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- https://www.ifcmarkets.com/en/fundamental-analysis Fundamental Analysis
Fundamental Analysis in Forex Trading
Applied to the currency market, fundamental analysis studies international economic, financial and political factors, their correlation and influence on the behavior of exchange rates. By this way, it sees what is absent in graphics. Technical and fundamental analysis is the market statistics. The main difference between fundamental analysis of Forex and technical analysis is that the fundamental analysis is based on positions; prices of the currencies in Forex market reflect the supply and demand, which in their turn depend on fundamental economic factors.
The changes in the economy of trading countries, political elections, regulatory actions of financial authorities, natural disasters influence the currency rate. And if one of these events is impossible to predict, the others are quite possible to plan. The date and time of the release of one or another indicator are known in advance. There are so called calendars of economic indicators and the most important events (indicating concrete dates, or approximate time of their release). Accordingly, if we want to create rational and contemporary prognosis, it is possible to predict the future of exchange rate shifts and to derive profit from it.
Don’t analyze going through too much details. Together with great amount of fundamental factors there exist the dangers of overloading yourself with too much information. Even the experienced traders fall into this trap and cannot take decisions about the price shift. The best approach for fundamentalists is considered to be dealing with some of the most influential indicators than to use an overall list of all fundamental factors.
Among the main macroeconomic indicators that influence the shift of the currency rate the following significant indicators can be distinguished:
None of the economic and financial indicators track dynamics of the currency market so significantly, as interest rates.
First of all it is important to know that interest rate is considered to be means of influence of Central Bank on national currency and is considered to be one of the chains of state’s monetary policy. Short term interest rates determine the size of percentage by credits, issued by the Central bank for commercial banks. In case of observing a wave of inflation, the Central Bank, depending on set goals, will try to influence the national currency. It is done through regulating interest rates. If a decision is made to take counter inflation means, the Central Bank will increase the level of interest rates.
Thereby, the amount of monetary means, being in free circulation, will be shortened, which will bring to containment of the inflation level. If a decision of infusion of money in circulation is made, then accordingly the straps of interest rates will decrease. The higher is the interest rate of the given currency in comparison with the other currencies / large percentage differential/ the more there will be volunteers among foreign investors who will buy that currency in order to place funds on deposit with high interest rate. In short, high interest rates make the given currency attractive as an investment instrument, which means that demand on that currency increases in international exchange market and exchange rate of that currency grows.
Gross Domestic Product is the cost of all goods and services produced by that country for an estimated period of time (month, year). GDP data is updated per quarter. It is one of the most important indicators, according to which it becomes possible to judge the economic situation of that country. Mostly, GDP influences the exchange rate when the published and expected results do not coincide. GDP growth speaks about the country’s stable economy and is accompanied by the growth of national exchange rate.
Nonfarm payrolls (NFP)
The quantity of new workplaces created in non-agricultural industries in a month.
The indicator is being estimated by Labor Statistics Office and reflects employment dynamics in the US per month.
Payroll is a pay sheet based on which employees are given wages. The indicator includes approximately 500 industries (production, construction, trading, services, real estate, finances, insurance), with the sample of 400000 firms. This is so called establishment employment. For estimating the indicator a survey of 50000 households is carried out. The growth of this indicator characterizes the increase in employment and in dollar exchange rate. It is called an indicator ‘driving the market’. There is an empiric rule, that the increase in its value for 200 000 per month equals the increase of GDP per 3.0%. It is being published, as a rule, on the first Friday of each month at 80:30 EST (New York).
Consumer Prices Index
The Consumer Prices Index reflects shift of price level of a group of goods and services for the reporting period (a month, 3 months, a year). It is created for analysis and comparison of the value of consumer basket of goods and services of the current month in comparison to the value of the consumer price a month or a year before. In the basket of indices goods form approximately 44% and services- 56%. It is considered to be an early indicator of consumer inflation. It is considered to be the best indicator of cost of living. The rise of this index, as a rule, warns about the rise of interest rate in the country, which brings with it growth of national currency interest rate. The indicator is considered to be one of the most volatile economic indicators in the Forex market, at the moment of its publication the responsive currency exchange rate can reach up to 50-100 pips in a minute.
Production Price Index
The Production Price Index reflects the changes of value of consumer basket, consisting exclusively from industrial products. PPI index calculation includes all phases of production; raw materials, intermediate stage, ready product as well as all the sectors; industry, mining, agriculture. When calculating the index, the prices of imported goods and services are not being calculated: however, they influence it through the prices of imported raw materials and components. The dynamics of industrial prices usually is ahead of the CPI index and because of that it is used by many analytics as an indicator of estimating inflation level for the future.
