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Forex fundamental analysis

Foreign exchange is also a commodity, but only a financial commodity, as long as it is a commodity, it must follow the price law of the commodity. All price fluctuations are determined by the supply and demand of commodities, and there is no unreasonable rise and fall. Generally speaking, the price rise is because more people buy than sell, which pushes the price higher. The price decline means that people buy more than sell. Fewer people and lower prices.

Fundamental analysis refers to deducing the economic development trend of different countries and clarifying the supply-demand relationship between currencies by studying the current status of a country’s economic, as well as future changes.

The impact of economic data on exchange rates
The impact of index indicators on exchange rates
Influence of political factors on exchange rate
Influence of psychological factors on exchange rate

 

The impact of economic data on exchange rates

GDP - Gross Domestic Product refers to the value of all final products and services produced by a country or region within a certain period of time. GDP can not only reflect a country's economic performance, but also reflect a country's national strength and wealth. Therefore, GDP is often regarded as the best indicator of the country’s economic situation: a high GDP means that the country is in the process of vigorous development, and it will naturally attract capital inflows, thereby pushing up the exchange rate; and vice versa.      

Interest rate - Interest rates are one of the main drivers of foreign exchange rates. Generally speaking, when all other variables remain unchanged, rising interest rates will lead to a trend of currency appreciation. Interest rate is an important financial variable in economics. Almost all financial phenomena and financial assets are more or less related to interest rates. Therefore, interest rates have become an important tool for macro-control in countries around the world. Interest rate policies have become the main means for central banks to regulate the supply and demand of currencies and thus the economy. Their position in monetary policy is becoming more and more important. For example, when the economy grows too fast, the central bank can raise interest rates, reduce the money supply, and prevent excessive speculation from causing economic imbalances and inflation. The interest rate level is determined by the combined influence of various factors, such as the industry's average profit level, the supply and demand of money, the status of economic development, price levels, interest rate control, international economic conditions, and monetary policy. Among them, the decisive factor is a country's economic development level. In theory, the optimal interest rate should be higher than the inflation rate and lower than the rate of return on marketable securities. In fact, this situation is not easy to appear. Then, if the interest rate is lower than the inflation rate, it is a negative interest rate, which means that social wealth is shrinking as a whole, then the country’s currency will depreciate, unless the rate of return on securities is significantly higher than the inflation rate.

Unemployment rate - Unemployment rate is a measure of idle labor, reflecting the state of the national labor market, helping to understand the ratio change between unemployment and the labor force. When the economy is improving, companies expand their operations, the number of employees increases, and the overall wage level tends to rise. ; Conversely, when the economy is sluggish, companies tend to lay off their workers and freeze their wages, and the number of unemployment rises. The unemployment rate also reflects the economic development of the country. From the performance of weekly average working hours and average hourly wages, the high or low unemployment figures can be observed, which have a lagging effect in economic indicators.

Commercial inventory - Commercial inventory includes factory inventory, wholesale inventory and retail inventory, mainly used to assess the production cycle. Among them, the inventory is lower than the appropriate level, which will increase production and improve the economy, which is beneficial to the currency; otherwise it is unfavorable.

Inflation - Inflation refers to the fact that the money put into circulation significantly exceeds the money actually needed for circulation, which causes the general price level to continue to rise at a certain rate within a certain period of time (from another perspective, the purchasing power of unit currency continues to decline). Regarding the causes of inflation, current mainstream economists have the following two types of views: (1) Monetarists believe that inflation is mainly caused by the supply of money being greater than the demand for money. (2) The New Keynesians believe that inflation has three forms: First, demand-driven inflation refers to the continuous and significant increase in the general price level caused by total social demand exceeding the total supply, that is, too much money chases too little Commodities; second, cost-driven inflation, which refers to the continued significant price increase caused by the increase in supply-side costs; third, intrinsic inflation, also known as inertial inflation, and expected inflation, which refers to inflation The price triggered by the expectation continued to rise significantly.

