eye on the future: often markets will move in anticipation of a certain indicator or report due to be released at a later time.

2. Know what indicator is gaining the most of attention at any given time as it becomes a catalyst for future price moves. For example, when the U.S. dollar is weak traders will watch closely the inflation indicator.

Know the market expectations for the data, and then pay attention to whether or not the expectations are met. That is far more important than the data itself. Occasionally, there is a drastic difference between the expectations and actual results and, if there is, be aware of the possible justifications for this difference.

3. When the difference between the expectations and real results occur, watch for corrections in the market price moves.

4. Pay attention to news revisions if any, the situation on the market can change quickly.

5. Don’t react too quickly to the news. Oftentimes, numbers are released and then revised, and things can change quickly. Pay attention to these revisions, as they may be a useful tool for seeing the trends and reacting more accurately to future reports.

One difficulty with fundamental analysis is accurately measuring the relationships among the variables. Necessarily, the analyst must make estimates based on experience. In addition, the forex markets tend to anticipate events and discount them in the currency value in advance.

Finally, serving as both a disadvantage and even as an advantage (depending upon the timing), the markets often take time to recognise that exchange rates are out of line with value.

–> Click Here for Lesson # 12