Fundamental Analysis

This presentation will introduce you to the world of fundamental analysis. You will learn the basic tools to leverage worldwide economic events into money in your forex account.

What is Fundamental Analysis?

Fundamental analysis examines and analyzes reports that can potentially affect the capital market. Although economic reports are critical to fundamental analysis, we must also consider a range of factors that might affect the market, including politics, natural disasters, etc.

Fundamental analysis helps traders understand the market, enabling them to make better decisions regarding their positions on what to buy, what to sell and most importantly – when!

Skilled traders balance technical analysis capabilities with a fundamental understanding of the market.

Economic Indicators

The main tool for fundamental traders is the analysis of all economic indicators that affect the market. Economic indicators are reports such as interest, unemployment rate, etc.

Keep in mind that even if not all economic indicators initially appear to have a direct impact on the forex and commodities market, the effect finds it way into this market by affecting different markets that influence the forex and commodities market. 

The economic indicator is extremely important to the fundamental analyst before, during and after its publication.
Before publication – Traders should know exactly when each indicator will be published. In addition, an understand of market projections and expectations for those indicators is critical.

During publication –The value of economic indicators are published via a press release. It is very important to read and understand it because it might be more significant than the indicator value itself.

After publication – Analyzing and understanding the effect of the indicator on the market.

In brief: Fundamental analysts should always know when indicators are published, the projection for the indicator and understand the potential impact this indicator has on the market.

Economic Calendar

The Economic Calendar is the most basic tool for the fundamental analyst, presenting all economic news.

Fundamental analysts should have access to such a calendar throughout the entire trading hours, as this will allow them to be prepared for any market event.

An economic calendar can be found on every major financial website including leading forex brokers.

The calendar is an updated table of many economic indicators and a good calendar will supply the following information for each indicator:

•Exact time and date for the publication of the indicator.

•Source country of the indicator.

•Last published value.

•Market projection for this value.

•Importance of this indicator.

There are a variety of indicators and related scenarios. Analysts must gain an in-depth understanding of the meaning of each economic indicator and the ways it might affect the market.

Central Bank Interest

Interest is the main tool used by central banks to control the market. Interest publication is a an extremely important event that can trigger significant market fluctuations.

The announcement of the interest rate is generally accompanied by a message that analyzes and explains the motives for the decision while elaborating on additional measures the bank will adopt.

Low interest rates lower investment in local currency and usually leads to a weakening of the local currency and rise in inflation.

Interest rate trends are important as well, e.g.: if the interest is low but in an upward trend, the market will probably react by strengthening the local currency against other currencies.

Interest publication has a significant influence, especially when the interest value or its accompanying message, is different from market expectations.

 

Lets analyze an example:

1.Current status is :

•US interest – 0.25%

•Euro Interest – 1%

•Euro USD rate is 1.40

•The US interest is about to be published. The market projection is that it will remain at the same level.

2.US interest publication: interest was increased to 2.5%

3.Effect: USD becomes more attractive for investment and the rate changes to 1.398

Gross Domestic Product - GDP

This is the most comprehensive economic indicator used to assess economic activity.
GDP provides an excellent indication of a particular economy’s growth rate of. It can be positive or negative value. Growth of the local market and the strength of the local economy characterized with high GDP value. It Is necessary to examine not only the GDP value itself, but also the underlying reasons for increased / decreased economic growth.
Example:
The U.S. GDP was expected to indicate a 1% growth of the US economy. When the GDP report was released, however, it actually indicated a 2% increase. This surprising factor indicates the strength of the local economy and will lead to the strengthening of the local currency (USD) against other currencies.
However, if the report estimates moderate growth in the coming quarters, then the indication is negative. The local market and currency will probably respond with a decline.

Consumer Price Index (CPI) 

This indicator examines inflation - It measures the fluctuation in prices of basket of products consisting of goods and services such as food, clothing, housing, transportation etc.
A high index that exceeds projections and the target set by leading central banks will probably cause banks to raise interest rates. This action will restrain the rising inflation, resulting in the strengthening of the local currency.
For example:
In August, projections place inflation at 0.2% and overall at 1.7% since the beginning of the year. August inflation ended up at 0.8% and the actual inflation since the beginning of the year is 2.3%. Since the central bank target for the annual inflation is 3%, and the inflation is above this target, the banks will increase the interest rate, resulting in the local currency growing stronger.

Unemployment rate 

This indicator measures the percentage of non-employed personnel and provides an indication of the overall economic strength of the country. When the unemployment rate is high, consumer purchasing power declines and this negatively impacts the country’s overall economic growth. When the unemployment rate is high and surpasses expectations, the market and the local currency are weakened.
For example:
The unemployment rate was expected to be 7%. In reality, it is 6.8%. As a result, the impact on the local currency is positive.

PMI at the Manufacturing Sector Services Sector

PMI stands for Purchasing Managers Index.

These indicators examine the degree of expansion or contraction of activity in the relevant sectors and provides an indication of the overall economic situation in the country.

A PMI level that is greater than 50% indicates expansion in sector activities. A PMI level below 50% indicates a shrinking sector.

A PMI level above the projection and greater than 50% is a positive indication regarding the improvement of the economic status. This will lead to the strengthening of the local currency.

For example:

PMI services sector is expected to be 52%, but in fact it is 54.3%. The result is a positive impact on the local currency and strengthening against other currencies.

General Indicators

So far we have reviewed the most important and widely used economic indicators but there are many indicators that are not directly from the financial world and still can create significant waves in the forex and commodities market. Factors such as political reports or natural disasters are prime examples. Fundamental analysts must remain updated regarding these indicators in addition to the standard economic indicators as it will help them estimate and understand market trends.

Examples:

• Political –a finance minister who is highly respected by all major players in the economy announces his resignation. The new situation characterized by economic vagueness and instability leads to the weakening of the local currency.
• Peace agreement - After long lasting war, two countries reach a peace agreement. The impact on the local market is positive: More foreign investment in the state and since there is no need to fund warfare, the government can allocate more funds to enhancing its internal economy. As a result, the country’s economic growth increases and the local currency strengthens.
• Natural Disaster - A hurricane that hits a region that supplies about 50% of world sugar production will lead to a worldwide sugar shortage and a subsequent rise in sugar prices.

Fundamental Analysis Golden Rules

1. Economic calendar – Remain updated with the economic calendar, know when the economic indicators are released.
2. Know the indicator - Learn as much as you can about the indicator, understand its significant in the financial world, know what the market projection for the indicator is and always pay close attention to the message that is released along with the value.
3. Don’t rush – If you are unfamiliar with a certain indicator, do not base important decisions on it. Take the time and study it.
4. Understand the big picture - Remember that the published indicator is not the only one in the market. Always analyze it by referring to all other indicators in the market and by considering the general financial situation.
5. Its not just economics – be aware of non-economic indicators such as : politics, natural disasters etc. which can have a major impact on the market.