Fundamental factors include economic and political events (such as elections, wars), monetary and fiscal policies, government reports--such as GDP, CPI, CPI, and Unemployment rate and other data. Traders refer to the publication of the above news and event reports for trading decisions, which is called the use of fundamental analysis. The value of a currency actually reflects the outcome of the country’s economic situation compared to other countries.
A country’s political conditions, inflation and interest rates will affect the country’s monetary value. Fundamental traders can predict currency price movements by tracking international news, economic reports, and government published indicators. Interpreting these data will help deepen traders' further insights into the currency market. It should be noted that the impact on the foreign exchange market is only an expectation of the future of the event, not the event itself. If such reports or news match the expectations, they will necessarily affect the current market price; if the report or news does not match or is expected to differ, the money market will also react to the “price” change.
Fundamental analysis often monitors, evaluates, and analyzes a variety of factors related to the national economy to determine their impact on economic growth and development. These are usually macro trends that are complex and take a long time to form. Another factor affecting the state of the state's economy is the political system, the balance between social welfare and individual competition, or the degree to which the economy is open to foreign trade and capital. Other factors include the social and cultural composition of the country, such as productivity, labor mobility, and entrepreneurship. Natural resources are also important factors such as oil or minerals.
Fundamental analysis studies economics and currency through economic statistics. These statistics usually depict specific sectors of the economy, not the entire economy. Therefore, different statistics may point in the opposite direction, as some areas of the economy may be growing, while others may be in recession, or some industries are falling in importance, while others are rising. Most statistics can be reversed to show what has happened, but not necessarily predict what will happen.
The world today is connected to each other and changes rapidly. Political, military, personnel, and even natural events can have a rapid, widespread, and lasting impact on the economy. Fundamental analysis must take into account all of this information and grasp the overall picture of the economy, such as strengths, weaknesses and weaknesses, but the most important thing is to understand its future potential and the future direction of the currency. Personal judgment and experience are very important for currency fundamental analysis.
Political factors include general elections, high-ranking officials, and crises. Some political factors such as the presidential election or the summit of the seven countries are scheduled in advance and can be expected. Political crises such as: a rogue state such as North Korea’s nuclear test, or the September 11 terrorist attacks can have a huge impact on the money market, and such events are unpredictable. However, only large political events can affect the shape of trade, or the operation of the economy; or the economy can have an impact on financial markets.
North Korea detonated a nuclear weapon in its nuclear capabilities test. How a currency responds to regional political dangers depends on many factors. Here, the yen is victimized because it is a country of North Korea and the two countries are nervous because of military hostility. Obviously, any North Korean attack on Japan will affect the Japanese economy. But traders are aware of these developments on Friday (10.6), they will sell the yen and buy dollars. A price change of about 100 points means that the yen needed to buy one dollar has risen from 117.90 to 118.90. In other words, it takes an extra yen to buy the dollar now.
In view of North Korea’s nuclear test, which has a large negative impact on the yen, the dollar will be relatively strong in the USD/JPY currency pair. The yen remains weak and the dollar will take advantage of its geopolitical events because it is considered a safe haven currency. In the dangerous period, investors will withdraw funds from more dangerous investments and invest in a stable currency. Given that the dollar is the world's only superpower, it certainly attracts investors who want to put money into a safer economy.
The status of the 'safe harbor' in the United States does not always work in times of crisis in the world. If a regional political event directly affects the United States, such as a terrorist attack or other less direct, such as military warfare against other countries such as Iran, then investors may sell dollars. Traders may be concerned that threats may become actual actions leading to war between the two countries. Entering Iran will weaken the dollar because the US economy is closely linked to the oil market, and most of the oil comes from the Persian Gulf. Declaring war with Iran will destroy the supply of oil and cause harm to the US economy. Therefore, as mentioned above, in the political crisis, many factors need to be considered for the influence of a certain currency.
