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 like social, political and economic influences. Though, it is rather hard to stay aside from all these variable factors. So, the sphere of complicated and subtle market fundamental lets the explorer know and understand more details of a dynamic global market during the analyzing.

It is possible to predict the conditions of the economy but unlikely the market prices by using the fundamental analysis. 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. Forex fundamental analysis is a fundamental strategy of trading widely used by online trader of forex. This strategy contains some estimations where the different basic criteria, except for the price movement, are taken into consideration during currency trading. The economic conditions in the currency native country along with a number of other factors are the obligatory elements of these criteria. Any fundamental part of the economy is included into the fundamental analysis. A decent forex fundamental analysis includes a number of macroeconomic factors like economic growth rates, interest rates, inflation, unemployment level and others. The market supply and demand coming from political and social powers is the aim of fundamental analysis. The market supply and demand balance forms the currencies prices. The interest rates and the overall economy strength are the two key factors that influence the supply-demand balance. The overall health of the economy can be understood through a number of economic indicators like GDP. The frequent inability of online forex fundamental analyses to find the entry and exit points is forex fundamental analysis key problem. Due to this factor the risk control, especially provided with the leverage, gets quite complicated. Only a piece of an enormous amount of information coming every day is considerable. The interest rates and international trade are the factors analyzed the most carefully. In order to create the forex trading strategy fundamentalist traders create models. The empirical data is gathered in these models for further forecasting the possible price trends and market behavior basing on the key economic indicators.

Sometimes it happens that two analysts possessing the same data come to different conclusions about the market behavior. Still you should research the fundamental data and find out their best fitting to the style of trading and expectations before getting down to any analysis. Any data making the country tick is considered as fundamental by forex traders. The fundamentals are the combination of certain plans, unpredictable behaviors and unforeseen events found out from the factors like interest rates and the policy of central bank and even natural disasters. That’s why it’s better to be aware of the affective contributors of all these factors than to all the fundamentals listed.

Fundamental elements of the economy :

1. The Basic Concept

The economy will be affected by the investment performance. The expected returns may change due to inflation or deflation influence. That’s why it is important to take the economy trends into consideration while planning the strategies of investment.

A. The Business Cycle

The activity of the economy is generally shown by the business cycle. The business cycle consists of four stages: recovery (also known as expansion), peak, contraction (also called recession), and trough.

The growth of business activity, the increase of demand and production as well as the expansion of employment can be seen. The interest rates generally rise during this phase due to money borrowing by businesses and consumers for their expansion.

B. Inflation

At the moment of business cycle peak the amount of goods on demand gets higher than the one on offer which is followed by the prices increase and makes the inflation. At the inflationary environment the amount of money offered for the goods is too high and it makes the conditions for the prices to rise. This lowers the customer’s ability for purchasing.

The demand declines lowering the economic activity due to the prices increase. The recessionary phase follows this process.

C. Deflation

During deflation the economical activity lowers making the employers fire the workers and lowering the demand. This is generally followed by the prices lowering that turn into deflation. The trough phase comes after that. Deflation is characterized as a process of strong and prolonged prices reduction. The following demand rise is caused by low prices and creates the conditions for the economy to come into the expansion phase.

2. Gross National Product (GNP)

Gross National Product is one of the key indicators of the economic activity. All the services provided and the goods produced within the US economy form the GNP. There are 4 components included in the GNP. They are: consumer spending, government spending, investments, and net exports.

Gross National Product adjusted for inflation (Real GNP) being in decline during two successive quarters is a sign of recession.

3. Indicators of the Business Cycle

Three types of indicators describing the economy movements during its entering into a certain phase of the business cycle are generally used by the economists: leading, coincident, and lagging indicators.

4. The business cycle’s effect in Forex

Forex market is sensitive to the economy changes and reacts during its movement through any of the phases. It is important for the investors to monitor these changes and take right decisions in order to get benefits out of these changes.

The US dollar movements in the Forex market are usually trending the opposite direction to the interest rates. For instance, the increase of incomes caused by the interest rates uptrending declines the US dollar index accordingly.

5. Monetary Policy

The control of money and credit supply within the economy is the general aim on the monetary policy. The interest rates are affected by these processes and cause the economic activity decline. The monetary policy is mainly interested in the inflation control.

6. The activity of the Federal Reserve System (FRS)

The US monetary policy is directed by the Federal Reserve System. The nation’s central bank, which is the Federal Reserve System, was established in 1913 by the Act of Congress that has created 12 Federal Reserve districts within the country. The Federal Reserve Board of Governors located in Washington D.C. is responsible for district banks activity coordination. The seven members of the board are appointed by the President and the nominees require the confirmation of the Senate later.

Forex Analytics

There are two main types of analysis one can use trading in the Forex. They are Fundamental analysis and Technical analysis. You should know a little about both types in spite of the fact that there has always been a debate which analysis is more preferable. It’s necessary to examine the currency markets from aside and learn how news influences prices. You should know and understand the daily Forex news and market analysis proposed by professional currency analysts. Soon you’ll realize what big part fundamental news are playing in your everyday trading. Luckily, most Forex news and analysis are offered on the Internet free of charge. We’ll name these sites.