Employment Cost Index
The Employment Cost Index shows the changes of earned salary and unemployment aid. It is an important indicator of possible inflation in economy. The index is fixedly tracked by the Fed and the ECB when deciding over their future monetary-credit policy. The index has a weak influence on the Forex market. If rise of interest rates is expected, the growth of index value causes the rise of exchange rate. As a rule, the sphere of applying ECI is considered to be prediction, which has two types in particular; medium and long lasting.
Durable Goods Orders
The Durable Goods Orders is an indicator showing the report on goods orders for long term use, terms of usage of which is more than 3 years –furniture, cars etc. According to industries, the orders are divided into 4 basic categories - primary metals, machinery, electrical equipment and transport. DGO is considered to be a leading indicator as many entrepreneurs plan production based on the orders they have, the fall of DGO occurs prior to the fall of production and vice versa. As durable goods are quite expensive, the increase of orders on them will show consumer’s readiness to spend their means on them. This way, the growth of this indicator is a positive factor for the development of the economy and will lead to the growth of national currency exchange rate. The fall leads to the opposite results. The Report about the level of the index of Durable Goods Orders is being published by Statistical Bureau of the USA. The publication takes place in the beginning of the 4th week each month. Time; New York 8:30.
The indicator shows the change of the quantity of jobless claims for a week. On the basis of the change of the average during 4 weeks it becomes possible to conclude about the unemployment in the country. Stable decrease of jobless claims quantity states about the improvement in the labor market, the growth of economy and stimulates dollar growth. Inverse relationship exists between the indicators of Jobless Claims and Nonfarm payrolls. In case when jobless claims increase it is quite possible to predict decrease of Nonfarm payrolls Index. The publication of the index takes place each Thursday at 08:30 EST (New York).
Balance of Payments
Balance of Payments is a record showing the flow of financial means in the form of payments coming from abroad and going abroad. If the sum of payment received by the country exceeds the payments paid to other countries and international financial structures, the balance of payments is considered to be active (Positive surplus), if the opposite –passive (negative surplus). The maintenance of the balance of payments is one of the goals of the state macroeconomic policy. A favorable factor for the rise of exchange rate is considered to be the positive surplus and the decline- the negative surplus.
Productivity is an Index showing the amount change of output per employee in a given period of time. It is considered to be an important indicator for evaluating the economic situation of a country. For example, during strikes or other disasters the number of employed in industry decreases, as a result of which the productivity of each employee increases, which is quite a positive fact. The increase of index value is considered to be a positive factor for the development of economy and will lead to the growth of dollar.
Industrial Production Index
The Industrial Production Index shows the business standing in industry- the amount of production in the manufacturing and mining industries as well as in the sector of utilities not including construction. It is considered to be one of the most important indicators reflecting the state of national economy. The rise of the index leads to the rise of the exchange rate.
Trade Balance is the relationship between the sum of all exported and imported goods. If the sum of the costs of exported goods exceeds the sum of imported goods, the trade balance is considered to be active (positive surplus), if import exceeds the export it is considered to be passive (negative surplus). Positive surplus speaks about the economic growth of the state and the increase of the national currency rate.
It shows the relationships between the quantity of unemployed people in percentage and working-age population. It is considered to be one of the most important macroeconomic indexes of ‘’ the market engine’’. Because employment indicators are difficult to predict, the declared value often doesn’t correspond to the expected ones and requires an immediate correction. The rise of unemployment, as a rule, is accompanied by the fall of national currency exchange rate. As a rule, they are being published each month with the index of “Nonfarm payrolls”.
The index reflects the shift of prices on the import for a month and is considered to be an indicator of inflation. As in calculation the prices of imported goods and services are being taken into consideration, the given index characterizes contribution of import prices to the common image of shifting the retail prices in the ‘’basket’’ of goods and services. The rise of the value of the index in the conditions of awaiting the rise of basic interest rates leads to the rise of the dollar exchange rate.
The given index shows the monthly dynamics of export prices and represents the index of inflation. While waiting for the rise of key interest rates the rise of the index value leads to the rise of the exchange rate of the dollar. It is being published each month with the value of Import Prices.
Retail Sales shows shift of the amount of the sales volume in the sphere of retail sales. One of the most important indicators showing the state of economy of the USA as the consumer demand is not considered to be the most important driving force. The indicator is divided into 2 main groups; ‘car sale’ and ‘the sale of everything’.
The indicator shows the quantity of permits for the construction of new houses on corrected seasonality. It is very sensitive towards the changes of key interest rates, as for the construction it is necessary to take bank loans. The statistics of construction is considered to be flagship for the housing market and is connected directly with the income of population. The rise of the construction amount characterizes improvement of welfare and economic development. The rise of its value has a positive influence on the national currency exchange rate.