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Chapter 6, Part III. Fundamental analysis. Page 2

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 15, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Because, we trade currency in pairs on Forex, we need not just a single look at particular country, but also a relative assessment of both currencies and, hence, the countries in pair.

    Generally speaking, if the economic perspective of some country is good then its currency should become stronger, other words, its rate should increase. Using fundamental analysis you will know which factors allow to assess this perspective, and to make a judgment about strength or weakness and why.

    Since we trade currencies, our major task is to find out the perspectives of particular country, relative to other countries, depending on what we are trading. If, for instance, you trade EUR/USD pair, then you should analyze EU and US economic perspectives, closely watch for any news and changes there, track macro data, including historical ones, check the pace at which it is changing, etc. If you come to the conclusion that the US economy is in better condition and has a higher pace of growth and better perspectives than the EU, then, you should buy USD for EUR. Simply speaking, the better an outlook for the economy of particular country the higher currency rate.

    I will give you a simple example of how in general fundamental analysis works.

    Let’s take into consideration current situation. In 2008 there was a total collapse in economy. The Fed decreased interest rates almost to zero, economic growth in terms of GDP has fallen significantly to negative numbers, and we see growth in unemployment and drops in corporate profits. How we can explain that from perspectives of fundamental analysis?

    Collapse leads to huge reductions in industrial production and service. This in turn, leads to reducing prices on commodities, because companies reduce production and do not produce as much as before the crisis. Hence, they do not need so many raw materials for production. Due to this reducing of production the revenues and profit of companies also decrease significantly and companies have to fire employees to decrease expenditures. That’s why unemployment starts to rise. Due to this reason we see strong down trend on equity markets and commodities. Because so many people have become unemployed, they are not able to pay on their mortgage and other loans and demand as many services as they did before the crisis. That’s why retail sales and personal income/spending are also reduced.
    #1 Sive Morten, Dec 15, 2013
    Lasted edited by : Feb 8, 2016
    TOURADA and fran alvarez like this.
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