fundamental Analysis
In the fundamental analysis the FX traders will tend to centre on the interest rates, monetary policies, various economic growth and inflation data. Political elections play major part in the analysis and developments in major economies. Also crucial are the geopolitical risks, trade conflicts that are becoming predominant in the 21st century, and terrorist attacks, last but not the least major movements in other financial markets.
Interest Rates
The domestic interest rate which is determined by the monetary policy which are in turn set by the a country's central bank acts as the most important overall determinant of a currency's value relative to other currencies. This because monetary policy is aimed at affecting domestic interest rates, which in turn drive currency rates relative to other currencies with different interest rates.
The domestic interest rates affects overall economic activity, with lower interest rates usually encourages borrowing, investment and consumption whilst high interest rates decreases borrowing and acts as an inducement to save rather than consume/ spend. The influence to the direction of global capital flows can be accredited to the interest rates and also serves as a criterion to what investors expect to earn investing in a particular country. Especially in the fixed income investing {BONDS} which constitute a huge share of investments, also affects equity and other investment flows. The relative interest rates is another aspect the fundamental forex trading strategy mainly known as carry trade whereby it is a practice of buying a currency with a high differential ratio translating to the interest rate of the currency the FX trader is buying is higher than that of the currency the trader is selling.
Monetary Policy
Is the set of policy that central banks use to achieve their legal mandates.
most of the central banks function under legislative mandates that are geared towards obtaining two objectives which are:
Restraining Inflation
Promoting sustainable economic growth
Promoting maximum employment
With low inflation tending to foster about stable business and investment environments, central banks often tend to see it as the best way then to promote long run economic growth.
There are normally two categories under which the monetary policy can be classified into:
Expansionary monetary policy
Restrictive monetary policy
EXPANSIONARY MONETARY POLICY
Also recognized as accommodative / stimulative or quantitative easing which is attained through lowering interest rates / cutting interest rates.
The other opton is for the central banks to increase the supply of money thus lowering the borrowing cost.
The reduction in the reserve requirement of banks frees up capital for lending, hence therefore adding to the supply and reducing borrowing costs.
This kind of policy is usually deployed when the economic growth is low, contracting, or stagnant and unemployment is rising.
In response to major shocks to the economic system I.e September 11, 2011 or even the BREXIT 23rd Thursday June 2016.
RESTRICTIVE MONETARY POLICY:
It is also allude to as contractionary or tighter monetary policy and it is gotten by raising interest rates. The higher interest rates increases the cost of borrowing subsequently reduces spending with the goal of slowing the economic growth.
Whenever the central banks believes that the economy is expanding too quickly, they deploy a tighter monetary policy. The reason being that heightened demand together with the low cost of borrowing may lead to inflation exceeding the levels which are considered acceptable to the long run overall robustness of the economy.
Economic Data
If anyone has tried to board a moving bus it is always important to run alongside it before reaching out and trying to grab hold like wise when alighting from the moving bus, you still have to run along it for awhile, you cannot just alight and stand still. The same can be said of Forex market, a trader cannot just jump in without getting up to speed with the economic data. And apart from the economic data it is good to do lots of paper trading to familiarize oneself with various currencies and their movements. Each currency has its own characteristic
News Sources
GET THE RIGHT FINANCIAL NEWS
There is a tendency to focus on the mainstream financial press, which provides continuous coverage of the major financial markets. Some of the Web sites where a trader can get frequent intraday updates that cover data releases and announcements, with additional institutional commentary as well to bring more insight on how and why the market is reacting as it is.
We got:
Bloomberg
Dailyfx (www.dailyfx.com)
Fxstreet (www.fxstreet.com)
There are three relevance levels that a trader needs to be aware in regards to the impact on the FX market upon the release of the data report, namely:
LOW: These kind of data reports normally don't move the market significantly but rather shows the background of the bigger economic picture. The significance will be indicted by a single head of a bull or blue color on the economic calendar.