Forex market transactions are different from retail transactions. In the retail market, the price is determined in advance by the seller, and the buyer measures his or her own needs based on the price and then decides whether to purchase. In foreign exchange market transactions, buyers and sellers constantly adjust their expectations of prices based on news released by the market to participants and news released to the market by external channels. If the seller believes that the price will rise in a few minutes, he may choose to cancel the offer price in the hope of getting a higher price. If enough sellers cancel the offer at a specific price, the transaction price will rise to the next offer price. However, if the trader believes that the price may fall, they will lower their selling price until they find the buyer, thus pushing the market price down.
When every participant in the market reacts to changing news, the price moves as the result of these reactions. For observers, the only reason for the decline in market prices is that price movements are caused by decisions made by thousands of people, not by individual decisions, that is, only the decisions of the majority can influence prices. We often say that "the market is very responsive to certain news" or "the market is full of success today." However, due to the widespread use of this “market” abbreviation, it is often easy to overlook the most important psychological factors in understanding market behavior – “market” is actually a collection of participants' views and a reflection of our consciousness.
The market participants' assumptions about the market often differ from the actual market trends. When specific economic statistics are released, if the market is in line with or close to the general view of the market, the response to market transactions is relatively flat. For such statistics, we call them “already digested by the market”, which means that many of the previous trading decisions have predicted the economic status described by the statistic and have been reflected in the trading volume. If the statistics are different from the forecast, most of the trading decisions will be closed immediately and the price moves according to these changes. The game between the views of most market participants and the actual situation of economics, statistics or exchange rates reflected by the volume of transactions is the main force that dominates currency trading.
In the foreign exchange market, traders will predict whether the national economy is stable. To understand the fundamentals of an economy, traders need to understand the production gains and vibrancy of different industries. This includes data on manufacturing, retail, housing construction and sales, consumer spending and confidence, and labor market conditions. The above data can be found in reports published by government agencies, research institutions and private companies.
GDP is the abbreviation for GDP at market prices. It is the final result of production activities of all resident units of a country (region) in a certain period of time. There are three manifestations of GDP, namely value form, income form and product form. In terms of value form, it is the difference between the value of all goods and services produced by all resident units in a certain period of time exceeds the value of all non-fixed assets and services invested in the same period, that is, the sum of the added value of all resident units; Seen, it is the sum of the initial distribution income of all resident units created and allocated to resident units and non-resident units in a certain period of time; in terms of product form, it is the final use of goods and services minus imported goods and services. In the actual accounting, the three manifestations of GDP are represented by three calculation methods, namely the production method, the income method and the expenditure method. The three methods reflect the gross domestic product and its composition from different aspects.
The foreign exchange market makes detailed variable analysis of each quarter's GDP report. Generally speaking: When GDP is upside down or revised, it indicates that the country and the region have strong economic growth, and the possibility of raising interest rates in the future will rise accordingly, which is good for the relevant currencies.
GNP is the total income of the country's permanent population. GDP measures all final products and services, and GNP measures all products and services produced by citizens of the country around the world. For example, the Japanese auto company opened in Michigan. Processing plants, the value of eradicating cars and the total cost of investment will not only be included in US GDP, but will also be included in Japan's GNP because they have capital and profits. GNP and GDP are announced quarterly, but preliminary measures will be announced. The GNP calculation formula differs from GDP in that it accounts for the income of US citizens and removes the income that non-US citizens receive in the United States.
