Every time you hear someone talking about analyzing the Forex market they
usually tout Technical and Fundamental Analysis. They talk about the need to use
both in your analysis and then do very little to tell you how to do this. And
while most traders are familiar with Technical Analysis it is hard to pin down
exactly what Fundamental Analysis consists of, particularly for the forex
market. Most traders are left with questions like"I don't get it" Is there a
PE ratio of Japan?? Well, sort of. Fundamental Analysis differs for the Forex
market just a bit but the same basic principles apply.
Fundamental analysis for the Forex market examines the macroeconomic
indicators, asset markets and political considerations of one nation's currency
as opposed to another. Macroeconomic indicators include things such as growth
rates (Gross Domestic Product), interest rates, inflation, unemployment, money
supply, foreign exchange reserves and productivity. Other macroeconomic
indicators include the CPI " a measurement of the cost of living, and the PPI "
a measurement of the cost of producing goods. Asset markets are made up of
stocks, bonds and real estate. Political considerations influence the level of
confidence in a nation's government, the climate of stability and level of
certainty.
There is a basic rule of thumb that says a currency can become more valuable
in two main ways: when the amount of currency available in the world market
place is reduced (for example, when the US Fed increases the interest rates
and causes a reduction in spending), or when there is an increase in the demand
for that particular currency. But there are also many little influences that
can nudge the currencies value enough for the retail forex trader to make (or
lose) a substantial amount.
Let's take a moment to examine some of the Fundamental information that has
the potential to move the forex market.
Getting a birds-eye view
If you want a solid view of the economy driving the currency pair you are
trading it is helpful to get a good overview of the currency you are looking to
trade. One way to perform a more complete fundamental breakdown of a currency
pair it is useful to compile the following information:
By filling out this form will help you to examine the health of your chosen
currency pairs.
Checking out the Macros
An interesting number watch when you are checking out the macroeconomics of a
country is the interest rate. Be careful not to jump to any premature decisions
however, interest rates work like a split-personality and can have both a
strengthening and a weakening effect on your currency. On the negative side,
investors will often sell off their holdings as interest rates increase because
they believe that higher borrowing costs will adversely affect stock rates.
This can cause a downturn in the stock market as well as in the national
economy. However, high interest rates tend to attract foreign investments which
strengthen the local currency.
Another thing to keep your eye on is the International Trade Balance. A
trade balance which shows a deficit (more imports than exports) is usually a bad
sign. Deficits mean that money is flowing out of the country to purchase
foreign made goods and this can have a devaluing effect on the currency. It is
important to remember that the market will generally dictate whether a trade
deficit is bad news or not. If the country routinely operates with a deficit it
has probably already been factored into the currency price. Trade deficits will
generally only affect a currency when they are reported higher than the market
consensus.
Marilyn McDonald is the author of "Forex Simplified" and works for
online broker Interbank FX. She can be
reached at marilyn@interbankfx.com.
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