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Forex Fundamental Analysis

The two primary approaches of analyzing Forex markets are technical analysis and fundamental analysis. Fundamental analysis comprises the examination of economic indicators, asset markets and political considerations when evaluating a nation�s currency in terms of another. The focus of fundamental analysis lies on the economic, social and political forces that drive supply and demand. There is no single set of beliefs that guide forex fundamental analysis, yet most fundamental analysts look at various macroeconomic indicators such as economic growth rates, interest rates, inflation, and unemployment.

Here we look at some of the major Forex fundamental factors that play a role in the movement of a currency:

Economic Indicators

Economic indicators are reports released by the government or a private organization that detail a country�s economic performance. These economic indicators can be released on a weekly basis, but the more common report is monthly. Indicators are based around a number of economical situations, of which the two primary factors are that of International trade and Interest. Subsidiary factors also include Consumer Price Index (CPI), Purchasing Managers Index (PMI), Durable goods orders, retail sales and Producer Price Index (PPI).

Currency�s Interest Rates

One of the major indicator factors, Interest rates, are a key economic function of any nation. Generally, when a country raises its interest rates, the country�s currency will strengthen in relation to other currencies as assets are shifted to gain a higher return. Interest rates hikes, however, are usually not good news for stock markets. This is due to the fact that many investors will withdraw money from a country�s stock market when there is a hike of interest rates.

International Trade

The trade balance portrays the net difference (over a period of time) between the imports and exports of a nation. A trade deficit can be an economic disaster for a government and a currency. A deficit may appear when a country is importing more than it is exporting, meaning that more money is leaving and less is coming in. In some ways, however, a trade deficit in and of itself is not necessarily a bad thing. A deficit is only negative if the deficit is greater than market expectations and therefore will trigger a negative price movement.

From http://www.forex-articles.net

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REACTING TO NEWS
News or data are always read by the market along the prevailing market bias. Data can provide a good reading for the state of the market. If the data is bad but the price is still rising or not affected, it must be a bull market which means buy on dip strategy is a better one. Conversely, if the data is good but the price is not rising or even falling, it must be a bear market which means sell on bounce strategy is a better one. The inflexion point must be when bad news or good news. no longer affect the prices as they have done before. Medium/long-term bias changes are usually accompanied by such reactions to the news. It is not the numbers that counts but how the market reacts to the numbers that counts. That gives some comfort to those who are not privy to the numbers already

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There are a few methods that are used when forecasting the Forex. Each system is used to understand how the Forex works and how the fluctuations in the market can affect traders and currency rates. The two methods that are most often used are called technical analysis and fundamental analysis. Both methods differ in their own ways, but each one can help the Forex trader understand how the rates are affecting the currency trade. Most of the time, experienced traders and brokers know each method and use a mixture of the two to trade on the Forex.
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With a daily turnover of over trillions of dollars, the Foreign Exchange market conducts more than three times the aggregate amount volume of the United States Equity and Treasury markets combined. The Forex market is an over-the-counter market where buyers and sellers conduct foreign exchange business using different means of communication.

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Let�s take a concrete example of getting a profit from the changing the rate of the Euro, from 0,9162 to 0,9292. If you have anticipated this change by using technical or fundamental analysis, you can buy the Euro cheaper for dollars, and then sell it back at a higher price. For example, if you choose leverage 1:100, then 99,000 dollars of the credit line, granted by the Internet broker, is added to 1000 dollars, and you buy the Euro at the price of 0.9162. As a result of this transaction we get: $ 100,000 / 0.9162 = Euro 109.146, 47.

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Asian Morning Update 7th April 2008

Sun, 06 Apr 2008 19:26:28 -0400
Poor U.S. unemployment data puts the Dollar on the back foot

European releases overnight:

February Forecast Actual
German Factory Orders (MoM) +0.8% - 0.5%
German Factory Orders (YoY) +6.7% +9.0%

Friday’s German factory orders data was rather strange seeing a far worse than expected MoM figure while the YoY figure was boosted by past revisions. Domestic orders were flat confirming the lack of consumer demand.

Several ECB officials offered the usual round up of often repeated statements, none of it of much consequence, that the U.S. economy is already in the midst of a recession and will overflow into the “real” economy and that could still cause a negative impact globally. One official, Alumnia, did suggest that the situation in Europe is not as bad as the IMF has suggested.

The U.K.’s Financial Times ran an article on the credit squeeze which it says has intensified and thus the chances of a rate cut on Thursday’s from the BOE have risen. This came in response to the BOE report which outlined a probable worsening in the squeeze on mortgages and corporate credit.

This has certainly placed more pressure on the Pound and while the medium term still looks bearish the prospect of a return to 2.0191 is certainly on the cards following Friday’s poor unemployment data from the States.

States releases overnight:

March Forecast Actual
U.S. Change in Non-Farm Payrolls - 50K - 80K
U.S. Change in Manufacturing Payrolls - 40K - 48K
U.S. Unemployment Rate 5.0% 5.1%

The non-farm payrolls were certainly pretty soft, the worst one month decline in five years in fact. It provoked a statement of disappointment from the White House. “Recession” has suddenly become a permitted word in officials’ statements now, used by both the White House and Paulson but always quickly followed by statements of growth in H2 as the fiscal stimulation package provides a positive impact. Paulson argued that while recession is possible the label is unimportant, preferring to focus on dealing with its practical effects.

It didn’t stop the CEO of PIMCO to take a swipe at the situation by saying that U.S. treasuries are the most overvalued assets globally given the level of inflationary expectations. I guess that highlights the difference between politics and investment strategy…

All in all it puts the Dollar onto its back foot again and does certainly look set to lose out again this week. The release calendar is not the most hectic but Thursday does see the BOE and ECB announce their rate decisions.

The ECB are almost certainly to announce an unchanged policy, caught still between the conflict provided by the high level of inflation and the need to ensure that the credit markets remain stable. The latter continues to reflect that while official comment is confident, their actions suggest otherwise.

The BOE rate decision has a little more uncertainty. U.K. figures have remained better that the doomsayers but there is still universal recognition that the U.K. economy is next most vulnerable to the credit crunch.

The conflict of the implications here make the rate decision less apparent. There is once again a rising cry for a rate cut on Thursday but BOE official comments do not really point to this at the moment. Things could change over the next few days but as of now the greater chance still appears to be an unchanged policy.

So as the week begins the Dollar should remain on the soft side with a decline towards recent lows on the cards. We do still have to be cautious even if the Euro penetrates the 1.5901 high as we are also approaching the G7 meeting at the weekend.

Concerted intervention does not appear to be favored by the central banks but there has been a growing lobby for such action to bring back some stability to exchange rates. Notably we have seen comments from French, German and Japanese officials that appear to be pushing this line.

Thus Dollar losses should be watch with some care but most likely this will be the overall preference shown by the market.

More later once the daily analysis has been done…

There following releases are due from Asia due today:

Australia
March AiG Performance of Construction Index
February Trade Balance AUD -2.5bn
February Building Approvals (MoM) +0.0%
March ANZ Job Advertisements

Japan
February Leading Economic Index (P) 50.0%
February Coincident Index (P) 44.4%

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