Forex fundamental news as applied to money rates

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Fundamental analysis accounts for global economic, financial and political news, their correlation and influence on live currency rates. In other words, it can forecast things that are not reflected on charts, but can appear tomorrow and become the object of the fundamental analysis. Correct estimations of the news "beyond each chart" and indicator brings you to profit.

Live fundamental news is one of the most important factors in the market of Forex rates. There are two types of news that can be distinguished: scheduled and unexpected:

Occasional and unexpected news

Unexpected news include political news and the one caused by natural events (less often, economic). Wars affect financial markets. Earthquakes, hurricanes and other natural disasters in a certain country can move national currency down (as a lot of money is needed for recovery), which can lead to inflation.

Scheduled news usually include economic and sometimes political news. The economic news is released in the form of report or forecast. This type of news is better subject to Forex fundamental indicators.

The first-rate news agencies like Reuters, Dow Jones Newswires, DJ Forex, Bloomberg, Tenfore, Bridge and Prime-TASS publish the dedicated page with the forecast on main economic figures of developed countries. Usually, this macroeconomic statistic published by national statistical offices (Bureau of the Census in the USA etc.). News agencies supply traders with fresh statistical data. Average weighted forecast of economists and research centers about expected figures of national statistic are published on certain days specifying date of release and previous rates. This data catches attention of all market players. Exchange rate and future actions are forecasted on their base.

In the sphere of foreign exchange markets 90% of operations includes the operations with U.S. dollar and usually the US economic data has the great impact on national currency rates.

There are two aspects of fundamental news which influence on Forex:

  • Long-term influence: change of currency rate trend from several weeks to several years. This impact is determined by fundamental factors, which set terms for national economic (dynamics of inflation, unemployment and interest rates etc.) This middle-term predict of national rate is used for opening strategical positions. For middle- and long-term influence there is a need to take into the consideration statistical rates for more than a month (a quarter, a year);
  • Short-term influence, how  statistical figure or unexpected news impacts  on currency rate. This effect longs from several minutes to several hours. A short-term influence is caused by the Forex fundamental indicators of short periods (a week or a month).

Three ways of how the fundamental event impact on the market can be distinguished:

  • The market comes up to expectations. Then the price movement won't be changed a lot;
  • The market falls short of expectations only because of current event, i.e., it underestimated this factor. In this case, the price will continue its acceleration at the moment of release;
  • Market's expectations do not only fail, but are proven to be totally fallacious. In this case, currency rate can move in the opposite direction. Prior to its change, participants of trades contemplate current situation.

If fundamental news contradicts current trend, period of influence can be limited to the time from one hour to several hours. In other case (when fundamental news confirms current trend), the market gets a certain acceleration with a possible rollback.

As the provisional forecast of economical rate is usually known, within the first second of its release, a trader should compare forecast with the real value. If they match, no active movement takes place. In this case, market is "discounted" or "set" for this value and the movement happened earlier. Respond of exchange rate is determined by that part of the market which has been discounted on this rate.

Generally, all fundamental factors are estimated from two points of view:

Let's consider main fundamental factors, which should be taken into consideration:

Gross domestic product – GDP

Gross domestic product (GDP) is the main indicator of the national economic state. And it includes smaller economical indicators.

There is a direct dependence between GDP and exchange rate: if GDP grows, exchange rate grows too. If GDP grows, the common economic status is good: manufacture grows, foreign investment and export increase. Increase in investment and export leads to increase in demand of national currency. It is represented by growth of exchange rate. Growth of GDP over the years leads to the "overheat", increasing of inflation tendencies and consequently, to increase in interest rates (as the main anti-inflation measure), which also provides the currency demand. GDP is represented both the ratio to its value for the previous period and as an absolute value.

For example, you know GDP forecast telling that quarter GDP falls from 1,2 down 0,4%. Though it is just a forecast, many investors already start to sell US dollars, which leads to drop of the exchange rate.

If their share in the market is big enough, by the time of release, market's respond will depend on a specific indicator:

If growth of GDP is only 0,1% (lower than expected), the US dollar will obviously fall; if growth is 0,4% (which was expected), the US dollar won't change; if growth is higher than expected, for example, it is 0,9%, US dollar will probably get higher, but to a very little degree; if growth is unexpectedly high, it will change the economic situation and exchange rate will increase considerably.

Real interest rates 

Real Interest Rates are very important as fundamental factor. It is the indicator, which determines total income from investment made to national economy (deposit interests of the banks, income from bonds, average rate of return etc.).

Change in the interest rates and the exchange rate are the corresponding values: if interest rates grows, exchange rate also too. Speaking about the rates, real interest rates should be taken into consideration, ie, nominal interest without account of the inflation rate.

To analyze the situation deeper, take into account that the difference between interest rates of two countries is the main factor for the exchange rate. If both countries have approximately the same level of interest rates characterizing their equal income from investment in the economy, then increase in the interest level made by the central bank of one country leads to growth of yield from investment in the currency of this certain country. It ensures growth of currency demand and exchange rate.