 

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Trade balance - Trade balance is the expression of the trade status of goods between countries. It refers to the difference between a country’s total imports and exports. If a country’s total imports are higher than total exports, this is called a trade deficit; but if a country’s total imports are lower than exports The total amount is called trade surplus; while the total amount of imports and exports is the same, this is called trade balance, but it is very difficult to pursue trade balance. When a country has a trade deficit, it reflects that foreign exchange spending exceeds income, and the country’s currency exchange rate will fall.

Financial budget - The fiscal budget is the state’s budget plan for income and expenditure in the coming fiscal year. According to the market economy, long-term planning is used to achieve the fiscal budget goals. The fiscal budget is an important tool for regulating social and economic development. The general budget is a deficit, but it can also be a surplus, and a moderate deficit budget can bring about economic stimulus, such as increasing infrastructure projects to improve the labor market, tax cuts, and increased consumer desire. . However, the persistent high deficit will cause social instability and destroy economic development. The country will reduce expenditures, reduce welfare and increase tax rates due to the high deficit to maintain the source of income.

Personal income and expenditure - The personal income and expenditure report is a monthly report issued by the US Bureau of Economic Analysis. Personal income refers to the total income that individuals obtain from various sources of income. The increase in their data indicates that the economy is improving and consumption may increase, which is beneficial to the national currency; otherwise it is unfavorable. Personal income data is very important for foreign exchange traders. It is a powerful indicator that can predict future consumption and serves as a thermometer for the consumer sector. Personal expenditures are mainly composed of purchased goods and services.

Current account revenue and expenditure - This is the main item on a country's income and expenditure statement. It records the state of capital outflow and inflow due to factors such as the import and export of commodities and labor services, investment income, income from other commodities and labor services, and one-sided transfer. If the current account is positive, it is a surplus, which is conducive to the national currency; if it is negative, it is a deficit, which is not conducive to the national currency.

Capital account income and expenditure - Capital account income and expenditure mainly describes the long-term and short-term capital flows of a country, including long-term capital, illiquid short-term private capital, special drawing rights, errors and omissions, and liquid short-term private capital projects. Today, with the increasing internationalization and liberalization of finance, capital projects have the same impact as current accounts. The higher the degree of opening of financial markets, the greater their impact.

Non-agricultural employment - The number of non-agricultural employment refers to the total number of laborers employed in non-agricultural enterprises, the number of which reflects the index of the national economy. A high number represents national economic expansion, a low number represents national economic contraction, and a high or low number will affect monetary policy. The number of non-agricultural employment has a forward-looking forecast of industrial production index and personal income.

Number of people claiming unemployment benefits for the first time - The number of people claiming unemployment benefits for the first time is an important indicator in the employment data. It reflects how many people applied for unemployment benefits due to unemployment in the past week. The more people applying for unemployment benefits, the fewer job vacancies are displayed.

Consumer credit balance - Consumer credit balances include family loans used to purchase goods and services that will be repaid in two months and more. Generally speaking, an increase in consumer credit balance indicates an increase in consumer spending and optimism about the economy. This situation usually arises during periods of economic expansion; a decline in credit balance indicates a decrease in consumer spending and may be accompanied by pessimism about future economic activity mood.

Durable goods orders - Durable goods orders refer to the number of orders from manufacturers for immediate or expected delivery of goods, and the data reflect manufacturing activities. If the data shows that growth represents expansion of the manufacturing industry, the exchange rate trend is positive, but a decline in the data represents a contraction in the manufacturing industry, which is negative for the exchange rate trend.

Equipment usage - Equipment utilization is the ratio of total industrial output to production equipment. It represents the capacity utilization of the industry. When the equipment utilization rate exceeds 95%, it indicates that the equipment utilization rate is close to the limit, and the pressure of inflation will increase rapidly as the production capacity cannot cope with it. In the case that the market expects that the interest rate may increase, it is good for the dollar. On the contrary, if the capacity utilization rate is below 90%, and continues to decline, it means that the equipment is too idle and the economy is in recession. In the case where the market expects that the interest rate may be reduced, it is negative for the US dollar.

