FUNDAMENTAL ANALYSIS

Fundamental research refers to circumstances that show the outlook of one economy relative to the world economy. Fundamental research take into account many events or news that occurs in multiple areas. Accordingly, trading by fundamental research is also known as trading the news. Different fundamental circumstances have different impacts on foreign exchange. Once in a while the outcome is quick and once in a while is slow. Fundamental research can be classified into 3 classifications: economic circumstances, financial circumstances, and political circumstances.

Economic Factors

Economic fundamental provides the most significant information to traders. The impact of economic data tends to be lasting oriented. Nevertheless, not all economic data is significant for the Forex market.

Economic indicators are reports published at a fixed time intervals by government and private organizations. Economic indicators illustrate the detail of a country's economic performance whether it has improved or reduced. This economic statistics are analyzed to predict the movement of the Forex trading market. An economic indicator that shows a strong country's economy circumstance will enhance the currency exchange rate to rise. Every economic indicator does not have the similar impact on the market every time.

The date and time of release of economic data is highly important to adjust a far off exchange position. Information on upcoming economic indicators can be found in newspapers and business magazines. Besides, critical announcement or circumstances can additionally be observed at economic time table as shown in table 1. Economic calendar mainly contains information of the date, time, type of events and the forecast impacts on the market.

Here are some lists of economic report that have most significant impacts on the market:

Gross Domestic Product (GDP)
Gross National Product (GNP)
Industrial Production
Inflation reports
Merchandise Trade Balance
Employment Rate
Retail Sales
Table 1: Sample of the economic calendar


Gross Domestic Product (GDP)

The Gross Domestic Product (GDP) is considered as a macroeconomic indicator. The GDP measures the sum of all goods and services produced either by domestic or foreign companies. Overall, the GDP is the market value of all goods and services produced within a country in a period of time. For GDP, it does not distinguish between country citizen and foreigners. The income is counted toward GDP as long as it is earned within the country's border.

This indicator consists, at macro scale, of the sum of consumption spending, investment spending, government spending, and net trade (exports - imports). Consumption spending is made doable by personal income and flexible income. Purchasers have the choice to save or spend. Investment spending consists of fixed investment and inventories. Government spending is highly influential and has specific role in country employment and economy. Net trade is a major component in the GDP due to worldwide internationalization.

Gross National Product (GNP)

Similar with GDP, the Gross National Product (GNP) is additionally a macroeconomic indicator. The GNP measures the economic performance of the economy and is released on quarterly basis. The GNP is the total income earned by a nation's resident and it measures all the goods and services produced by nation's resident in the course of the world.

Although the nation's products are produced in foreign country plants, it is counted toward that nation's GNP. The GNP does not include the investments from foreigner. Thus, the formula for calculating GNP differs from GDP in the way of including income earned by citizen outside the country and apart from income earned by foreigner within the country.

Industrial Production

Industrial production measures the production convert, industrial aptitude and resources of a country's factories, utilities and mines. It is an important report which recollects the strength of economy and the strength of a specific currency. It is released on a monthly basis.

This report additionally shows their capacity utilization. Capacity utilization is the degree of aptitude of factories that is being used. It is useful for a nation to observe the increase of production whether it reached maximum or near maximum capacity utilization. High capacity utilization rates lead inflation, and the central bank is expected to raise the interest rates to avoid inflation.

Inflation reports

Inflation measures the rate of prices rise in an economy. Inflation has direct relation to the purchasing power of a country within its borders and the country's standing on the international markets. Therefore, gauging inflation is a critical macroeconomic task. The tool of fighting inflation is raising the interest rates and the higher interest rates tend to support the local currency. The examples of economic data that measures inflation are, Producer Price Index (PPI), customer Price Index (CPI), Commodity research Bureau's Index (CRB Index), and so on.

The PPI has been compiled since the developing of twentieth century. The PPI gauges the average price level for capital-rent and materials required for producers to manufacture their goods. The PPI data is compiled from many sector of economy, such as manufacturing, mining and agriculture. The PPI measures the prices at producer level while the CPI measures the prices from customer point of view. The sample used to estimate the index contains about 3400 commodities and the weight of each commodity used for calculation is different. This index is released on monthly basis.

The CPI gauges the average price level of goods and services that are purchased by purchasers. Changes in CPI correspond to inflation pressure in the economy. Unlike PPI, the CPI data is compiled from a sample of prices for foods, clothing, shelter, fuel, transportation and medical services that people purchase daily. This index is released on a monthly basis.

The CRB index is produced with the objective of watching for inflationary trends easier. The CRB index consists of the futures prices of 21 commodities. Some examples are gold, silver, lumber, copper, cotton, oil, wheat and so forth. The rising of vital commodity prices such as oil will start off up out inflation. When the oil price increases, many other items will increase in price for the factor that the production process consumes oil. Purchasers and companies have to spend more compare with previous time to buy the same amount of goods. Thus, the quick rise in oil price initiates inflation and inflation wear down the purchasing power of the particular currency.

