Chapter 5 - Introduction to fundamental analysis

Lesson 5.8
Fundamental Analysis Tools
15 min to read
By Point Trader Group

The most useful tools for fundamental analysis are the economic calendar, financial news media and historical background data. The circulating economic calendar shall be notified of the time and date specified for the issuance of major and secondary economic data that could have an impact on the country's currency.

Historical background data can be useful to determine trends in the underlying indicators, as well as to analyze how a currency responds to a particular economic issue after examining its behavior following a previous release or interest rate decision from the central bank, for example.

Basic Analysis Indicators - The Main Economic Indicators

Some of the main indicators of fundamental analysis that traders use in the foreign exchange market "Forex" to determine the strength of the currency economy and the prediction of potential currency rates; Trade balance, retail sales, employment data, inflation, consumer price index.

Let's take a look at some of the main key economic indicators that traders use in the Forex market:

  • Employment reports - including unemployment.
  • Trade balance
  • Current Account
  • Gross domestic product (GDP)
  • Consumer price index (CPI)
  • Producer Price Index (PPI)
  • Purchasing Managers' Index (PMI)
  • Goods prices
  • National credit quality

Central Bank Monetary Policies

Central banks are likely to be one of the most volatile sources for basic trading. The list of actions they can take is extensive; They can raise or lower interest rates (even in the negative region), keep them as they are, indicate that their position will soon change, introduce unconventional policies, or interfere directly in the market for themselves or others, or even revalue their currency. Central banks central analysis is often a process of checking data and speeches given by central bankers, as well as trying to think like them in predicting their next move.

Every major economy has a central bank that manages its currency, standard interest rates and money supply. The activities of the Central Bank and the speeches of central bank officials are closely monitored by major traders in search of clues about future monetary policy shifts.

  • Interest rate decisions: The amount of interest charged by the central bank is extremely important to assess the country currency. If the central bank of a country sets a high interest rate, with the exception of other factors, for example political instability, the country currency tends to attract foreign assets from countries with a lower interest rate.
  • Central Bank price data: A statement from most of the central banks is issued after issuing the revised price to clarify the monetary policy committee’s vote and the reasons why the price was adjusted or the price was fixed without modification. The statement could affect the market if policymakers vote is unexpected or if the central bank has more hawkish or pessimistic behaviour towards future interest rate decisions.
  • Speeches by policy makers and officials of the Central Bank: The content of a speech given by a president, governor or other official in a major central bank can sometimes provide clues to the bank's future monetary policy, which often affects the currency of that country. Among the main policy makers are the voting members of the Central Bank's Monetary Policy Committee, and while their sermons may not carry the weight of the speech of the central bank governor , they may have an influence on the country currency depending on the content of the speech.
  • Asset purchases and quantitative easing (QE): The amount of money the central bank uses to purchase debt securities and other assets to support the weak economy. An increase or decrease in the amount of stimulus packages can have a major impact on a country currency because changes in asset purchases can indicate a change in the interest rate and money supply.

Geopolitical Events

Geopolitical tensions: Whether you like it or not, some countries around the world are not very well converging with each other or with the global community and sometimes conflicts or wars are imminent. These tensions or conflicts can have a negative impact on tradable goods by changing the supply or even the demand for certain products. For example, a growing conflict in the Middle East could put pressure on the oil supply, leading to an increase in prices. On the contrary, relative calm in this part of the world can lower the price of oil as supply is not threatened. Being able to correctly predict how these events will conclude may be a way to move the market forward through your fundamental view.

Wars: The outbreak of war or the cease-fire greatly affects the assessment of currencies issued by states in the event of war, and sometimes, depending on the participating countries, but this has a significant impact on the foreign exchange market "Forex" in general. Wars can also greatly affect the prices of commodities and other assets produced in the countries concerned, affecting the currencies of other countries that produce similar assets.

  • Elections: Changing leaders or political parties can greatly affect the value of a country currency. If the next government prefers capital incentives and lower interest rates, the value of the currency may be negatively affected. Other types of common sounds can also greatly influence a currency rating. For example, a referendum on a country’s exit from the Eurozone could significantly affect the value of the Euro.
  • Power Shifts : Any country that has experienced a change in power such as a coup or a forced regime change may face a full revaluation or devaluation.
  • Natural disasters: When a country experiences a major natural disaster, the currency of that country is usually valued on the short term because of the need to return funds for disaster relief. However, on the long run, a currency may be negatively affected if a natural disaster has a significant negative impact on that country's economy.

Market Sentiment

The trick of trading on the primary side of economic releases is to decide when to commit. Do you trade before or after the release of economic data? Each of them has both advantages and disadvantages. If you trade before the release of the data, you can try to take advantage of the flow of the majority expectations, but other economic events in all countries of the world can affect the financial markets more than the expectations of most of the traders. 

  • Risk Aversion\ Willingness:  Officially called a trip to quality until quality becomes a misnomer, risk appetite and aversion are among the latest market terms used to refer to investor preferences for currencies with higher returns and higher risk versus safe haven currencies. For example, in a risky market environment, economic and political stability is preferred, and therefore the Japanese Yen and US Dollar are generally able to trade in major European currencies and commodity currencies such as the Australian, New Zealand, and Canadian Dollars. If risk appetite is high, higher-yielding currencies and high-risk secondary currencies are usually higher.
  • Financial Surveys:  In addition to risk appetite and aversion affecting the entire market, each country issues a market sentiment index in the form of opinion polls and indicators, generally on a monthly basis. Among these surveys is the PMI Confidence.
  • Morale indicators: Examples of common sentiment indicators include the use of Trader Commitment or the COT Report, which illustrates the future status of different types of market participants.

Seasonal Factors

Weather-related seasonality is as rational as the example of natural gas referred to above, but there are other seasonal factors that are not weather- related either. For example, at the end of the calendar year, many investors will sell shares that have decreased throughout the year in order to claim capital losses on their taxes. Sometimes, it may be beneficial to exit positions before the beginning of sales at the end of the year. On the other side of this equation, investors usually return to stocks in large numbers in January, a phenomenon called the "January effect". The end of the month can be somewhat active, as are companies that sell products in multiple countries looking to compensate for their currency hedges, a practice called "month-end rebalancing".

Trading The News

Some major traders use economic news and data releases to start and filter short-term deals based on the release results. Although it may seem easy to trade on basic news, the market will not react as often as you would expect, or in many cases, it will move in a completely opposite direction to what traders intuitively expect.

Most professional traders try to avoid acquiring a large position immediately before the release of important economic data, simply because volatility immediately after the release of important economic data may lead to the suspension of positions on both sides of the market. Despite the volatility, having a position in the number can allow the trader to benefit from the volatility. The trader can offload his position with a profit and possibly reverse the position to take advantage of the "occasional fluctuation" effect that generally occurs after important releases.

Fundamental analysis in trading gives the Forex trader a deeper understanding of how the market interacts with a variety of events. However, having good knowledge of the technical analysis alongside fundamental analysis can give the trader a huge advantage over a trader who uses only one method.

Basic trading that involves taking short-term trades can also make sense with a trading plan that allows for wide volatility in the market. Some traders may purchase option groups such as nesting or throttling ones with both calls and place them to take advantage of the short volatility that often appears after the release of the economic statement.

Long-term Forex position traders evaluate the country’s economic releases over a longer period of time. This helps give the Forex trader a more accurate assessment of the country's economic health, social and political environment, and monetary policy in order to establish a long-term position in the market.

Therefore, regardless of whether you are a short term or long term trader, applying sound fundamental analysis can provide you good guidance in the overall business decision making process.


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