Technical analysis

Technical analysis is equal to charts, or, in other words, it’s the study of price movement. The thing is that anyone can look at historical price fluctuations, and according to them, predict at some point where the price will go. In the charts one can find trends and patterns which will help you find good trading options. The most necessary thing in technical analysis is the trend! A lot of people know quite well that “The trend is your friend”. You will more apparently succeed if you’re able to find a trend and trade in the same direction, and Technical analysis can help you identify these trends as soon as possible. Then you’ll get more beneficial trading opportunities.

Fundamental Analysis

With the help of Fundamental analysis you observe at the market through economic, social and political forces that influence supply and demand. To put it differently you look at whose economy is successful and whose is not. If someone’s economy is doing well; their currency will also be doing well. That happens because the more successful a country’s economy is, the more other countries trust in this currency. For instance, as the U.S. interest rates are increasing, the value of the dollar is also increasing. So the U.S. dollar has been doing well as the U.S. economy is doing well. Later in this course you will learn which specific news events mostly influence currency prices. For now it’s enough to realize that the fundamental analysis of the Forex is a way of analyzing a currency through the strength of this country’s economy.

ABC / Money Magazine Consumer Comfort Index

ABC/Money Magazine Consumer Comfort Index is a nationwide enquiry of about 1,000 adults per month about personal finances, buying climate and the status of the economy. It’s supposed to be helpful and more frequent measure of consumer opinions. Aggregate Hours Worked The aggregate hours worked totalizes two series we just mentioned. The idea is to get an entire picture of the total hours worked each month by calculating an index that represents both employment and the workweek. This indicator is considered to reflect monthly changes of GDP. The quarterly change in the amount of goods produced is defined as equal to the change in man-hours plus the change in productivity.

As far as we can predict productivity from quarter to quarter, the aggregate hours worked index provides a useful monthly read on the entire economy. Atlanta Fed Index Official name of this index is Southeastern Manufacturing Survey. It is regional manufacturing review that covers such prominent industrial states as Alabama, Georgia, Louisiana, Tennessee and Florida. The survey’s industry business conditions index is designed to represent changes in factory-sector: it is above zero when the sector expands and it’s below zero when the sector contracts.

Actually, this index has no market importance and it’s available after the releasing of the national Purchasing Managers’ Index. So this index considered too dated not worth tracking. Average Hourly Earnings One of the most important indicators of the tightness of labor markets and labor cost inflation is Average hourly earnings (AHE). The Bureau of Labor Statistics of the U.S. Department of Labor provides it every month, and it’s available one week after the reported month. The indicator seems to take insignificant effect financial markets; unexpected increases can cause rising of interest rates because such increasing considered inflationary, especially if in excess of productivity growth. A large rate of growth of AHE can cause increasing of Fed Funds rate that is also bearish for the bond market. Stock Prices: high wage growth may increase long-term interest rates, reduce profits, and lead to increase of the Fed Funds rate to stem inflation, that is why higher wage inflation is bearish for the stock market.

Exchange Rates: unclear. On one hand it leads to higher nominal interest rates and real ones too. On the other hand high wage inflation leads to high inflation and loss of competitiveness. Ability to Affect Markets: it is an early signal of wage inflation.

Analysis of the Indicator: if the wage growth were above productivity growth, high rates of growth of average hourly earnings would lead to higher inflation.

Employment Cost Index (ECI), closely watched by the Fed, is a measure of wage cost growth. Compared to the quarterly published ECI, the advantage of the average hourly earnings indicator it that it is published monthly and is an early indicator of wage growth in the previous month. But, nevertheless, compared to the ECI, AHE has some minuses. The ECI includes wages and salaries as well as benefits costs, so it is a broader measure of labor costs. In general, the basis of AHE indicator is gross earnings. So they represent changes in basic hourly and incentive wage rates as well as premium pay for overtime, late-shift work and changes in output of workers paid using an incentive based plan. They also demonstrate shifts in the number of employees between relatively high-paid and low-paid work. Changes in earnings for the individual industries making up those groups and divisions will impact averages for industry groups and divisions. Average hourly earnings that are reported by CES are not wage rates.

Average Weekly Earnings

Average Weekly Earnings – multiplying average weekly hours estimates by average hourly earnings estimates derives these estimates. So, weekly earnings are affected the length of the workweek along with changes in average hourly earnings. Monthly trends in these factors as stoppages for varying reason, the proportion of part-time workers, labor turnover during the survey period and absenteeism for which employees are not paid may cause the fluctuations of average workweek. Structural changes in the makeup of the workforce can cause long-term trends of average weekly earnings. For example, persistent long-term rising of the percentage of part-time workers in retail trade and many of the services industries have reduced average workweeks in these industries and have affected the average weekly earnings series. Average workweek.

The average workweek, or worked hours is necessary for two reasons. First, it is considered a useful indicator of labor market conditions: a rising workweek early in the business cycle may be the first indication that employers are preparing to increase their payrolls, while late in the cycle a rising workweek may indicate that employers are having difficulty finding specialists to occupy vacant positions. Second, it is a critical determinant of such monthly indicators as industrial production and personal income.