The correlation of the crude oil price and the USD/CAD exchange rate is inversely proportional relation as shown in figure 1. Since U.S. is a very industrialized country, the demand of crude oil is relatively high. Furthermore, Canada supplies most of the crude oil to U.S. compare to other oil-production countries in the Middle-East due to the shorter distance between the two countries and thus the cost is relatively lower. When the crude oil price increases, it brings large inflation pressure to U.S. and wears down its purchasing power. High oil prices tend to cut into the US's capacity to prevail productive. Besides, Canada gained benefits from exporting the overpriced crude oil. Therefore, the exchange rate of USD/CAD falls as the Canadian dollar appreciates its value or the US dollar depreciates its value in the reason when the crude oil price rises rapidly.

Merchandise Trade Balance

The merchandise trade balance is one of the most important economic indicators and its value may trigger long-standing changes in the monetary and foreign policies. The trade balance is based on the internet difference of the imports and exports of an economy. Items that are traded may include food, raw material, industrial supplies, purchaser goods and other merchandise.

The merchandise trade balance is interrelated to the changes in foreign exchange market. For example, the US dollar was relatively high against other currencies. Then, the US exporters were in disadvantage. Their high price products lost competitive in the international market. In order to rebalance the economic disequilibrium, the US dollar was devalued in short term period.

Employment Rate

The employment growth is measured by employment indicator. The employment indicator reflects the health of an economy. The job opportunities and unemployment are highly important aspects to evaluate an economy circumstance.

Generally, the most used employment figure is the monthly unemployment rate and it is released as a percentage. The report consists of two separate surveys: business firms and household. The business firms' survey consists of the payroll, workweek, hourly earnings and total hours of government jobs, manufacturing, services, retail and others. The households survey illustrate the unemployment rate, overall labor force and the number of people employed. Lower in unemployment rate show acceptable economy circumstance while increase in unemployment shows that the economy is poor.

Retail Sales

Retail sales are a significant customer spending indicator for Forex traders. It shows the strength of customer demand and confidence. If the customer has enough flexible income, then more merchandise will be produce or imported.

This indicator is released on a monthly basis and is related to the seasonal aspect. Holiday season and back to school month are important period for Forex traders to watch the retail sales report. Retail sales are monitored to gauge the overall strength of economy and currency.

Financial Factors

Currency exchange rates are immensely influenced by financial circumstances, principally the interest rates. Financial circumstances are vital to fundamental research. Changes in government's monetary or fiscal policies are bound to generate changes in the economy, and will be reflected in the exchange rates. Financial circumstances should only be triggered by economic circumstances. Financial circumstances may have priority by means of economic circumstances when governments focus on different aspect of the economy. Financial circumstances affecting currency exchange rates are money supply and interest rates.

Money supply

Changes in the money supply by means of time should lead to a predictable convert in nominal economic output. Growth acceleration or growth retardation affects the real economy activity in short term. The money supply data is released on a weekly basis. The money supply data is useful in revealing the cyclical phase of economy recovery. A larger money supply will recollect a strengthening economy.

Somehow, the money supply had lost some of its impacts since 1980s due to distortions created by newer types of bank deposits. By 1993, the Federal Reserve Bank observed the money supply no longer useful for gauging the economy, thanks to the statistical distortions.

Interest rates

Interest rate is an important role in the foreign exchange market for the factor that it has the aptitude to move the exchange rates of currencies. Therefore, the central banks are the most influential player in this case as the central banks set the interest rates. Different in interest rates have an outcome on the relative worth of currencies in relation to one another. Overall, the higher interest rates generate a stronger currency and vice versa.

Forex market experience volatility when central banks convert the interest rates. An accurate speculation of central banks' actions is important for most of the traders. A higher interest rate will encourage traders to invest in that currency and cause the demand for that currency to rise. As the result of increasing demand, foreign investments are drawn to the currency and thus causing the currency to increase in value. In opposition, fall in interest rates will discourage investors and the currency will depreciate due to weaker demand.

For an example, a US investor that wants to deposit a savings account of 1000 dollars with domestic or foreign banks. The US, Japan and Switzerland bank's interest rate are 4.5%, 0.5% and 5.5% respectively. Among all the measures, depositing the money in the Switzerland bank is the best option that produces highest return for that investor. The high interest rate in Switzerland bank had attracted foreign investors and that will affect the growth of currency value.

Since Forex is the simultaneous transaction of two currencies, then the market must focus on two respective interest rates, which are the base currency interest rate and the quote currency interest rate. This will generate an interest rate differential and this is a basic factor in the Forex markets. Traders will react when the interest rate differential changes, not the interest rates themselves.

Traders approaches the interest rates based on trading expectation and facts. When there is rumor about changes in interest rate differential, traders will react before the fact. Even if, the quieter of the markets is before a news release will frequently signify immense movement in the market. Besides, the market expectations and actual new release will cause a potential breakout opportunity. The news that comes out as the market expected usually do not cause a strong market reaction. On the other hand, a sudden unexpected convert in interest rates is then possibly to trigger a sharp currency move.

Political Factors

Political circumstances in this case include all the political circumstances and emergency. Political circumstances represent an open-ended category of the fundamental circumstances affecting the global currency market. Political circumstances take place by means of a period of time while political emergency strike suddenly and unplanned. Political circumstances are highly uncertain and difficult to forecast. Traders need to adjust their reaction relative to each event.

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