Applying Fundamental Analysis
Overview
The
announcement of economic events can cause volatile swings
in currencies where traders can make significant profit
/ losses. As a helpful tool for more experienced traders,
you may click on the calendar which includes the dates
& times of upcoming announcements which are listed
in GMT time. The GMT time tool uses your computer clock
and requires Java Applets to be enabled.
Economic
Calendar
NetDania
Charting Program
Take
a look at the time when announcements will be made and
make a note to watch the chart of the correlating currency
while having the time tool and FXCM trade station open.
If you choose to take the FX Powercourse, you will learn
more about reports and analysis that affect currencies
such as Taylor Rule, GDP reports, Balance of Payment,
Non-Farm Payroll, Fed Rate hikes and more.
Fundamentals
Every Trader Should Know
Currency
prices reflect the balance of supply and demand for
currencies. Two primary factors affecting supply and
demand are interest rates and the overall strength of
the economy. Economic indicators such as GDP, foreign
investment, and the trade balance reflect the general
health of an economy and are, therefore, responsible
for the underlying shifts in supply and demand for that
currency. There is a tremendous amount of data released
at regular intervals, some of which is more important
than others. Data related to interest rates and international
trade is looked at the closest and actual figures coming
from news events during times posted on the economic
calendar can cause large fluxuations in prices.
Folowing
are examples of factors that could influence each currency
pair are listed below.
EUR/USD
If, for example, you think the U.S. economy will continue
to fall and that will hurt the USD, you click on BUY,
you are buying euros expecting them to go up against
the USD. If you click on SELL, you buy U.S. dollars,
expecting them to climb against the euro.
USD/JPY
If, for example, you think that the Japanese government
is going to weaken the yen in order to help its export
industry, you would click on BUY, expecting the U.S.
dollar to increase in value against the yen. If you
think that Japanese investors are pulling money out
of U.S. financial markets and repatriating funds back
to Japan, you would click on SELL, expecting the yen
to strengthen against the U.S. dollar as Japanese investors
sell their assets and convert their dollars to yen.
GBP/USD
If, for example, you think the British economy will
continue to be the leading economy among the G7 nations
in terms of growth, thus buoying the pound, you would
click BUY, expecting the British pound to strengthen
against the U.S. dollar. If you believe the British
are about to commit themselves to adopting the euro,
you would click SELL, expecting the pound to weaken
against the dollar as the British devalue their currency
in anticipation of merging with the euro.
USD/CHF
If,
for example, you think the Swiss franc is overvalued,
you would click BUY, expecting the U.S. dollar to strengthen
against the Swiss franc. If you believe that due to
instability in the Middle East and in U.S. financial
markets the dollar will continue to weaken, you would
click SELL, expecting the Swiss franc to strengthen
against the dollar.
EUR/CHF
If, for example, you think the Swiss government wishes
to devalue the currency to help exports in Europe, you
would click BUY, expecting the euro to increase in value
against the Swiss franc. If inflation started taking
off in Germany and France, you would click SELL expecting
the Swiss franc to increase in value against a devalued
euro.
AUD/USD
If, for example, you think that commodity prices are
going to rise dramatically, thus benefiting the AUD,
you would click BUY, expecting the aussie to strengthen
against the U.S. dollar due to Australia being a leading
exporter of many commodities. If you believe that Australia
is heading into recession, you would click SELL, expecting
the U.S. dollar to strengthen against the AUD.
USD/CAD
If, for example, you think that the U.S. economy is
going to rebound while the Canadian economy goes into
recession, you would click BUY, expecting the U.S. dollar
to strengthen against the Canadian dollar. If you believe
the Canadian dollar is fundamentally undervalued and
will strengthen against the U.S. dollar, you would click
SELL, expecting the CAD to rise against the U.S. dollar.
NZD/USD
If, for example, you think the success of Lord of the
Rings will cause tourists to flock to New Zealand and
pump money into the local economy, you would click BUY,
expecting the NZD to strengthen in value against the
U.S. dollar. If you expect the AUD is going to fall
along with commodity prices, you would click SELL expecting
the NZD to drop in value against the U.S. dollar.
EUR/GBP
If, for example, you believe the British are about to
commit themselves to adopting the euro, you would click
BUY, expecting the pound to weaken against the euro
as the British devalue their currency in anticipation
of the merger. If you believe that Great Britain's economy
will grow at a faster rate than Europe's, you would
click SELL, expecting the British pound to rise in value
against the euro.