The new durable goods order represents the quantity of items that are not easily depleted in the next month. This data reflects the manufacturing activity. By definition, the order refers to the intention. Commodity transactions that are purchased and are expected to be shipped immediately or shipped in the future. Consumers often use these products. New durable goods orders calculate manufacturing capacity because durable goods are typically used for 3 or more years, including aircraft, factory machine parts, cars and buses, cranes and small appliances. Since the fundamental indicators calculate new orders, they reflect the performance of actual production in the future. Production companies need to produce durable goods to complete the filling of new orders. Since the statistics include supplies for the defense sector and transportation supplies, these products are high-priced products. The data changes in these two departments have a great impact on the overall data. Therefore, the market pays more attention to deducting supplies from the defense sector and transportation equipment. The change in data. New orders can directly affect the level of unfinished orders and inventory monitoring when the company makes production decisions. The board of directors also tried to take inflation into account when calculating the measurement. In the United States, new durable goods orders use price indices from different levels of industry, and chain-weighted price index formulas to try to achieve "decreased" results. Overall, if the data grows, it means that the manufacturing situation has improved, which is good for the country's currency. On the contrary, if it is lowered, it means that the manufacturing industry is shrinking.
The retail sales metric is a monthly indicator that is important to Forex traders because it reflects the ability of consumers to spend and the success of retailers. Retail sales reveal economic performance because it reflects consumer spending. If the consumer has enough funds to buy the goods in the store, more goods will be manufactured or imported. Retail sales vary with the seasons. For example, in September (children return to school) and December (festival season). Retail sales metrics are particularly important in the US as all businesses are targeting consumers.
New housing starts and construction permits to record the number of new home starts and future construction permits. The index is highly sensitive to interest rates. When real estate prospers, the economy usually prospers. It is this phenomenon that has led many experts to view the residential construction industry as one of the most reliable leading indicators of economic activity. The real estate industry was one of the first departments to make a downward response when the economy went to a depression, and the earliest signs of recovery when the economy rebounded.
New home sales, this data represents the number of new homes sold and being sold. This report not only shows the demand for new homes, but also shows the economic power. The high sales volume indicates that the economy is in a period of rapid development; low sales volume indicates that the economy may be stagnant.
The country's stock market reflects price changes and the value of the country's largest company. The rise or fall of the stock index can reflect changes in the investor's overall mood and interest rates. Interest rates and inflation are financial indicators that are significant for future economic activity and the foreign exchange market. Next we will understand these indicators.
Inflation measures the price at which economic prices will rise. Inflation is directly related to the purchasing power of a currency in its territory and affects its position in the international market. Currency prices, housing, labor, production materials, etc.
For a simple example, inflation is due to uncontrolled economic growth. Rapid economic growth has accelerated the printing and circulation of money. The extra money is necessary because the consumer will transfer the funds out of the bank to buy the goods. If companies and stores are highly profitable, their employees' salaries will increase, stimulating them to buy more.
Companies that have not profited from the initial extra economic activities see consumer wages rise, and with the money, they will purchase more of their goods and expand their economic activities to other areas. To meet additional demand, companies may choose to raise prices.
If these cyclical changes are not controlled, it will take economic benefits from actual economic growth. In theory, people have more money, but because of the price increase, they can buy less goods. For example, if a retired employee has his funds in the bank, but when the price rises, he will be negatively affected, because the goods that he can save before the savings are different from those before inflation.
A key price, such as an increase in energy, may also trigger inflation. If oil prices rise, many other products that use petroleum as a production process will increase their prices. Not only that, consumers and businesses need to spend more on their income and income to pay for the same amount of gasoline. Inflation will reduce the purchasing power of money. Because the economic activities of economies such as the United States require oil, the rapid rise in energy prices may increase inflationary pressures.
Inflation is a headache. Central banks in all economies have a responsibility to stabilize prices. The central bank’s greatest right is to set a national benchmark interest rate. If inflation is fast, the central bank will raise interest rates to slow economic activity in order to curb inflation. If inflation is slow, the central bank hopes to stimulate economic growth by lowering interest rates. Given that inflation has a direct impact on a country's interest rate policy, it plays a pivotal role in the currency market.
The Consumer Price Index (CPI) is a price change indicator that reflects the price of goods and services related to residents' lives. It is usually used as an important indicator for observing inflation. Changes in CPI reflect the pressure of inflation facing the economy. In the United States, CPI may be the most critical indicator of inflation. Consumers buying goods, enjoying services and experiencing price changes reflect inflation in the economy.
