In the past, Tian Yan Jun often shared some tips for foreign exchange investment trading, especially the risk management that must be carried out before trading. Some partners are curious about the specific mode of operation, especially how risk management should be implemented. In fact, this risk management involves fundamental analysis of forex, but many people do not know exactly what fundamental analysis covers.
There are two main ways to analyze the foreign exchange market: fundamental analysis and technical analysis. Today, Tianyan Jun will talk with you about the fundamental analysis of foreign exchange!
What is fundamental analysis?
Fundamental analysis is a common market analysis method, which mainly judges the relationship between currency supply and demand by studying the state and change of macro basic factors and their impact on the trend of exchange rate, and then predicts the trend of exchange rate. For example, the US non-farm payrolls data is one of the economic data closely watched by the forex market every month. Once these data are released, it could trigger a turning point in the currency market and even lead to wild volatility.
Fundamental analysis can predict the long-term trend of the future exchange rate relatively reliably, and has a certain degree of advance. However, it has the disadvantage of not being able to accurately provide the starting point, the key point and the time of change of the exchange rate. In addition, sometimes exchange rate changes do not strictly follow changes in fundamental factors. Therefore, in the fundamental analysis, it is necessary to combine technical analysis and market psychology and other factors to conduct comprehensive research.
In simple terms, the important factors considered in fundamental analysis can be divided into three categories: economic factors, political and governmental factors, and market factors. These factors all play an important role in the analysis of exchange rate movements.
Economic factor
Macroeconomic situation: In the long run, the change of the exchange rate mainly depends on the level of economic development and economic prosperity of a country, which is the most important and direct factor affecting the exchange rate. Economic conditions have a direct impact on the currency market, which typically moves in cycles. The main factors considered include the level of economic growth, the balance of payments position, the level of inflation and the level of interest rates.
Interest rate level: Interest rate is one of the sensitive factors affecting the exchange rate trend.
Inflation rate: The level of inflation rate is the basis for affecting exchange rate changes.
In addition to the above factors, there are also some economic data releases that will affect the short-term trend of the exchange rate. Through these data, we can understand the economic situation of a country, but a single data is not enough to judge the economic situation of a country.
Here are some important economic data: non-farm payrolls, unemployment rate, trade balance, Gross Domestic Product (GDP), Consumer Price Index (CPI), Producer Price Index (PPI), inflation rate, business climate index, retail sales data, new housing starts, consumer confidence, etc.
Non-farm payrolls and unemployment rate: They are important indicators of a country's macroeconomic development. A decline in the unemployment rate or an increase in non-farm payrolls indicates an improvement in economic conditions and could lead to an increase in interest rates, which would benefit the currency. On the contrary, it is bad for the currency.
Trade balance: Reflects the total income and expenditure of a country's foreign trade over a period of time. A trade surplus means more money flows in than out, and a trade deficit means more money flows out than in. If the trade deficit widens, meaning that imports exceed exports, meaning that the country's goods are less attractive than foreign goods, policymakers may act to devalue the currency to improve the trade deficit, which is bad for the country's currency. On the contrary, a smaller trade deficit is good for the currency.
Gross Domestic Product (GDP) : The first estimate of the previous quarter is published at the end of January, April, July and October each year, and two revisions are published within the following two months. GDP represents all economic activity within a country, regardless of who the assets belong to. For example, if a foreign company sets up a subsidiary in the United States, even if the profits are recouped, the profits still belong to the GDP of the United States.
Different countries focus on different economic data. For example, the United States is a big consumer, and consumption accounts for a large proportion of its gross domestic product, so investors should pay attention to data related to consumption and production. In addition, there is a correlation between some currencies, such as the Australian dollar and the New Zealand dollar. As trade between China and Australia is closely linked, China's economic data can also influence the direction of the Australian dollar.
Political factors and governmental factors
Political factors include the international political situation, political events, relations between countries, the replacement of important political leaders, the outbreak of wars, labor disputes and even strikes, etc. These emergencies will have a huge impact on a country's exchange rate. This is also one of the important aspects to consider in fundamental analysis.
Exchange rate fluctuations have an important impact on a country's economy, so governments (central banks) often intervene in the foreign exchange market in order to stabilize the foreign exchange market and maintain the healthy development of the economy. There are four main ways to intervene: 1. Buying or selling foreign exchange in the foreign exchange market; 2. Adjust domestic monetary and fiscal policies; 3. Making statements at the international level to influence market psychology; 4. Cooperate with other countries to intervene directly or indirectly through policy coordination.
Such interventions are sometimes massive, with billions of dollars invested in a matter of days. Of course, this is only a small fraction of the more than $1.2 trillion traded in the forex market every day, but to some extent, government intervention, especially international intervention, can affect the psychological expectations of the entire market and cause the exchange rate trend to reverse.
Therefore, although government intervention cannot fundamentally change the long-term trend of the exchange rate, in many cases it has an important impact on the short-term fluctuations of the exchange rate.
Market factor
The behavior of investors, the intentions of big players, and manipulation can have a large impact on market prices.
In the forex market, people's decision to buy and sell a certain currency is largely determined by their view of future market conditions. When traders expect the exchange rate of a certain currency to fall, they will sell the currency in large quantities in order to avoid losses or gain additional profits; And when they expect a currency to rise, they buy it in bulk.
Some forex experts even believe that forex traders' expectation of a certain currency has become the most important factor in determining market exchange rate fluctuations. Under the control of this expectation psychology, market funds will quickly flow on a large scale, causing price changes.
Sum up
Fundamental analysis of forex is not a simple matter, as the amount of data and information involved is very large and difficult to fully collect. Some messages may be uncertain, lag, or hidden. However, learning the fundamental analysis of forex can increase the sensitivity of traders to the economic market, so that they can better understand the market trends and make informed choices. Of course, forex analysis is not only limited to fundamentals, technical aspects are also an important part. Therefore, in actual operation, we must combine the two to better guide trading decisions.
