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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.
©Forexchartscapes ® ™
2011
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