Investors generally prefer to avoid investing in currencies that continue to inflate. The growth of CPI will cause the growth of interest rates to lead to a decrease in bond prices and specific currency prices. Interest rate growth will cause anxiety in the minds of foreign exchange investors, and they will sell their bonds. This series of chain reactions is likely to cause an increase in the money supply and weaken the liquidity of the money market.
The Producer Price Index (PPI) is an index that measures the trend and degree of change in the ex-factory price of industrial products. It is an important economic indicator reflecting the price changes in the production sector in a certain period. It is also the formulation of relevant economic policies and national economic accounts. An important basis. CPI measures prices from the perspective of consumers, while PPI measures prices from the perspective of producers. PPI can reflect inflation earlier than CPI, because when consumers buy these higher-priced products and services, some of the inflation that affects producers is also passed on to consumers, thus affecting the CPI index.
If the PPI is higher than expected, it indicates a risk of inflation; if the PPI is lower than expected, it indicates a risk of deflation. A sharp rise in PPI will have a negative impact on the money market.
Average hourly wage, this indicator estimates changes in employee salaries. It reflects the disposable income of the consumer and the company's salary paid to the employee. Changes in wages also highlight the tightening of the labor market, as companies need to pay their technical staff to retain them
Employment indicators reflect an overall economic or business situation. New jobs, employment and new unemployment are important indicators of a country's economic performance. In the previous chapter, we have mentioned that it is especially important to understand the speed of wage growth.
Unemployment rate refers to the ratio of the unemployed population to the labor force (the number of laborers who have the willingness to work and the unemployed work in the total employment population in a certain period of time). The purpose is to measure the labor productivity in idle, which reflects a country or region. The main indicator of unemployment. The unemployment rate figure has always been regarded as an indicator of the overall economic situation, and it is the first economic data published every month, so the unemployment rate indicator is called the “crown pearl of all the economic indicators”. It is the most sensitive monthly economic indicator on the market. The survey included business companies and families. Commercial company surveys include payroll, weekly working hours, hourly wages, manufacturing, retail, government work, and total hours worked in other industries. The household survey reflects the total labor force, employment and non-employment. The decline in the number of unemployed reflects a mature business cycle, and the increase in the number of unemployed indicates a recession.
How to interpret the indicator. Under normal circumstances, the unemployment rate declines, which represents the healthy development of the overall economy and facilitates the appreciation of the currency. The rise in the unemployment rate represents a slowdown in economic development and is not conducive to currency appreciation. But the unemployment rate has changed slowly, so fundamental traders will use other indicators to get more immediate information. If the unemployment rate is matched with the inflation indicator for the same period, it can be seen whether the economic development is overheated at that time, whether it will constitute pressure to raise interest rates, or whether it is necessary to reduce interest rates to stimulate economic development.
The non-agricultural employment index, which is one of the US unemployment rate data, reflects the number of new employment outside the agricultural employment population, and the unemployment rate is released simultaneously, by the US Department of Labor Statistics Bureau on the first Friday of the US East Time 8:30 is the data of the month before 20:30 Beijing time. The non-agricultural employment index reflects the development and growth of the manufacturing industry and the service industry. The reduction in the number means that the company reduces production and the economy is in a depression. It is loved in the absence of hyperinflation, such as a sharp increase in numbers, showing a healthy economic situation. In theory, the exchange rate should be favorable, and may indicate that interest rates will be raised more. The interest rate hike will be beneficial to the US dollar. If the non-agricultural employment index increases, it reflects an increase in economic development, and vice versa.
