A few indicators of the economy actively affect
currencies course movement. The other indicators do not have a direct, immediate impact on this movement, they are more important to economists and
other markets.
They indirectly confirm (or not confirm) the supposed or known trends
in the economy, which is out of concrete determining influence at the FOREX
market and therefore they are simply absorbed by the market in its usual
fluctuations.
The fundamental analysis examines the economic situations in
definite countries and the world all in all and their influence on each other
on the basis of dozens of different reasons and economic indicators that
suddenly took place or vice versa openly reported and published in advance of
the known by various governmental, non-governmental and academic organizations
from major world countries plan.
Any information which directly or indirectly may influence the economy can be
regarded as fundamental. It all can be divided into 4 main categories -
economic factors, financial factors, political events and crises.
1. Economic factors (indicators) are different from
others that their released data is known in advance, at least for the majority
of the Largest Economies.
2. Political factors are very diversified, some of
they are previously known, such as the presidential elections; for example, a
sharp change of government form will be a shock for all markets, regardless
which methods of analysis they used - fundamental or technical
3. Financial factors often remain to be unpredictable
and therefore they have a strong impact on the state of FOREX. The most demonstrative example is the trend of interest rates by the Central Banks of
the Largest Economies in the world.
For example, by the U.S. Federal Reserve
Bank (Federal Reserve). No one knows exactly whether the trend of interest
rates will be done or not but even assumptions about it will have an intense
impact on the market.
Inside 2-3 weeks prior to the meeting of the Federal
Reserve heads (FOMC - Federal Open Market Committee), who gather together in
Washington for their meeting every 1 .5
months, they accepted by the market very nervously, if the change of the interest rate was a sudden one, then the market literally became
"nervous", which leads to sharp changes in the exchange rate.
4. Crises can have a strong impact on the market,
according to their predictability, that is why the crisis in the Persian Gulf had a limited effect on the FOREX market. But
sometimes even fluffs in the officials' speeches led to a sharp change of the
course, as it was during the speech of the British Prime Minister Tony Blair
concerning the Euro taking - over instead of the pound in 2001 .
Indicators of fundamental analysis
Economic indicators are an important element of
fundamental analysis. The dates of their publication are known beforehand. In the USA
Indicators
that are published weekly usually do not influence the work on Forex and there
is no sense in considering them. Knowledge of economic indicators’ date of publication is of the utmost importance for the trader but it is easy to receive it
now – information about the dates as well as analysis of these indicators’
influence regularly appear in the news of all firm-providers which provide
Internet trading, and in many other resources of the Internet.
The economy of the USA USA
The Gross National Product (GNP) is the
most important economic indicator. It
is calculated by the formula:
GNP = C+I+G+T
where: Consumer Expenditures which depend on
personal income and Consumer Confidence,
i.e. on psychological factor, the result of which
is the decision of spending or saving money;
I – investments
G – Government spending, which influences much on
different economic indicators and country’s economy as a whole;
T – Trade balance of the country (Export (minus)
Import).
GNP is published quarterly and shows the total amount
of goods and services provided by American companies in the USA
The Gross Domestic Product (GDP) – in
distinction from GNP, GDP reflects the value of all goods and services produced
on the territory of the USA US economy difference between GDP and GNP is small;
however this index is more popular abroad than in the USA , then it is published in the United States of America
Inflation Indexes – indicators showing
the distribution of trend of price rising for goods and services; and traders
closely follow the inflation processes development in the country because the main weapon of the Central Bank in the fight against inflation is the interest rate
rising, which increases the value of the local currency.
Moreover, inflation
level lower the interest rate till its real objective value which along with
real data of GDP/GNP is the most objective tool of comparison of different
countries economics for the search of the best conditions for money making for traders
and funds managers.
Producer Price Index (PPI) has
been investigated since the XXth century and considers the average wholesale
price changes for the raw products and utilities at all production stages. For
This index information from the majority of branches of the economy including
production, extraction of raw materials and agricultural sector is processed.