Home sales - Housing sales reflect the economic prosperity of a country and also serve as a leading indicator. Since the purchase of housing for individuals involves huge amounts of money, consumers generally make careful decisions about future economic prospects and personal income. The overall sales of housing can be divided into two parts: new homes and existing homes. The continuous rise of data shows that consumers are very optimistic about the economic outlook; on the contrary, it shows that consumers are very bleak about the economic prospects.

car sales - Car sales are an important part of consumer spending, and at the same time they can reflect consumers' confidence in the economic outlook. In general, car sales are the first-hand information to understand the strength of a country’s economic cycle, which is earlier than other communiqués on personal consumption data. In addition, car sales can also serve as an early signal of economic recession and recovery.   Back to top


The impact of index indicators on exchange rates

Leading index - The leading index is also called a leading indicator or a leading indicator. It is one of the most important economic indicators for predicting the future economic development, and is the weighted average of various economic variables that guide the economic cycle. Generally speaking, the foreign exchange market will react strongly to the sharp fluctuations of the leading index. The sharp increase of the leading index will promote the strength of the country's currency, and the sharp decline of the leading index will cause the country's currency to weaken.

Industrial Production Index - The industrial production index refers to the total value of all industrial products produced by the industrial production department of a country within a certain period of time, and occupies a large proportion in the gross domestic product. Since the industrial sector employs a large number of workers, its changes have a significant impact on the entire national economy and are positively related to exchange rates.

Consumer Price Index - The CPI, also known as the consumer price index, is a macroeconomic indicator that reflects changes in the prices of consumer goods and services generally purchased by urban and rural households. It is usually used as an important indicator for observing inflation. This index reflects the purchasing power of consumers, which in turn reflects the economic prosperity of a country. Therefore, if the CPI declines, it means that the country’s economy enters a recession period, and it will inevitably have an adverse effect on its currency exchange rate; if the CPI rises moderately, it means that the country’s economy develops steadily, and of course its currency exchange rate is beneficial; This means that the country has entered into significant inflation and the purchasing power of the currency has weakened, so it must be unfavorable to its currency exchange rate.

Product price index - PPI mainly measures the price changes of various commodities at different stages of production. From the perspective of foreign exchange transactions, its main role is actually to serve as a very important predictor of CPI inflation indicators. CPI is a consumer price index, and PPI is a producer price index. Because the consumer price index and the producer price index are closely related, PPI and CPI can usually reflect each other well.

Wholesale price index - WPI is a price index compiled based on the weighted average price of the wholesale price of bulk materials. The included products include raw materials, intermediate products, final products and import and export products, but do not include all types of labor services. When discussing inflation, the wholesale price index is one of the three most commonly mentioned price indexes, and its observation method is basically the same as CPI and PPI.

Employment cost index - The ECI report is a quarterly report issued by the US Bureau of Labor Statistics. This report measures the cost of wage compensation for non-agricultural industries and state and local governments. Like CPI, the main function of the ECI indicator is to serve as an inflation indicator. For this reason, the ECI indicator is a useful economic indicator that foreign exchange traders should close.

Retail sales index - Retail sales refer to the statistical summary of retail sales, including the total value of goods sold in the form of cash or credit by all stores mainly engaged in retail business. Expenses incurred in the service industry are not included. An increase in a country’s retail sales represents an increase in the country’s consumer spending, and the economic situation is improving, and interest rates may be adjusted upwards, which is beneficial to the country’s currency exchange rate; conversely, if retail sales decline, it means that the business climate is slowing or not good. It may be lowered, which is negative for the currency exchange rate of the country.

Purchasing Manager Index - PMI is a composite index of manufacturing conditions, including new orders, output levels, employment rates, supplier lead times, and inventory. It is actually a sentiment indicator reflecting the American manufacturing sector. The data for this indicator is obtained through a survey of purchasing managers.

ISM index - The ISM index is an important data released by the American Supply Management Association, which has an important impact on the US economic prosperity and the trend of the US dollar. The American Supply Management Association is the world's largest and most authoritative professional organization in procurement management, supply management, logistics management and other fields.