EUR/JPY
If, for example, you believe that the Japanese banking
crisis will continue to get worse, you would click BUY
expecting the euro to rise against the yen. If for example
you believe that Europe is going into recession, thus
weakening the euro, you would click SELL, expecting
the euro to drop in value against the yen.
GBP/JPY
If, for example, you believe that the BOE is going to
raise interest rates, you would click BUY, expecting
the British pound to increase against the yen due to
interest rate arbitrage. If you think the Nikkei index
will rise at a higher rate than the FTSE, thus buoying
the yen, you would click on SELL, expecting the yen
to increase against the British pound.
CHF/JPY
If, for example, you believe conflict in the Middle
East may cause a spike in oil prices, you would click
BUY, expecting the CHF to increase against the yen due
to Japan's reliance on imported oil and the CHF's safe-haven
status. If you believe there will be more stability
in the region, you would click SELL, expecting the yen
to rise against the CHF.
GBP/CHF
If, for example, you believe that the BOE is going to
raise interest rates, you would click BUY, expecting
the British pound to increase against the CHF due to
interest rate arbitrage. If you believe the British
are about to commit themselves to adopting the euro,
you would click SELL, expecting the pound to weaken
against the CHF as the British devalue their currency
in anticipation of merging with the euro.
EUR/AUD
If, for example, you believe that Australia is heading
into recession, you would click BUY, expecting the euro
to strengthen against the AUD. If you think that commodity
prices are going to rise dramatically, you would click
SELL, expecting the aussie to strengthen against the
euro due to Australia being a leading exporter of many
commodities.
EUR/CAD
If, for example, you think that the German economy is
going to rebound while the Canadian economy goes into
recession, you would click BUY, expecting the euro to
strengthen against the Canadian dollar. If you believe
the German economy will go into recession and drag the
euro down with it, you would click SELL, expecting the
Canadian dollar to rise against the euro.
AUD/CAD
If, for example, you think that the Australian economy
is going to grow while the Canadian economy goes into
recession, you would click BUY, expecting the AUD to
strengthen against the Canadian dollar. If you believe
the Australian economy will go into recession, you would
click SELL expecting the Canadian dollar to rise against
the AUD.
AUD/JPY
If, for example, you think that the Australian economy
is going to grow while the Japanese economy goes into
recession, you would click BUY, expecting the AUD to
strengthen against the yen. If you believe the Australian
economy will go into recession due to falling commodity
prices, you would click SELL, expecting the yen to rise
against the AUD.
NZD/JPY
If, for example, you think that SARS and the situation
in North Korea will cause Asian tourism and exports
to fall, you would click BUY, expecting the yen to decrease
in value over the NZD. If you believe that the factors
that pushed the New Zealand economy up in 2002 are no
longer in play, you would click SELL, expecting the
NZD to weaken against the yen.
CAD/JPY
If, for example, you believe that the weakened U.S.
dollar will cause Canadian exports to suffer, you would
click SELL, expecting the yen to increase in value over
the CAD. If you think the Japanese economy will remain
weak due to lack of economic structural reform, you
would click BUY, expecting the CAD to rise against the
yen.
Interest
Rates
If
the market has uncertainty regarding interest rates,
then any bit of news regarding interest rates can directly
affect the currency markets. Traditionally, if a country
raises its interest rates, the currency of that country
will strengthen in relation to other countries, as investors
shift assets to that country to gain a higher return.
Hikes in interest rates, however, are generally bad
news for stock markets. Some investors will transfer
money out of a country's stock market when interest
rates are hiked, believing that higher borrowing costs
will affect ballance sheet negatively and result in
devalued stock, causing the country's currency to weaken.
Which effect dominates can be tricky, but generally
there is a consensus beforehand as to what the interest
rate move will do. Indicators that have the biggest
impact on interest rates are PPI, CPI, and GDP. Generally
the timing of interest rate moves are known in advance.
They take place after regularly scheduled meetings by
the BOE, FED, ECB, BOJ, and other central banks.
International
Trade
The
trade balance shows the net difference over a period
of time between a nation's exports and imports. When
a country imports more than it exports, the trade balance
will show a deficit, which is generally considered unfavorable.
For example, if US consumers wanted Japanese products,
major automobile dealers might sell US dollars to pay
for the import of Japanese vehicles with yen. The flow
of dollars outside the US would then lead to a depreciation
in the value of the US dollar. Similarly if trade figures
show an increase in exports, dollars will flow into
the United States due to inreased confidence in the
economy and then the value of the US dollar would increase.
From the standpoint of a national economy, a deficit
in and of itself is not necessarily a bad thing. However,
if the deficit is greater than market expectations then
it will trigger a negative price movement.
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