Understanding Fundamental Analysis
Thursday, May 30, 2013
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Most traders approach forex trading in one of two ways, either technical analysis, or fundamental analysis. The best traders are able to do both to varying degrees, in reality almost all famous traders you will read and hear of employ both.
Fundamental Analysis is can be best described as a in depth method of evaluation where analysts dig deep to determine what the real “worth” of a currency is. They do this by looking at several key indicators that are released as news announcements, all traders have the ability to see the complete data and see the latest changes at the same time. Making the fx trading world one of the fairest and most open markets for all traders. Below are some of the major data releases that keen fundamental traders remain aware of at all times.
Interest Rates :
When the central bank of a country raises interest rates this not only affects the short term rate that they target, but the interest rates for all types of debt instruments. If the central bank of a country raises interest rates then debt instruments of all types are going to become more attractive to investors. This not only means that foreign investors are more likely to invest in the debt of that country, but also that domestic investors are less likely to look outside the country for higher yield, creating more demand for the debt of that country and driving the value of the currency up.
It is important to understand that investors are exposed to, not only the potential profit or loss from interest rate changes on the debt instrument they are investing in, but also the profits and losses which result from fluctuations in the value of that country’s currency.
Gross Domestic Product (GDP) :
Gross Domestic Product (GDP) measures the total value of a country’s output (total of all economic activity). The Gross National Product (GNP) is the same as the GDP but includes a country’s net earnings from abroad. Simply put, the GNP is a measure of monies generated by residents of the country in question, but is not limited to the domestic output, as some is generated abroad.
A currency value will INCREASE with an INCREASE in GDP / GNP
A currency value will DECREASE with a DECREASE in GDP / GNP
Note: GDP and GNP levels are easily predicted ahead of their release due to the components that make up the figure. Therefore, any large variation from the expected figure will usually move the market, sometimes substantially.
Retail Sales :
This figure represents the amount of merchandise sold within the retail sector. It is constructed from taking a sample of companies engaged in selling end products to consumers. The higher a retail sales output, the higher the spending is within an economy. This should increase corporate profitability as well as job stability and lead to a overall positive market sentiment.
A currency value will INCREASE with an INCREASE in Retail Sales
A currency value will DECREASE with a DECREASE in Retails Sales
There are many other minor economic news releases. These are the 5 major’s that can directly move the markets. Every country publishes figures at a set time of the month and every trader should always be aware of upcoming news announcements, particularly the ones listed above.
Unemployment :
higher the unemployment figure the less disposable income and lower spending in the economy, making an additional drain on the resources of government.
To help unemployment figures the government can use interest rates to try and stimulate spending through lowering the cost of borrowing.
A currency value will INCREASE with a DECREASE in unemployment
A currency value will DECREASE with an INCREASE in unemployment
A similar indicator to the Unemployment is the Average Earnings figure. It provides an insight into disposable income in the economy. A high average earnings number suggests that there is greater buying power, affecting the markets in the same manner as the overall unemployment figure.
There is a positive correlation between earnings and inflation, with greater buying power leading to greater demand from consumers which fuels increases in retail prices.
Ayman Khlifat on Twitter :
Follow @aymankkhlifat
Most traders approach forex trading in one of two ways, either technical analysis, or fundamental analysis. The best traders are able to do both to varying degrees, in reality almost all famous traders you will read and hear of employ both.
Fundamental Analysis is can be best described as a in depth method of evaluation where analysts dig deep to determine what the real “worth” of a currency is. They do this by looking at several key indicators that are released as news announcements, all traders have the ability to see the complete data and see the latest changes at the same time. Making the fx trading world one of the fairest and most open markets for all traders. Below are some of the major data releases that keen fundamental traders remain aware of at all times.
Interest Rates :
When the central bank of a country raises interest rates this not only affects the short term rate that they target, but the interest rates for all types of debt instruments. If the central bank of a country raises interest rates then debt instruments of all types are going to become more attractive to investors. This not only means that foreign investors are more likely to invest in the debt of that country, but also that domestic investors are less likely to look outside the country for higher yield, creating more demand for the debt of that country and driving the value of the currency up.
It is important to understand that investors are exposed to, not only the potential profit or loss from interest rate changes on the debt instrument they are investing in, but also the profits and losses which result from fluctuations in the value of that country’s currency.
Gross Domestic Product (GDP) :
Gross Domestic Product (GDP) measures the total value of a country’s output (total of all economic activity). The Gross National Product (GNP) is the same as the GDP but includes a country’s net earnings from abroad. Simply put, the GNP is a measure of monies generated by residents of the country in question, but is not limited to the domestic output, as some is generated abroad.
A currency value will INCREASE with an INCREASE in GDP / GNP
A currency value will DECREASE with a DECREASE in GDP / GNP
Note: GDP and GNP levels are easily predicted ahead of their release due to the components that make up the figure. Therefore, any large variation from the expected figure will usually move the market, sometimes substantially.
Retail Sales :
This figure represents the amount of merchandise sold within the retail sector. It is constructed from taking a sample of companies engaged in selling end products to consumers. The higher a retail sales output, the higher the spending is within an economy. This should increase corporate profitability as well as job stability and lead to a overall positive market sentiment.
A currency value will INCREASE with an INCREASE in Retail Sales
A currency value will DECREASE with a DECREASE in Retails Sales
There are many other minor economic news releases. These are the 5 major’s that can directly move the markets. Every country publishes figures at a set time of the month and every trader should always be aware of upcoming news announcements, particularly the ones listed above.
Unemployment :
higher the unemployment figure the less disposable income and lower spending in the economy, making an additional drain on the resources of government.
To help unemployment figures the government can use interest rates to try and stimulate spending through lowering the cost of borrowing.
A currency value will INCREASE with a DECREASE in unemployment
A currency value will DECREASE with an INCREASE in unemployment
A similar indicator to the Unemployment is the Average Earnings figure. It provides an insight into disposable income in the economy. A high average earnings number suggests that there is greater buying power, affecting the markets in the same manner as the overall unemployment figure.
There is a positive correlation between earnings and inflation, with greater buying power leading to greater demand from consumers which fuels increases in retail prices.
Ayman Khlifat on Twitter :
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