German IFO Economic Prosperity Index - The IFO economic prosperity index is compiled by the German IFO research institute and is an important leading indicator for observing the German economic situation. Because the IFO Economic Prosperity Index publishes information every month, and surveys companies' views on the future, and covers a wide range of sectors, it is relatively high in predicting economic trends.   Back to top


Influence of political factors on exchange rate

General election - Elections in a country mean changes in leaders and changes in economic policies. In the general election process, changes in the election situation, that is, investors' expectations of the election results, will have a certain impact on the foreign exchange market.

Regime change - When a regime changes in a country or region, the impact on economic development is huge, and it will have an inestimable impact on foreign exchange. Because a country's political situation is unstable, it will cause great damage to the country's economy.

War or coup - When a country breaks out a war or a coup, the country’s currency will show instability and fall, and turbulence is an important reason for the country’s currency. Socio-political factors affecting the foreign exchange market are usually sudden events. Such short-term emergencies can cause spot price fluctuations in foreign exchange and even deviate from long-term equilibrium prices. However, after such events, foreign exchange trends will follow their own The direction of long-term equilibrium prices fluctuates. Generally, short-term price changes will only correct the direction of long-term foreign exchange equilibrium prices, and it is difficult to change or completely reverse its long-term fluctuation trend.

Direct government intervention - Since the introduction of floating exchange rates, central banks in industrial countries have never adopted a laissez-faire attitude toward the foreign exchange market. On the contrary, these central banks have always retained a considerable portion of their foreign exchange reserves, and the main purpose is to directly intervene in the foreign exchange market. Generally speaking, the central bank strikes when the price of the foreign exchange market is abnormal, large, or violently fluctuating in the same direction for several consecutive days.   Back to top


Influence of psychological factors on exchange rate

Market expectation - In the international financial market, foreign exchange prices are largely affected by investors’ expectations of exchange rate movements, especially some short-term capital investors and speculators. When traders expect that the exchange rate of a currency will rise, they Will buy in large quantities; and when they predict that the exchange rate of a certain currency will fall, they will throw in large quantities. That is to say, if people expect a certain long-term equilibrium price in foreign exchange, then they will adopt the corresponding investment strategy, and the change of this investment strategy with large inflows and outflows will often affect the spot price of foreign exchange. People’s expectations arise mainly from their predictions and estimates of a country’s economic growth, currency supply, inflation, foreign exchange reserves, government policies, and international political and economic situations. In the foreign exchange market, the amount of short-term liquidity is very high It is huge and investors are very speculative. Such short-term speculative funds are very sensitive to the political, economic, and military situations of various countries. A little bit of trouble will change the flow of funds. Therefore, any little information on the market may change the market mentality and people's market expectations, thus affecting the foreign exchange market.

Speculation information - Speculation is widespread in the foreign exchange market and has become an indispensable part of the foreign exchange market. When the exchange rate of a currency is bullish, speculators will buy the currency with a view to profiting after the exchange rate rises, and a large number of speculative purchases will cause the exchange rate to rise; conversely, when the exchange rate of a currency is bearish At this time, speculators will throw out this currency in order to buy when the exchange rate falls to make a profit, and a large number of speculative selling will cause the exchange rate to fall. This speculative mentality and behavior have contributed to the fluctuations in the foreign exchange market, which can further increase the exchange rate fluctuations.

Economic news - News public opinion is also a sudden factor that affects the exchange rate. For a relatively stable foreign exchange market, the entry of important news will break the stable state and cause the foreign exchange market to fluctuate. Therefore, investors should collect and possess news materials in a timely manner, analyze them comprehensively and systematically, make judgments on the relevant news, and choose the appropriate time to buy or sell the corresponding currency.

Some of the news in the market is unconfirmed "rumors", but it will also affect the psychological expectations of investors, leading to fluctuations in the foreign exchange market, although some rumors eventually proved to be unrealistic. Therefore, correctly understanding and using rumors will also benefit from foreign exchange transactions.   Back to top

 

 

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