MEDIUM: Usually these kind of data tend to have a larger impact on the market, especially instantly and apparently hours following the release of it. It can occur when the data is not coinciding with the market anticipation or importantly contradicts the market's future expectation. The medium relevance tends to support an existing directional trend. Will be indicated by either two heads of a bull or orange color.
HIGH: There are the biggest market movers and leads to a substantial price volatility instantly after their release and over subsequent trading days. Will be shown by either three heads of a bull or red color on the economic calendar beside the name of the report.
Below are some of the economic data:
Economic Data
Labour Market
Jobs and job creation are the keys to the medium and long term economic outlook for any country. More jobs created translates to more wages being paid, consumers are spending and economic activity expands. The contrary can be said whenever job growth is stagnant, the long-run economic growth will be constrained. In forex trading the labor market strength is normally seen as a currency positive. Some indicators of labor market are:
1. Non- farm payroll ( relevance/ importance HIGH)
2. Unemployment rate
3. Employment rate/ change
4. ADP national employment
5. Institute for supply management employment indices
Inflation Data
These reports are used to monitor overall changes in price levels of goods and services whilst setting monetary policy forecast.
1. Consumer price index {CPI} relevance/ importance: high
2. Producer price index {PPI} relevance/ importance: medium
3. Core Consumer price index relevance/ importance: high
GDP
Is the monetary measure of the total amount of economic activity pertaining goods and services produced in a specified period of time either quarterly or yearly and adjusted for inflation. The GDP is usually a very important fundamental data with it's relevance being high. If the actual data outcome of the GDP is better than both the forecast and the previous data, a notion of a higher interest rates would suffice. A poor data outcome would signal a need of an easier monetary policy in the future.
Current Account Balance
It has a high relevance data due to the fact it measures the international trade and the net cash transfers. It can either be in deficit or surplus which shows if a country is a net lender or borrowers in comparison to the rest of the world. If a country has a surplus then it is considered as a net lender whilst the reverse is the case when a country current account is in a deficit state, it becomes a net borrower.
Trade Balance
It is also a high relevance data for it measures the difference between the monetary value of a nation's export and imports over a certain period of time.
If the country exports more than it imports then it has a trade surplus whilst if a nation imports value are greater than the exports, it has a trade deficit.
Retail Sales
This data release is very significant as it reflects personal spending over a specific timeframe, providing insight into the economy's current state and its potential trajectory for growth or decline. In the United States, it serves as a monthly economic indicator, encompassing nearly all types of purchases.
Geopolitical Issues
The geopolitical tensions have become a paramount concern and a factor which is having an influence to the value of the currency. The North Korea nuclear test which have been contacted lately is one such example. Given such conflicts, the USD tends to be more vulnerable due to the size of the economy, the high probability of a military involvement and the sheer reliance on world trade. When there is geopolitical tensions some currencies are usually term as safe havens, such as Swiss franc (CHF) and Japanese Yen (JPY).
Election
Political elections impact the currency market as they bring changes in government policies that may differ from those of the previous administration. A notable instance is the shift in the US government following the November 2016, as well as the uncertainty surrounding the UK's Brexit decision on June 23, 2016, which led to a significant drop in the value of the Pound. Additionally, the postponement of the UK parliamentary vote on December 11 2018, illustrates how political developments can influence currency market volatility.
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Hawks & Doves
The central bankers are either termed as a being hawks or doves.The central banks are usually termed either hawks or doves from past policy statements or from their academic or policy writings prior being a central banker. Hawks generally favors an aggressive way to fight inflation and is not averse to raising rates even if it will not be favorable to the economic growth. Whilst a dove tends to be inclined to growth and employment monetary policy hence therefore reluctant to tighten rates if it will not be so convenient to the economy. when there are dovish comments coming from a hawk then the market will react to that and vice versa with a hawkish comments coming from a dovish central banker.