Fundamental Analysis
Fundamental analysis is one of the true cornerstones of investing and it can be applied to all asset classes. It looks at what causes price to move up or down and uses this to anticipate and profit from future price moves. It can be used to analyze a national economy by examining areas like gross domestic product, employment, inflation and the monetary policy of a central bank. It can be used to analyze an individual company by examining its financial statements like assets, liabilities and earnings as well as its management and competition.
Fundamental analysis can also be applied to whole industries by examining the drivers of supply and demand. There are many different fundamental trading and investment strategies and most of them try to determine the fair value of an instrument by analyzing the underlying drivers of price. If the current market price of an instrument differs significantly from this fair value, it will eventually gravitate towards it, as long as none of the fundamental drivers change.
What Is Fundamental Analysis
Fundamental analysis is a method of evaluating the intrinsic value of an asset and analyzing the factors that could influence its price in the future. This form of analysis is based on external events and influences, as well as financial statements and industry trends. The goal of fundamental analysis is to determine whether or not the price of an asset is overvalued or undervalued.
For stock traders, fundamental analysis involves poring over income statements and balance sheets of individual companies. But the way we define fundamental analysis different when it’s used to trade currencies. Fundamental analysis is a way of understanding the changes in market valuation by analyzing economic, social, and political forces that affect the supply and demand of a currency.
In forex, the idea behind this type of analysis is that if a country’s current or future economic outlook is good, its currency should strengthen. Fundamental analysis involves studying economic trends and geopolitical events that might affect a currency’s price. The better shape a country’s economy is, the more foreign businesses and investors will invest in that country. This results in the need to purchase that country’s currency to obtain those assets.
Fundamental Analysis In Financial Markets
Although the desirability of a country’s goods or services will influence the demand for its currency, investment opportunities in the country will also be a major factor. In particular, traders in the FX market will buy or sell currencies based on their expectations of how its exchange rate will change due to:
Political instability in its own country or other countries.
Uncertainties in the global market. For example, during the recent Coronavirus Crisis, demand for U.S. dollars surged as investors looked for a safe haven for their money.
Differences in interest rates between countries. When a country’s interest rates rise, its currency appreciates as foreign investors seek higher returns than they can get in their own countries.
Differences in economic growth between countries. For example, developing nations that have implemented successful economic reforms may experience currency appreciation as foreign investors seek new opportunities for growth.
Use In Real Time Trading
Forex traders who utilize fundamental analysis often keep one eye focused on price action while keeping the other on financial news. They will study the news for information on the political climate, international relations, natural disasters, and other global events.
Fundamental factors that many traders use when deciding whether to enter, stay with a trade or exit, besides those already mentioned, include unemployment rates, inflation, fiscal policy changes, and stocks/bonds/money markets.
For example, let’s say that the U.S. dollar has been gaining strength because the U.S. economy is improving. As the economy gets better, raising interest rates may be needed to control growth and inflation. Higher interest rates make dollar-denominated financial assets more attractive. In order to get their hands on these lovely assets, traders and investors have to buy some U.S. dollars first. As a result, due to higher demand, the value of the U.S. dollar will likely increase. Fundamental analysis looks to a larger picture around the price of an asset. Considering as many influencing factors as possible, fundamental analysis seeks to determine the real value of a trading asset.
Gross Domestic Product (GDP)
Annualized change in the inflation-adjusted value of all goods and services produced by the economy. It’s the broadest measure of economic activity and the primary gauge of the Economy’s health. Released quarterly (for most economies), about 30 days after the quarter ends however Canada is an exception as they release GDP every month
ADP NONFARM EMPLOYMENT CHANGE
Estimated change in the number of employed people during the previous month, excluding the farming industry and government. Job creation is an important leading indicator of consumer spending, which accounts for a majority of overall economic activity. Job creation is an important leading indicator of consumer spending, which accounts for a majority of overall economic activity.
NON FARM EMPLOYMENT CHANGE
Change in the price businesses pays for labor, excluding the farming industry. Released monthly usually on the first Friday after the month ends. This is the earliest data related to labor inflation. Source changed series calculation formula as of Feb 2010. It’s a leading indicator of consumer inflation when businesses pay more for the labor the higher costs are usually passed on to the consumer.
PURCHASING MANAGERS INDEX (PMI)
It’s a leading indicator of economic health businesses react quickly to market conditions, and their purchasing managers hold perhaps the most current and relevant insight into the company’s view of the economy. Above 50.0 indicates industry expansion, below indicates contraction. It’s a leading indicator of economic health – businesses react quickly to market conditions, and their purchasing managers hold perhaps the most current and relevant insight into the company’s view of the economy.