In general, price changes approximately at 3400 name of raw materials and goods
produced only in the USA
Consumer Price Index (CPI)
examines average changes of retail prices at the special consumer basket which
includes one and same goods and services constantly. It includes data about
whole food prices – 1 9% of the
index, house value – 38%, fuel – 8%, vehicles – 7%, and clothes, transportation
charges and medical services which people pay for daily. It also includes
imported goods. Published monthly. Both indexes PPI and CPI help to measure the inflationary activity of the economy.
Commodity Research Bureau’s Futures Index (CRB Index) consists of equi-weighted futures prices for 21
type of commodities: precious metals (gold, silver, platinum), industrial commodities
(oil, gasoline, diesel fuel, wood, cuprum, cotton), crops (corn, wheat,
soybean, bean cake, soya oil), live cattle and meat (livestock, pork), import
(coffee, cocoa, sugar), misc. (orange juice).
In spite of the fact that 1 3
positions of 21 refer to the whole
foods which wrench the real situation of the headline inflation, this index
is rather popular during the last 20 years among the professionals of FOREX.
The Journal of Commerce Industrial Price Index (JoC) consists of prices at 1 8
industrial goods being processed at the first stages of industrial production,
building and electric-power production. This indicator is more accurate because
it is projected to show inflationary changes before other inflationary
indicators.
Balance-of-Payments consists of all
international commercial and financial transactions of one country. Analysts
value the real importance of this index by keeping the eye on the big picture
of a county’s economy from the point of view of its competitive ability.
It is
derivative from the number of natural resources of the industrial base,
professional level of labour at the employment market and labour costs market.
However, this index is used meagrely by traders who work in intraday
operations.
Merchandise Trade Balance
consists of the difference between export and import of the concrete country. It is one
of the most important economic indicators.
It includes 6 categories of goods:
- Whole goods
- Raw materials and industrial semi-raw materials
- Consumer commodities
- Vehicles
- Large industrial goods
- All other commodities
If this index is greatly different from the
forecasting one, then it can influence the US Dollar – if the deficit is bigger
than forecasting one, US Dollar is falling, if less – rising. The USA-Japan Merchandise Trade Balance. While the deficit rises in trading with Japan
INDICATOR OF INDUSTRIAL PRODUCTION
Industrial production is
composed of the production output of all the production, process plants and mines.
From the fundamental point of view, this indicator is very important; it
reflects the real strength of the economy and by its strength of the concrete currency,
so the higher index – the stronger US Dollar. Published monthly.
Capacity Utilization is the correlation of total
industrial output to the existent production capacities. The normal ratio for a good
economy is 81 , 5%. If this index is
in these bounds, then does affect FOREX. But if this index reaches 85% and
more, then it indicates that industrial production is “got heated”.
i.e. the economy is working at full capacity. This index, if it reaches 85%, forebodes
the beginning of probable inflation which can lead to an increase in Central Bank interest rate for avoiding the inflation of fighting against it.
National Association of the Purchasing Managers Index (NAPM) is deduced by the inquiry of 250 managers of the major industrial
enterprises to study out how, in comparison with the last inquiry, the number
of new orders of their production, total output, the total volume of hire, the quantity
of produced goods stored in the warehouse and delivery speed of goods to the wholesaler has changed.
If the index is less than 45-50% it shows the aggravating
position of a country. It is the first established and used till present
indicator. It is not perfect because it is based upon psychology more than
facts and does not include the largest state California
Factory Goods Orders – the total
amount of orders for the durable, nondurable and single-use goods, i.e. for
whole foods, light, simple industrial goods and accessory products and tools.
It has a weak impact on the prices at FOREX.
Durable Goods Orders takes
into account orders for goods with a period of use of more than 3 years. Such
commodities are divided into 4 major categories – hardware (including jewellery);
mechanisms and goods working by mechanical drive; mechanisms and goods working
by electric drive; transfer mechanisms and goods.
This indicator divides the
orders by military and unmilitary. It is very important for FOREX because
durable goods cost more and an increase in their sales indicates rising consumers’
sentiment in their future and the increasing the possibility of spending money. So
positive digits of this indicator lead to the US Dollar (or currency of any
country releasing such indicators) rate appreciation.
