A fundamental trading strategy consists of strategic assessments in
which a certain currency is traded based on virtually any criteria
excluding the price action. These criteria include, but are not limited
to, the economic condition that the country the currency represents,
monetary policy, and other elements that are fundamental to economies. 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 fundamental analysis, yet most fundamental
analysts look at various macroeconomic indicators such as economic
growth rates, interest rates, inflation, and unemployment. Several
theories prevail as to how currencies should be valued. Alone,
fundamental analysis can be stressful when dealing with commodities,
currencies and other "margined" products. The reason for this is that
often fundamental analysis does not provide specific entry and exit
points, and therefore it can be difficult for risk to be controlled
when utilizing leverage techniques. Currency prices are a reflection
of the balance between supply and demand for currencies. Interest rates
and the overall strength of the economy are the two primary factors
that affect supply and demand. Economic indicators (for example, GDP,
foreign investment and the trade balance) reflect the overall health of
an economy. Therefore, they are responsible for the underlying changes
in supply and demand for that currency. A tremendous amount of data is
released at regular intervals, and some of this data is significant.
Data that is related to interest rates and international trade is
analyzed very closely.
Interest Rates If there is an uncertainty
in the market in terms of interest rates, then any developments
regarding interest rates can have a direct affect on the currency
markets. 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, causing the country's
currency to weaken. Knowing which effect prevails can be tricky, but
usually there is an agreement among the field as to what the interest
rate move will do. PPI, CPI, and GDP have proven to be the indicators
with the biggest impact. The timing of interest rate moves is usually
known in advance. It is generally known that these moves take place
after regular meetings of the BOE, FED, ECB, BOJ, and other central
banks.
International Trade The trade balance portrays the net
difference (over a period of time) between the imports and exports of a
nation. When imports become more than exports, the trade balance shows
a deficit (this is --for the most part-- considered unfavorable). For
example, if Euros are sold for other domestic national currencies, such
as US Dollars, to pay for imports, the value of the currency will
depreciate due to the flow of dollars outside the country. On the other
hand, if trade figures show an increase in exports, money will flow
into the country and increase the value of the currency. In some ways,
however, a 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.
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