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Fundamental Analysis

The underlying elements affecting the economy of the subject is studied by Forex fundamental analysis. According to this method, the analysis of economic indicators, social factors and government policy of a business cycle can forecast price movement and trends of the market. The fundamentals of any country, multinational industry or trading bloc lie in the combination of factors such as social, political and economic influences. As a trader you should have a certain plan of action concerning the ways of using the information as entry and exit spots in a certain strategy of trading. Sometimes it happens that two analysts possessing the same data arrive at different conclusions about the market behavior – therefore this strategy contains ESTIMATION.

The main macroeconomics we are interested in are:

Interest Rates
Unemployment Rate - Non-Farm Payroll
Trade Balance
Retail Sales
Gross Domestic Product
ISM Institute of Supply Manufacturing
CPI Consumer Price Index

We prefer to trade the above releases as they will produce a significant move. We also trade them with technical evaluation as opposed to fundamental evaluation.

The full range of economic news releases can be found on the ECONOMIC CALENDAR which is released every week. This calendar is located and extracted from the Forexfactory website. The full descriptions can be found adjacent to each news release for further study.


INTEREST RATE
Four times per year the Swiss National Bank (SNB) Governing Board meets to set the nation's short term interest rate (i.e., "three-month libor"). Shortly after the meeting they release a statement that contains the decided rate, a brief commentary of the economic conditions that effected their decision, and most importantly, clues regarding the outcome of future meetings. A rising trend can have a positive as well as negative trend effect on the nation's currency. Short term rates are the paramount factor in currency valuation; traders look at most other indicators merely to predict how interest rates may change in the future. High interest rates attract foreigners looking for the currency opportunities in regards to trading, which can dramatically change demand for the nation's currency. The decision on where to set interest rates depends mostly on inflation. The primary objective of the central bank is to achieve price stability; when inflation rises above an annualized rate of approximately 2%, they will respond by raising interest rates in an attempt to bring prices down.

Libor: London Inter-Bank Offer Rate. The interest rate that the banks charge each other for loans (usually in Eurodollars). This rate is applicable to the short term international interbank market, and applies to very large loans borrowed for anywhere from one day to five years. This market allows banks with liquidity requirements to borrow quickly from other banks with surpluses, enabling banks to avoid holding excessively large amounts of their asset base as liquid assets. The LIBOR is officially fixed once a day by a small group of large London banks, but the rate changes throughout the day.

UNEMPLOYMENT RATE / NON FARM PAYROLL
Measures the number of new jobs created in the previous month, excluding the farming industry. A rising trend can have a positive as well as negative trend effect on the nation's currency. The number of new jobs being created is one of the most important indicators of the economy's health because consumer spending, which is highly correlated with labor conditions, makes up a large portion of GDP. This report is the first of the month that relates to labor conditions, making it susceptible to big surprises.

TRADE BALANCE
Measures the difference in value between imported and exported goods. A positive Trade Balance indicates that more goods were exported than imported over a given period. A rising trend may have a positive as well as negative effect on the nation's currency. When higher levels of exports are sold to the world, demand for the nation's currency is elevated as foreigners convert their native currency to purchase the exports. The Trade Balance also has a sizeable impact on GDP because high demand for exports creates increased employment and production, as domestic factories work to fill this demand.

RETAIL SALES
Measures the value of sales at the retail level. A rising trend may have a positive as well as negative effect on the nation's currency because Retail Sales make up a large portion of consumer spending, which is a major driver of the economy and has a sizeable impact on GDP (gross domestic product). Traders pay close attention to Retail Sales because it is usually the first significant indicator of the month that relates to consumer behavior and is susceptible to surprises.

GDP
Gross Domestic Product (GDP) measures the total value of all goods and services produced by the economy. A rising trend can have a positive as well as negative effect on the nation's currency. GDP is the broadest measure of activity and the primary gauge of the economy's health. To foreign investors, a strong economy is viewed favorably because it spurs investment opportunities in the domestic stock and bond markets. More importantly, the central bank is more likely to raise interest rates in the face of a strong and growing economy. The combination of these effects can have a large impact on the demand for the nation's currency.

ISM
The Institute of Supply Management (ISM) Manufacturing Index measures the activity level of purchasing managers in the manufacturing sector, with a reading above 50 indicating expansion. A rising trend can have a positive as well as negative effect on the nation's currency. To produce the index, purchasing managers are surveyed on a number of subjects including employment, production, new orders, supplier deliveries, and inventories. Traders watch these surveys closely because purchasing managers, by virtue of their jobs, have early access to data about their company’s performance, which can be a leading indicator of overall economic performance.

ISM PRICES
The Institute of Supply Management (ISM) Manufacturing Prices measures the monthly inflation experienced by manufacturing organizations when purchasing materials and services. The ISM surveys 400 firms to produce this index.

CPI
The Consumer Price Index (CPI) measures the rate of inflation (i.e., the rate of price changes) experienced by consumers when purchasing goods and services. A rising trend can have a positive as well as negative effect on the nation's currency. The primary objective of the central bank is to achieve price stability; when inflation rises above an annualized rate of approximately 2%, they will respond by raising interest rates to bring prices down. Higher interest rates attract foreign investment, thus increasing demand for the nation's currency. CPI is one of the most closely watched indicators and will usually have a high impact upon release.


Macroeconomics
The field of economics that studies the behavior of the aggregate economy. Macroeconomics examines economy-wide phenomena such as changes in unemployment, national income, rate of growth, gross domestic product, inflation and price levels.

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Forexchartscapes®™ and company staff, owners, associates and all administrators of this site and/or trading, training, seminar/workshop rooms are not licensed financial advisers and are neither intending, representing or advising financial decisions for any person coming to this site or assume responsibility for inaccurate information and shall not be liable for any special, direct, incidental, or consequential damages, including and without limitation, losses, lost revenues, or lost profits that may result from these materials. The purpose of this site is to provide educational information regarding the Forex market, access to further potential education for trading the Forex market and submitted testimonials of those who have used this educational information, which an individual may apply according to his or her own free choice. Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts. You are solely responsible for your actions. Contents of this site and any enclosures are copyrighted 2011 by Forexchartscapes®™, LLC