Fundamental Analysis

Fundamental Analysis

A fundamental analysis usually is centered in financial and economic data, but also it influences in this analysis the possible political decisions, in this way the trader can make an idea of how hard can be the offer and the demand of this currency.

The fundamental analysis includes the revision of macroeconomic indicators, the stock markets and the political decisions (these decisions influence in the confidence in the governments and the climate of stability of the countries). The greater confidence in a government, together with good greater macroeconomic indicators, the trader will invest with greater confidence.

In order to make an analysis fundamental the macroeconomic indicators to consider are rates of growth, the Gross Domestic Product, types of interest, the existing inflation in the country, the monetary mass, the foreign currency reserves and the productivity.

Sometimes the governments through the Central banks try to influence in the Market with the purpose of avoiding that the currencies do not separate from a certain level stops of this form to avoid imbalances. These interventions usually have a remarkable impact, but these interventions usually are temporary.

To avoid imbalances, a central bank could enter the currency market as an investor, buying or selling a currency against another. Even several central banks might intervene in the market.

The operators consider the expectations on the possible evolution of a currency, or several, the macroeconomic factors, the news on a determined currency, or the possible events that can happen in the country of a currency which would influence in the quotation of this currency.

Therefore the traders look for in those macroeconomic variables to be able this way to the future predict behavior of the currency.

To that end, the governments published frequency with the evolution of these macroeconomic variables, so that the trader can see the previous situation of that variable economic, the forecast, and the government realeased.

When the emitted variable does not agree with the forecast usually produce abrupt movements in the market that will give great benefits to the trader.

Among the variables released are several which are important in a primary analysis.

Growth of Economy.

It is usually publish quarterly figure growth of Gross Domestic Product (GDP). This variable is important because it will tell us how this evolving economy of the country.

When we see a GDP of a country is growing, we indicate that there is movement of capital which shows higher consumption and savings. Companies that are encouraged by that consumption and investment that can be made.

But in the case of excessive growth would lead to inflaccionary tensions therefore in raise of interests on the part of the central banks.

At first, a higher GDP of the forecast would push the quotation of the currency from the country to the rise, whereas a lower GDP would harm the quotation of the currency to drop.

Price developments: Inflation

The appreciation or depreciation of a currency against another is usually neutralizad by the change in the differential in interest rates. Those currencies with higher interest rates are often seen due to the possible containment of inflation and higher profitability that offer these currencies.

This variable is released monthly. A higher CPI than expected will push the exchange rate upward, while a lower CPI will push downward.

Unemployment

This is usually an indicator difficult to predict, but his weight is important and the impact that this has is immediately both in the income and consumption of families.

If the non-farm employment are greater than estimated, then the currency of the country go to the floor. But if the rate of unemployment is lower than that estimated that help an appreciation of the currency. The same would apply to the indicator "Earnings Hour”.

Trade Balance

The equilibrium point of a quote of a currency is when the country has a stable balance of payments.

In case the country presents a trade deficit then experienced a reduction of the currency reserves, causing in last instance a depreciation of the value of its currency.

It is necessary to consider that a cheap currency favors exports of the country but it increases in price the imports. Causing in mid term, a drop in imports and an increase in exports. Causing thus a stabilization in the Trade Balance and an appreciation of the currency.

Stock Market

Variables such as growth, inflation, unemployment and trade balance are not the only ones that can favor the appreciation or depreciation of a currency. Every day more the evolution of the currencies have a greater correlation with asset markets, especially the stocks.

When investors consider a country as a good place to invest, that market of stocks or assets will be boosted by the arrival of other currencies, making the value of the currency of that country will remain robust.

Therefore, when we see that the variables are positive, that will encourage an increase in the quotation of the currency, but if the variables are negative, this will indicate a decrease of the currency.