Forex Fundamental Analysis beginner to expert
Understanding Fundamental Analysis
- Every country has a central bank that manages the monetary policy of that country.
- The function of the central bank is to maintain economic stability
- The central bank does this by monitoring various economic indicators to get an idea how the country is performing
- The central bank then based on the state of the economy implements various changes in monetary policy such as raising interest rates
- Every month there are several fundamental announcements, news reports (economic indicators) release each month, these are also call as risk events.
- Some have a huge impact on the market and cause major movements in prices while others have small effect on the market and will not affect much price movement.
Major Economic Indicators
- Production – Anything that the country makes, through these indicators the bank sees whether the country is being productive or not
- Geopolitical – Non economical things that can cause risk in the market (e.g. change in government, wars etc.
- Employment – How many people are unemployed
- Growth – Is the country growing is there an overall increase in production
- Inflation – How the cost of goods and services are moving
Tools for Economic Stability
- Interest Rates – The main tool of central banks mainly used to control inflation
- Price limit – When the central bank prevents their currency from passing a certain price
- Language – Comments by the central bank that are aim at affecting change in an economy (e.g. hints of raising interest rates)
- Quantitative Easing – Pricing money (this weakens the currency) to boost the supply of money in an economy in hope to spur growth in that economy.
Focus on The News
Focus on the central banks
- Let’s say central bank is focus on inflation. If the central bank is worring that inflation is too high, then we know that they are heading towards and interest rate increase. Hence the currency will increase in value.
- Central banks will focus on a maximum of two things at once and we know what they are focusing on and we can then figure out what tools they will use and how it will affect the markets
Pay Attention to The News
- Bllomberg.com – Read articles in the currency section, pay attention to articles that gives information on the reasons for a move in currency and the analyst expectation for the possible continuation of that move.
- Fxstreet.com – News calendar, this allows you to see a list of economic data that will be coming out.
- Ransquawk.com – Real time news feed and analysis (premium service)
- Forexfactroy.com – News calendar, this allows you to see a list of economic data that will be coming out.
- Reasons for move – First identify the cause of move using the news sources, is it because of an economic announcement, rising oil prices etc.
- Fundamentals – Identify the overall fundamental picture of that currency, use the news sources to find out what the central bank is focusing on and which way the currency should be going.
- Fair price fair value – What is the fair price of the currency based on the cause of the move and the fundamentals
- Sentiment – The mood of the market, very often the fundamental may point towards the market moves down this is often just a change in sentiment and is temporary
- Sentiment change may be caused by traders taking profits and as a result we see a tempory change in the direction of the market we see a tempory change in the direction of the market but as long as the fundamentals remain unchanged the market will eventually go in the direction of the fundamentals.
Fundamental Correlation PPI
- PPI – CPI – Producer price index and consumer price index are correlate as a result a high PPI will affect market sentiment towards and higher CPI release.
- PPI relates to the cost producers pay to manufacture goods and services while the CPI relates to how much these goods and services cost consumers.
- Data of PPI is usually release before the CPI so we can use the PPI to give us an idea of what to expect for the CPI.
Fundamental Correlation Retail
- Retails Sales – GDP – Retail sales and GDP are correlate so if retail sales for a specific quarter is very good, we can expect a good GDP for that quarter (higher GDP means better economy)
- Retail sales makes up about 70% of the market for most countries and the data is release month on month, so we can get idea of what expect for GDP from early out.
- Unemployment, Jobless claims, unemployment – Retail sales – If people are losing jobs they not have money on a whole
- Housing Data – Durable Goods – This is because more people buying new house will result in more people buying new appliances.
Fundamental Correlation PMI
- PMI – GDP and overall economy – The purchasing managers index this affects the GDP
- ADP -NFP – US ADP employment report has an impact on the expectation of the nonfarm payrolls (NFP). The PMI also affects the expectation of the nonfarm payrolls
- In Forex the anticipation of the news has a greater impact than the actual news for example, if we know the federal bank is planning on raising interest rate this will have a greater impact on the market than the actual raising of the interest rates.
