5. What causes the markets to move?
Fundamentals
Fundamental analysis deals with the
factual influences on the market and
the trader will aim to predict
economic developments and the impact
on the direction of foreign exchange
rates.
Many aspects are taken into
consideration when applying
fundamental analysis. Many of the
monthly and quarterly economic
statistics give good indications of
the strength of the economy. This
indicates probable future changes in
short and long-term interest rates
that are of great significance to
foreign exchange trends. Generally,
high short-term interest rates will
be supportive for a currency, unless
confidence is undermined by fears of
strong inflationary pressures.
International trade and investment
flows are followed closely to assess
the implications for the relative
strength of buying and selling for
commercial and cash transactions.
Political events, such as elections
or cabinet appointments can often
have significant impact on foreign
exchange markets, depending on the
perceived policy impact on the
economy. Monetary policy is also
followed very closely, including the
indicators shaping such policy
decisions. Money supply, central
bank interventions and short-term
interest rates are all significant
factors for fundamental analysts.
Trading currencies is probably the
purest way of taking a view of a
country's overall economic
situation. Events in South East Asia
in the second half of 1997 clearly
showed the consequences when
confidence in a local economy
collapses and the most efficient way
to profit from such expectations is
shorting the currency involved.
Economic Statistics
Trade Balance
The trade balance is a measure of
the difference between imports and
exports of tangible goods and
services.
The level of the trade balance and
changes in exports and imports are
widely followed by foreign exchange
markets.
The trade balance is a major
indicator of foreign exchange
trends. Seen in isolation, measures
of imports and exports are important
indicators of overall economic
activity in the economy. It is often
of interest to examine the trend
growth rates for exports and imports
separately.
Trends in export activities reflect
the competitive position of the
country in question, but also the
strength of economic activity
abroad. Trends in import activity
reflect the strength of domestic
economic activity.
Typically, a nation that runs a
substantial trade balance deficit
has a weak currency due to the
continued commercial selling of the
currency. This can, however, be
offset by financial investment flows
for extended periods of time.
Gross Domestic Product (GDP)
The Gross Domestic Product (GDP) is
the broadest measure of aggregate
economic activity available.
Reported quarterly, GDP growth is
widely followed as the primary
indicator of the strength of
economic activity.
GDP represents the total value of a
country's production during the
period and consists of the purchases
of domestically produced goods and
services by individuals, businesses,
foreigners and the government.
As GDP reports are often subject to
substantial quarter-to-quarter
volatility and revisions, it is
preferable to follow the indicator
on a year-to-year basis. It can be
valuable to follow the trend rate of
growth in each of the major
categories of GDP to determine the
strengths and weaknesses in the
economy.
A high GDP figure is often
associated with the expectations of
higher interest rates, which is
frequently positive, at least in the
short term, for the currency
involved, unless expectations of
increased inflation pressure is
concurrently undermining confidence
in the currency.
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