Construction Data – information about
housing. It is the most important economic indicator, included in the GDP.
Starting from the postwar period it is housing that helps the USA
- new houses building and building licenses;
- sales of new and already existent one-family houses;
- building expenses.
This indicator is cyclic and very sensitive to the
interest rate of the Central Bank. The number of new houses sales 1 .5 – 2 million per month shows that the economy is
strong, but when this number decreases to the 1
million per month, it is said that the economy went into a recession. It is
usually used for receiving the big picture of the economic situation of the
country.
Employment Indicators – indexes
of the unemployment rate. They are of the utmost importance for the analysis of the situation in the economy in general, and as components of another economic indicator such as GNP and GDP.
The Unemployment Rate is given in percentage
terms. It consists of 2 separate parts:
a) The Business Firms (Establishments) Survey also consists of the following indicators:
- Payroll;
- Workweek;
- Hourly earnings;
- Total hours of employment in the non-farm sector
b) The Household Survey consists of:
- The unemployment rate in %;
- The overall labour force;
- Number of people employed
For traders working at market FOREX, indicators
which are published monthly are important, because they show how the economy is
strong and what position of business cycle it has – at the side of growth or at
the side of the recession. Among indicators appreciating the situation in the labour
market, the unemployment rate improves last of all. If the unemployment rate is
decreasing, then the US Dollar position will probably consolidate and vice versa.
Consumer Spending Indicators
Retail Sales is very important for traders because it indicates
the force of consumer demand and consumer confidence in the future which have
vicarious impact on the strength of a currency.
If the consumer has enough income or credit for the purchase, this can lead to
the situation that more goods and services will be produced and imported.
This indicator has seasonal nature, the most important months for traders –
September, when purchases are made for children at school, and December – the month of Christmas purchases. The higher these indicators, the stronger US
Dollar.
Consumer Sentiment is an inquiry of houses
owners, created for clarification of tendencies at individual intension of the
middle class for spending money. It is made by two organizations – Michigan University
Auto Sales is the number of auto sales. Despite the importance
for the economy as a whole, it rarely used for forecasting FOREX.
Leading Indicators is composed of indicator
and consists of the following economic indicators:
- Average workweek of production workers in
manufacturing;
- Average weekly claims for state unemployment;
- New orders for consumer goods and materials;
- Vendor Performance (companies receiving slower
deliveries from suppliers);
- Contract and orders for plant
and equipment;
- New
building permits issued;
- Change in manufacturers'
unfilled orders, durable goods;
- Change in sensitive materials
prices;
- Index of stock prices (Dow,
NASDAQ, S&P500, Russell 2000 etc.);
- Money supply, adjusted for
inflation;
- Index of
consumer expectations.
These indicators are developed for the determination of
economic development for the next 6-9 months. However, this indicator is not
that valuable for traders on FOREX.
MARKET ANALYSIS BY FINANCIAL, SOCIAL AND POLITICAL FACTORS
Financial factors
Financial factors are the main ones in fundamental
analysis. Changes in state monetary and taxation policy are made with the aim
of positive results achieved in the county’s economy and they are, for sure,
reflected at the exchange rates. Sometimes it is necessary for the Government to
get involved in international affairs with the aim of different obligations
execution which the United States of America ,
or the European Economic Community , incur to the
world community.
And financial factors are leverages of such interference. The
major structure controlling such leverage is the Central Bank of a country – in
the USA
FEDERAL RESERVE BANK
“Fed” has huge opportunities of influence on the
economy of the country by the “key interest rates”, i.e. percentage which “Fed”
allocates funds to the commercial banks for their reserves at, and at which
they lend these reserves to other banks for a day. Such percentage is called the “overnight federal funds rate”.
By this percentage “Fed” influence the
slowdown or acceleration of the economic growth rate and decrease of the inflation
processes. Let us consider now those financial factors which have the most
impact on the exchange rate. They are Money Supply and Interest Rate.