AVERAGE HOURLY EARNINGS
Change in the number of employed people during the previous month, excluding the farming industry. Job creation is an important leading indicator of consumer spending, which accounts for a majority of overall economic activity.
UNEMPLOYMENT RATE
Percentage of the total workforce that is unemployed and actively seeking employment during the previous month. Although it’s generally viewed as a lagging indicator, the number of unemployed people is an important signal of overall economic health because consumer spending is highly correlated with labor-market conditions. Unemployment is also a major consideration for those steering the country’s monetary policy.
RETAIL SALES
Change in the total value of sales at the retail level. This is the earliest and broadest look at vital consumer spending data. It’s the primary gauge of consumer spending, which accounts for the majority of overall economic activity. It’s the primary gauge of consumer spending, which accounts for the majority of overall economic activity. Released monthly, about 13 days after the month ends
CORE RETAIL SALES
Change in the total value of sales at the retail level, excluding automobiles. Automobile sales account for about 20% of Retail Sales, but they tend to be very volatile and distort the underlying trend. The Core data is therefore thought to be a better gauge of spending trends. Released monthly, about 13 days after the month ends
CONSUMER PRICE INDEX (CPI)
This is the most important inflation-related release due to its earliness and broad scope. This is among the few non-seasonally adjusted numbers reported on the calendar, as it’s the calculation most commonly reported. Consumer prices account for a majority of overall inflation. Inflation is important to currency valuation because rising prices lead the central bank to raise interest rates out of respect for their inflation containment mandate.
TRADE BALANCE
The difference in the value of imported and exported goods during the month. Export demand and currency demand are directly linked because foreigners must buy the domestic currency to pay for the nation’s exports. Export demand also impacts production and prices at domestic manufacturers. It is also one out of the four elements used in the GDP formula.
UNEMPLOYMENT CLAIMS
The number of individuals who filed for unemployment insurance for the first time during the past week. Although it’s generally viewed as a lagging indicator, the number of unemployed people is an important signal of overall economic health because consumer spending is highly correlated with labor-market conditions. Unemployment is also a major consideration for those steering the country’s monetary policy
CONSUMER CONFIDENCE
Level of a composite index based on surveyed households. Financial confidence is a leading indicator of consumer spending, which accounts for a majority of overall economic activity. A Survey of about 5,000 households asks respondents to rate the relative level of current and future economic conditions including labor availability, business conditions and overall economic situation.
FEDERAL OPEN MARKET COMMITTEE (FOMC)
It’s the primary tool the FOMC uses to communicate with investors about monetary policy. It contains the outcome of their vote on interest rates and other policy measures, along with commentary about the economic conditions that influenced their votes. Most importantly, it discusses the economic outlook and offers clues on the outcome of future votes.
(FOMC) STATEMENT
Scheduled 8 times per year, 3 weeks after the Federal Funds Rate is announced. It’s a detailed record of the FOMC’s most recent meeting, providing in-depth insights into the economic and financial conditions that influenced their vote on where to set interest rates.
CRUDE OIL INVENTORIES
Change in the number of barrels of crude oil held in inventory by commercial firms during the past week. It’s the primary gauge of supply and demand imbalances in the market, which can lead to changes in production levels and price volatility.
It’s the primary gauge of supply and demand imbalances in the market, which can lead to changes in production levels and price volatility. It is releasing from the USA which is the largest crude oil-consuming country so a very important price driver.
OPEC-JMMC MEETINGS
It is released monthly. The Organization of Petroleum Exporting Countries (OPEC), Joint Ministerial Monitoring Committee (JMMC) OPEC-JMMC meetings are attended by representatives from the 13 OPEC members and 11 other oil-rich nations. They discuss a range of issues regarding energy markets and, most importantly, agree on how much oil they will produce. The meetings are closed to the press but officials usually talk with reporters throughout the day, and a formal statement covering policy shifts and meeting objectives is released after the meetings have concluded. Source first met in Jan 2017.
EUROPEAN CENTRAL BANK MAIN REFINANCING RATE
The interest rate on the main refinancing operations provide the bulk of liquidity to the banking system. It’s the primary tool the ECB uses to communicate with investors about monetary policy. It contains the outcome of their decision on interest rates and commentary about the economic conditions that influenced their decision. Most importantly, it discusses the economic outlook and offers clues on the outcome of future decisions
EU ECONOMIC FORECASTS
This report includes economic forecasts for EU member states over the next 2 years, and covers about 180 variables. Source changed release frequency from twice per year to three times per year as of Feb 2012 and from three times per year to quarterly as of Jul 2018. The forecasts serve as the European Commission’s basis for evaluating the economic performance and trends of EU member states regarding potential austerity measures and other forced spending cuts.