- This because the, market is largely driven by speculation. The actual nes outcome is not as important as the anticipation of the news.
Fundamental Correlation Nonfarm Payrolls
- ISM Manufacturing PMI – Pay attention to the employment component of the ISM manufacturing PMI this will give you an indication of what the NFP will be like
- ADP NFP report – This tells you what the private job sector is like so if this number is good say above 160K then we expect a good NFP
- Unemployment Claims (4 weeks) – Keep track of the unemployment claims each week to have an idea of the unemployment rate.
- Challenger Job cut report – This gives you a little idea of what the unemployment rate will be like
- Personal spending – Good personal spending data also indicates good employment data as more personal spending indicates higher employment hence more consumers in the market spending.
- This is when the economy is doing good and persons are more willing to take risk
- This is when the economy is not doing so well and as a result person are not willing to take as, much risk.
- When there is risk appetite some traders will tend to invest in currencies with higher interest rates e.g. AUD. This because their central bank pays more interest. So you might see very good news for the USD as a result the AUD YSD rises.
The Five Major Us Fundamentals
- Gross Domestic Product (GDP)
- Nonfarm Payrolls (NFP)
- Balance of Trade
- Treasury Int’l Capital Survey (TICS)
- Philadelphia Fed Survey (Philly Fed)
- Each of them gives us insight into the state of the US economy when they are combined, they give us an overall view of the US economy and as a result help us to identify the future direction the US dollar
- Interest rates are the primary driver of the market sentiment. All the economic data that is disclose is using as and indicator to assess the likelihood of the central bank raising or lowering interest rates.
Gross Domestic Product
- GDP refers to the total value of all goods and services produced within a country within a given period. GDP is a measure of production in a country. If GDP is going up production is going up and the country is experiencing economic growth. GDP is a lagging indicator released quarterly.
- Raising GDP is a positive sign for the economy, this is as rising GDP signals growth and as the economy grows there is increased inflation remember the main tool used by central banks to control inflation is raising interest rates.
- Higher interest rates make money more expensive to borrow and thereby reduce spending by those who produce goods and services. Lowering interest rates have the opposite effect.
The nonfarm payrolls present the number of people on the payrolls of all no agriculture businesses. As this umber grows it means jobs are being created hence more persons having jobs. More jobs mean more people spending money which results in economic growth.
Balance of Trade
- A countries balance of Trade is the economic value of all the products that it exports minus the economic value of its imported products. A positive balance of trade is when a country exports more than it imports. A negative balance of trade is when a country exports less than it imports.
- A Negative balance of trade indicates that more money is being taken out of the economy, this means less money is available for investments that increase productivity. Every month the US balance of trade operates at a deficit of approximately -44 billion dollars.
- When the deficit decreases from month to month that is positive for the US as that means less money is leaving the economy.
Treasury International Survey
- Treasury International Survey (TICS) is a measure of foreign investment back into the US economy. This measures the amount of US treasury debt, bonds, bills and notes sold to foreign investors.
- If more foreign investors are buying US debt – more money entering US economy.
- If each month TICS covers the monthly trade deficit we have a balance (positive for the dollar)
Philly Fed Index
- The Philly Fed index is a measure of manufacturing expectations.
- This survey is conducted by the Philadelphia branch of the reserve.
- Top manufacturers surveyed for their expectations and current conditions and this data is used to develop a numerical index.
- A positive or rising value for the index (above 50) is seen as positive for the economy as more manufacturing equals more growth.
- Remember the market is focused on whether the central bank is likely to move interest rates and in which direction.
- If together economic data suggest growth, then it is more likely that the central bank will raise interest rate s to control the inflation caused by growth. As rising inflation will negatively affect growth.
- If data suggest a slowdown in the economy, then we expect the central bank to likely lower rates.
- Focus on how likely the new release will be in affecting the current sentiment towards interest rates.
- Remember the higher the interest rate the more attractive it is to investor who are looking to gain interest on their capital, as a result whenever a country raises interest rates we tend to see an increase demand for that countries currency.
Forex Fundamental Analysis