Money Supply consists of:
- M
- M2 – includes funds in the savings bank account;
- M3 – consists of different banking financial instruments.
Information about Money Supply is released in the USA
The whole fundamental analysis starts with the observation of “interest rates”. It is a rather complicated process and Central
Banks usually reluctantly change it and make it rarely (sometimes – once in
several years), but the frequency directly depends on the economic situation in
a country and in the world.
The main rule says the higher the interest rate,
the stronger the currency of a country. But in the rate of exchange always two
currencies are involved, that is why it is important to look after the ratio of
interest rates of these countries, which is called “Interest Rate
Differential”. It is also one of the main factors which traders of Forex keep
an eye at. So they should react to the change of this factor too and not only
to the change of interest rate of one country.
Traders think of the “Interest Rate” the same as
they treat other indicators – trading on the basis of rumours and estimates
first, and then on the basis of real facts. So expected and predicted change of
interest rate occurred during the last meeting of the Central Bank governor,
is often already devalued by the market and the situation remains stable.
If changes of the interest rate occurred because of
political reasons and not economic ones, then the market can go against the Central
Bank, rested upon the fundamental analysis in its estimates. However not only
the change of interest rate is important but also how big the difference
between the change and the anticipated magnitude is, and how this change will
help the economy.
Social and political factors
Political events are the last category of
fundamental factors which influence the global market of currency exchange.
Those which are known before, such as presidential elections, are rather
predictable and their influence is well-known. For instance, presidential
elections in the USA
If some socialist parties which are not usually
supported by business, come to power, then the exchange rate of the currency most
likely temporally falls against US Dollar. If parties or politics are
supported by business and connected with some hopes for economic recovery, comes
power, then the exchange rate of the currency rises.
But that was before the euro, now the situation is that
socialists are in the government of many European countries. European Central
Bank (ECB) is headed by Gan-Claude Triche, succeeded Wim Duisenberg, who is
completely solid with the predecessor and the worth thing for him (and for 1 2 countries, where Euro was accepted) is the threat of
inflation and his main task are not to allow its growth.
Huge pressure is put
upon the European Central Bank by the European politics of different ranks with
the aim of making the interest rate lower, and this pressure was successful.
Besides the predictable political events, there are
many unexpected events – military coups, wars, conflicts, murders of
politicians which cannot be foreseen. Usually, financial instruments, which are
called “safe haven” for investors, are used. During the last ten years “safe
heaven” is US Dollar and Swiss Franc – their rates surge forward against all
other currencies because everybody starts buying them (it
also concerns gold).
Though not only these currencies can be “safe heaven”,
sometimes the British pound acts similarly in similar situations. In case
instability of South-East Asia sharply increases by different reasons, for
instance, the threat of war from the side of North Korea, or in the regions of the Middle East, wherein case of war extraction and cargo of oil to the world
market decrease drastically, the rate of the Japanese Yen slumps against the US
Dollar.
If the world oil price rises steeply, then usually the
rate of the British pound rises as well because the British economy directly depends
on its oil extraction in the North Sea . In
general, prices at the commodity markets, i.e. at the different raw materials,
rise, then the rates of currencies of those counties which economies depend
strongly upon the export of these materials.
These countries are Canada , Norway ,
Finland
In all cases, as we discussed above, when military
events are imminent where the United States of
America can take part, exchange rates of US Dollar and
Swiss Franc rise sharply against other currencies (but in case of war in Yugoslavia
Fundamental analysis should take into account the great number of different factors, it is an entire science. However, factors
clearly defined in the fundamental analysis, not always influence the market
instantly – sometimes some days and even months can pass before the fundamental
factors have an impact on the market.
If by the time you cannot make your
opinion regarding the situation at the market, then do not trade, wait until the market gives you more clear signals about the direction of its movement.
An economic calendar containing description and
approximate time and day of macroeconomic indicators’ publication.
Lessons:
- Operations With Trader Platform On The Basis Of Meta Trader 4
- Fundamental Analysis of Foreign Exchange Market