Fundamental analysis

What is fundamental analysis

Fundamental analysis refers to the study of the core factors influencing the changes of a country's economy and currency exchange rate. It aims to predict the exchange rate changes and market trends in a certain economic cycle by analyzing a series of economic indicators, government policies and events, social or other factors. Fundamental data not only tell us the current market situation, more importantly, it can help us predict the future development of the market.

The foreign exchange forecast analysis method can be divided into basic analysis method and technical analysis method. In fact, both the basic analysis method and the technical analysis method are trying to solve the same problem,The direction in which market prices are moving，The direction in which market prices are moving

The factors influencing the exchange rate change involve social, political, economic and other aspects. It is not easy to remain sensitive to highly dynamic market fundamentals, but at the same time you will find that your understanding and understanding of dynamic global markets will greatly improve as you study the fundamentals.

Fundamental analysis is a very effective way to predict economic trends, but it does not necessarily address exact market prices. For example, when analysing an economist's forecast for future gross domestic product or employment reports, we can get a relatively clear picture of the overall state of the economy, but for specific trading strategies such as entry and exit points, we need to resort to more precise technical analysis.

Although fundamental factors will affect the market sooner or later, it is difficult to predict the timing and magnitude of market trends based on fundamental factors. One reason is that the basic analysis does not take into account some non-quantifiable factors, such as market sentiment, but they do affect the exchange rate changes. And the fundamentals themselves have different effects at different times.

Forex traders who use fundamental analysis often use certain analytical models to arrive at specific trading strategies.These models tend to predict market behavior and future currency values by using a large amount of empirical data and early core economic data. Traders use this information to take advantage of market opportunities and execute trades.

There are different types of traders in the foreign exchange market, and each USES a different analytical model.With the same data, two traders may come to very different conclusions. Therefore, it becomes important to study the fundamental data carefully according to your trading style and expectations.

Don't let fundamental analysis get in the way。Fundamental analysis involves many factors in all aspects, so traders are likely to be overwhelmed by a lot of information. This is one reason why many traders rely more on technical analysis. For some traders, technical analysis can translate market fundamentals into simple, straightforward tools, or specific currency prices. However, trading without some understanding of the fundamentals of the market is like fishing without bait. You may be lucky enough to make a profit once in a while, but in the long run, this is not a wise investment strategy.

In foreign exchange trading, fundamental factors are all that affect the functioning of a country. From interest rates and central bank policy to natural disasters, fundamentals are a vast dynamic collection of unique plans, irregular behavior, and unforeseen events. So the right approach to fundamental analysis is to get hold of some of the most influential data, rather than trying to capture it all.

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Factors affecting the foreign exchange market

Generally speaking, the value of a country's currency is influenced by economic growth, monetary policy, exchange rate policy and many other factors. In international economic exchanges, exchange rates between currencies of different countries will also be affected by market factors, and always fluctuate up and down. As a result, foreign exchange assets often rise or fall when denominated in different currencies. The price of foreign exchange reflects a balance between money supply and demand. The two most important factors affecting supply and demand are interest rates and the performance of the economy. Among economic indicators, for example, gross national product, foreign capital inflows, or international trade re present s a country's economic performance and determine the supply and demand for its currency. Of these, interest rates and international conditions are the most important.

The interest rate

In general, if a country raises its own interest rates, its currency will strengthen as investors move assets into the country in the hope of getting a higher return on their investments in the future. For example, when the interest rate in the us is higher than that in China, people will choose the us dollar to sell RMB, which is reflected in the increased demand for us dollar in the foreign exchange market, leading to the expected appreciation of us dollar against RMB. When the interest rate in China is higher than that in the United States, people will buy RMB and sell us dollars, which is reflected in the increased demand for RMB in the foreign exchange market, leading to the expected appreciation of RMB against the us dollar.

What determines the interest rate? Interest rate is the product of the relationship between money supply and demand. If a country increases the amount of money in the market, the amount of money in the market increases and the supply exceeds the demand, the interest rate will decline. Conversely, if a country reduces the amount of money in circulation, the amount of money in circulation in the market will decrease, the supply will exceed the supply, and the interest rate will increase. Once again, take China and the United States as examples. If China increases the amount of money invested, the interest rate will be reduced, but if the interest rate of the United States is unchanged, the depreciation of RMB against the dollar will be caused in the foreign exchange market. Otherwise, the dollar depreciates against the renminbi. We conclude that an increase or decrease in a country's money supply directly affects its exchange rate through interest rates.

