FOREX Fundamentals
The use of Technical Analysis in the FOREX market is much the same as in other trading markets: price is believed to already reflect all news which would have had an effect on the currency’s value. But since countries don’t normally have balance sheets, how can Fundamental Analysis be conducted on a nation’s currency? Since this type of analysis involves looking at the intrinsic value of an investment, its application in the FOREX market will entail the study of the economic conditions that influence the valuation of the country’s money. Here are some of the major fundamental factors that play a role in the price movement of a currency.
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Economic indicators are reports that are released by the government or a private organization which detail the country's economic performance. These reports are the means by which a nation’s economic health is measured. (It must be kept in mind, however, that a great many factors will influence a country’s economic performance.) These reports are released at scheduled times, thereby providing a readable marker of whether a nation's economy has improved or declined. Some of the reports, such as unemployment numbers, are well-publicized. Others, like housing statistics, receive very little media coverage. However, each indicator serves a particular purpose, and can be very useful. Four major indicators are listed below:
- The Gross Domestic Product (GDP) is considered to be the broadest measure of a country's economy, and it represents the total market value of all goods and services produced by that country in a given year. Since the GDP figure itself is a lagging indicator, most investors focus on the two reports that are issued in the months before the final GDP is released: the advance reportand the preliminary report. Significant revisions from one report to the next can often cause considerable market volatility.
- The Consumer Price Index (CPI) is a measure of the change in the prices of consumer goods across 200 different categories. This report, when compared to a nation's exports, can be used to determine whether a country is making or losing money on its products and services. The exports must be carefully monitored as well, however, because their prices often change relative to a currency's strength or weakness.
- A country’s Retail Sales report measures the total receipts of all retail stores. This report is particularly useful because it’s an indicator of broad consumer spending patterns, and is adjusted for seasonal variations. It can be used to predict the performance of more important lagging indicators. It’s also valuable in assessing the immediate direction of a country’s economy. Revisions to advance reports of retail sales can cause significant volatility.
- The Industrial Production report shows the change in the production of factories, mines and utilities within a nation. It also reports their 'capacity utilizations', which are the degrees to which the capacities of the factories are being utilized. Traders using this indicator are usually concerned with a nation’s utility production.
There are many other important economic indicators, and still more private reports that can be extremely useful in evaluating FOREX fundamentals. It's important to not only look at the numbers, but to also take the time to know and understand what they mean and how they affect a nation's economy. When properly used, these indicators can be a valuable resource for the FOREX investor.
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