This indicator is also more sensitive than the unemployment rate indicator. It has become the opposite measure of non-agricultural wage changes because it reflects the time people are unemployed and their need to apply for unemployment insurance. When the employment situation deteriorates, this indicator will become the main indicator of concern. Unlike other indicators, the average number of weekly claims for unemployment insurance is announced once a week
The average weekly working hours are other indicative sampling data, which are not important but provide clues to understanding the economic situation. The average weekly working hours of the manufacturer usually dominates the business cycle, as the employer adjusts the working hours before adjusting the staff.
Industrial production index, an index based on the total amount of industrial production in a given country and region, consists of machine manufacturing, mining and utilities. A highly active industrial production index means that the economic development is in good shape and will have a positive impact on the local currency; the low activity industrial production index reflects a bad state of local economic development.
The trade balance reflects the difference between the import and export of a country's goods. When the country’s exports are higher than imports, there is a trade surplus or trade surplus. Conversely, when exports are lower than imports, they are called trade deficits or trade deficits. The trade account is an overall assessment of the overall economic activity of a country or region, and is closely watched by participants in the currency market because of its important influence. Export activities not only reflect the competitiveness of a country, but also reflect the vitality of overseas economy. The import trend reflects the country’s domestic economic strength. If a country has a major trade deficit, it usually causes the country's currency to weaken. However, large-scale financial investment inflows can offset this negative impact.
The current account is an important part of international trade data, which measures the sale of goods and services, interest payments and unilateral transfers. The trade account is included in the current account. Under normal circumstances, the current account deficit is also negative for the local currency.
The Purchasing Managers Index, which usually refers to the US Purchasing Managers Index, is a very important sub-indicator of the economic leading indicators and a key parameter for manufacturing in the ISM Business Report of the American Institute of Supply Management. In the general sense, the increase in the purchasing managers' index will bring the dollar exchange rate up; the decline in the purchasing managers' index will bring down the dollar exchange rate. The Purchasing Managers' Index is expressed as a percentage, often with 50% as the cut-off point for economic strength: when the index is above 50%, it is interpreted as a signal of economic expansion. When the index is below 50%, especially close to 40%, there is a worry of economic depression. Generally between 40 and 50, the manufacturing industry is in recession, but the overall economy is still expanding.
Supply Management Association is the world's largest and most authoritative organization in the areas of procurement management, supply management, and logistics management. The index is higher than 50 points, representing the expansion of manufacturing activities and good economic development; the index is between 45 and 50 points, representing the stagnant development of industrial manufacturing; the index is below 40 points, representing the manufacturing industry and the overall economic downturn. Because ISM has a decisive influence on the Fed's monetary policy, it also plays a pivotal role in the economic market.
The University of Michigan Consumer Confidence Index, which regularly surveys and evaluates consumers' perceptions of their personal finances and national economic conditions. The correlation between the consumer confidence index of the University of Siegen and consumer spending is even closer. If consumer confidence rises, the bond market sees it as bearish and prices fall; the stock market usually sees it as good. The US dollar exchange rate usually seeks hints from the Fed. If consumer confidence rises, it means consumption growth, the economy is strong, and the Fed may raise interest rates, and the dollar will strengthen accordingly.
The IFO Business Climate Index is compiled by the German IFO Research Institute and is an important leading indicator for observing the economic situation in Germany. The IFO Economic Climate Index is compiled every month for various industrial sectors including manufacturing, construction and retail. The number of entrepreneurs covered in each survey is more than 7,000, and the current situation is assessed by the company. And the index compiled by the company's plans in the short term and the views for the next six months. As the largest economy in the Eurozone, Germany's GDP accounts for nearly a quarter of the Eurozone's GDP. Therefore, the German IFO survey is of great significance to the overall economic health of the Eurozone. The data is positive, indicating that the German economic outlook is optimistic, meaning that consumer spending is growing and the economy is expanding; on the contrary, if the IFO data is low, it may imply an economic slowdown. The indicator uses 100 as the watershed, and the farther the data is from 100, the greater the intensity. The survey has two important sub-indicators – the current status index and the business expectations index.