Balance of payments

A country's balance of payments will lead to fluctuations in the exchange rate of its currency. Balance of payments is a summary of all the external economic and financial relations of a country's residents. A country's balance of payments reflects its economic position in the world. The effect of balance of payments is ultimately the supply and demand of foreign exchange on the exchange rate.

An economic transaction, such as an export, or a capital transaction, such as an investment by a foreigner in a foreign country, generates foreign exchange earnings. Since foreign exchange is generally not freely circulated in the domestic market, it is necessary to convert foreign currency into the currency of the country where it is traded. This forms the foreign exchange supply in the foreign exchange market. An economic transaction, such as an import, or a capital transaction, such as an investment in a foreign country, causes foreign exchange expenditure. There is a demand for foreign exchange in the foreign exchange market because the domestic currency needs to be converted into foreign currency to meet their respective economic needs.

When these transactions are combined and recorded in the balance of payments statistics, they constitute a country's foreign exchange balance. If foreign exchange income exceeds expenditure, the supply of foreign exchange increases; If foreign exchange expenditure exceeds income, the demand for foreign exchange increases. When the supply of foreign exchange increases, the demand remains unchanged, which directly causes the price of foreign exchange to fall and the value of local currency to rise correspondingly. When the demand for foreign exchange increases, the supply remains unchanged, which directly causes the price of foreign exchange to rise and the value of the local currency to fall correspondingly.

Market judgment

Foreign exchange markets do not always follow a logical pattern. Difficult to understand factors such as personal feelings, judgments, and analysis and understanding of global political and economic events. Operators in the market must correctly understand various published reports or data, such as foreign exchange receipts and payments data, inflation indicators, economic growth rates, etc. But in fact, before the above reports or data are released to the market, there will be an expectation or judgment on the substance of the reports or data. Such expectations or judgments will be priced in before reports or data are published. Once the real reports or data are different from people's expectations or judgments, it will lead to large fluctuations in the exchange rate.

Degree of political stability

Politics and economics go hand in hand. Political instability in a country can cause investors to lose confidence in the country's economy, which can affect the country's currency exchange rate, even its neighbors and countries with close economic and political ties. In terms of specific forms, political risks mainly include general elections, wars, coups and border conflicts.

The foreign exchange market is far more influenced by politics than markets such as stocks and bonds. When a major international event occurs, the foreign exchange market regularly fluctuates more than the stock and bond markets. The main reason is that foreign exchange, as an asset of international flows, will face greater risks than other assets in the turbulent political situation. The rapid flow of foreign exchange markets further makes them more volatile in times of political turmoil. If the global situation becomes tense, it will lead to instability in the foreign exchange market, abnormal inflows or outflows of some currencies will occur, and the final result may be large fluctuations in exchange rates. The stability of the political situation is related to the stability of the currency. In general, the more stable a country's political situation, the more stable its currency.

The news media

The influence of the news media in today's society is crucial. Investors often decide whether to buy or sell certain foreign exchange according to the economic news reported by the news media, which changes the relationship between supply and demand and thus affects the change of the exchange rate. Movements in foreign exchange prices largely reflect the expectations of participants in the foreign exchange market. In other words, without outside participation, the exchange rate would slide towards expectations. But when the news media published a speech by a national monetary authority official or a research report by a research institute, it could cause violent fluctuations in the foreign exchange market. In the foreign exchange markets, the news media often act as a catalyst for reasonable forecasts.

Market psychological expectation

Investor psychology plays a crucial role in the foreign exchange market. The value of foreign exchange does not follow any rules, but is determined by the subjective evaluation of the marginal utility of foreign currency by both the supply and demand of foreign exchange. In the foreign exchange market, the proportion of transactions directly related to international trade is relatively low. Most transactions are essentially speculative, which causes the flow of different currencies to have an impact on exchange rates. When people analyze the factors that influence exchange rate movements and conclude that a currency will rise, they will rush to buy it and turn the rise into reality. Conversely, when a currency is expected to fall, there is a rush to sell it, causing the exchange rate to fall. The trading activities of the foreign exchange market provide an experience that the psychological power of the market is the most important factor in determining the short-term exchange rate.