Unemployment rate

The employment factor can be represented by two values: unemployment rate (i.e., percentage ratio of unemployed people to the total number of working population) or the number of employees. Unemployment rate is usually published in percentage.

There is an inverse relation between unemployment rate and exchange rate: if unemployment grows, exchange rate falls. According to the modern theory, zero level of unemployment can't be reached (seasonal, structural and frictional unemployment always exists). That's why nowadays there is best possible rate worked out for each country. It determines the most sufficient unemployment rate required for prosperity. These rates usually vary from 3 to 7% depending on the amount of working population.

Inflation rate

Inflation or devaluation of the national currency is measured in rate of growth of prices. There are two figures of change in price:

  • CPI - Consumer Price Index – determines change in retail prices on the basket of goods and services. CPI is considered to be the most reliable index, if it doesn't include food and power industry. In this index, prices of imported goods and services are taken into consideration. CPI is the main indicator of inflation in a country. This index is analyzed along with PPI.
  • PPI - Producer Price Index –determines change of price in the manufacture. This index consists of 2 parts: input prices (semi-products, components, etc.) and output prices (ready-made goods). The output price include labor costs and represent inflation related to change in labor costs. PPI is considered to be the most reliable figure, if it doesn't include food and power industry. Import prices are not accounted in this index. PPI has a notable impact on the market.

Thus, inflation and exchange rate have an inverse interrelation: if inflation grows, exchange rate falls.

Payments and trade balance

The balance of foreign payments and cash receipts of a country includes:

  • payments balance or payment deficit ;
  • trade balance или trade deficit.

Payments balance represents the ratio between payments coming from abroad and payments going abroad. If incoming payments exceed payments to other countries and international organizations, the payment balance is positive, if not, then the balance is negative and exchange rate falls down. And on the contrary, growth of exchange rate (positive balance) leads to active payments balance.

Trade balance represents the ratio between prices for exported goods and imported goods. This is a difference between exports and imports. If export exceeds import, this is aa positive trade balance. Exporters receiving export revenues in foreign currency sell goods in exchange for national currency, thereby contributing to growth rate of national currency rate. The relation we get in the end: when trade balance grows, exchange rate grows too.

If import exceeds export, this is the trade deficit. In this case, importers have to sell national currency in exchange to foreign currency in order to purchase foreign goods. Here we have a relation: if the trade balance falls, exchange rate falls too.

Industrial production index(IPI)is the one of main indicators telling about condition of national economy. The index demonstrates changes in output volume of industry and public services of a specific country. Its change has a great impact on the market. Growth of this index leads to growth of national currency.

Leading indicators index is a weighted index of such indicators as factory orders , the number of jobless claims, money supply (aggregates), average working week, building permits, major stocks prices, durable goods orders, consumer confidence index . It is believed to characterize development of economy that will be observed during coming six months. There is also an empiric rule: if the indicator's rate has a negative value during 3 months, development of economy is slowing down. Growth of the index tells about improvement and leads to growth of national currency. Leading indicators index has a limited effect on the exchange rate, because it is published a month after all main indicators are already published.

Economic sentiments index

Economic sentiments index is widely applied in developed countries. This group of indices represents the poll among leading businessmen and heads of large corporations.

In the USA this is NAPM index - National Association of Purchasing Managers index. It represents results of a survey conducted among purchasing managers. This index is used to estimate changes in new factory orders, volume of industrial production, employment, supply of commodities and providers' operation time. Figures below 45-50 points mean that economy is slowing down. This index is more affected by psychological factors than by real state of things. Since the volume of industrial production does not stipulate consumer demand automatically, this indicator requires accuracy. Growth of the index leads to growth of exchange rate of the U.S. dollar. Economic sentiments index also has limited effect on market.

As a rule, fundamental factors exert an expected rate influence. But it should be used very carefully. It's not recommended to take one of these factors as 100%-guarantee of change in rate that demanded by you. In real situation there are different types applied for assessment of one event or rate: optimistic and pessimistic. Before making a decision to open a trade, study situation on the market and its possible respond of a particular factor. And only after that you can make a decision.

Take a look at the examples of two possible approaches in evaluation of statistical indicators:

  • price is growing (increase in CPI, PPI) — traders note that soon monetary policy will be getting tough, interest rates will be increased. So the exchange rate should grow. But pessimists will argue that this will result in inflation leading to drop in export, deterioration and drop of exchange rate.;
  • GDP is growing – traders note that economy is developing, exchange rate will grow. Pessimists say that overheat, inflation, increase in import and consequently, drop of exchange rate can be result of this situation.

That's why, the universal rule for any trader is to account for expectations of majority. You can figure it out by analyzing publications, studying market reviews in information systems, sharing your view with other traders. The information from these researches can show you different options of where the exchange rate will go (after publishing the economic indicators). Finally, trader's goal is to join the rate movement dictated by majority of the market.

Conclusion: fundamental analysis has many aspects. Price is influenced by several factors, which can be even conflicting with each over. If a trader uses such analysis, he/she keeps the track of the most important events that can impact on the exchange rate. Also, this type of analysis is recommended to be used along with technical and chart analysis.

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