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“Fundamental Analysis” of Important Economical News

As an investor can use a variety of methods to come to an investment decision.

The two most widely used and popular methodologies is fundamental and technical analysis.

Let’s take a look at this first by starting with fundamental analysis.

What is Fundamental Analysis first of all?

A trader or investor who takes a Fundamental approach to active investing, will focus on economic numbers.

A trader who uses fundamental approach to trading, could take a short term view by following today’s or the last few sets of data.

The trader can have a longer term view by taking in a broad picture of macro-economic, geo-political, legislative and regulatory news and data.

As a participant in the Forex Market, a trader should not limit themselves to focusing on the events of one country.

The Forex Market is the leading indicator of Global money flow and as such what may seem an inconsequential piece of news from one part of the planet could have huge global ramifications.

This was the case in 2013 when the Cyprus government took a political and budgetary decisions to liquidate its small holding of Gold.

Due to the financial crisis the markets took the Cyprus government’s decision to sell its entire Gold position as a signal that the same would follow from the Italian and Portuguese governments who hold substantial positions of Gold.

The study of Fundamental Analysis is to focus on the macro-economic indicators which allows investors to build a picture of the state of a nation’s economic well being.

By understanding the trend in the data and being able to take a longer term views, investors are able to gain a perspective of what the future could hold.

Fundamental analysis is however not just a case of collection lists of data samples.

There is a need to and requirement to be able to read through the news and between the lines of statements made by prominent Central Bankers, politicians and business leaders.

Which Economical Data is more Important?

All data is important, some data though gain greater importance at certain times.

In recognition of the above, many Forex brokers employ their teams of highly skilled and experienced market analysts who will alert their client’s focus to what they need to know.

There are however some consistently important news and events which are repeated on a weekly, monthly, quarterly and yearly basis.

There is a whole list of data sets which come out on a daily basis.

Let’s explore what data the market will give us.

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1. “Non-Farm Payrolls”

The king of the data sets we previously mentioned is the Non-Farm Payrolls number, or more commonly known as the NFP.

The NFP number is released monthly on the first Friday of a new month.

The NFP accounts for the total number of Paid US Workers of any business.

The NFP has an overbearing impact on the market and can cause large amounts of volatility in all liquid asset classes and the forex market.

The NFP ,being released early in the month, gives traders and investors an early warning of economic changes and as such is a valuable tool in helping one decide if new risk should be taken or if current exposure management should be changed.

The NFP is an important barometer on the current position of the United States economy and is a leading indicator on possible changes to consumer spending.

For Example

If the market consensus expects 241K new vacancies to have been filled in December, whilst the November number is 235K, this means that the market is expecting an improvement in the outlook for Jobs.

If the actual release was for instance 230K then the market will be disappointed as the actual release missed the consensus target and the prior month’s number.

The above scenario would also disappoint the Federal Open Market Committee (FOMC) which is the body managing the United States interest rate policy.

A jobs number that shows contraction could lead to a decision to reduce interest rates or put into discussion the possibility of an interest rate cut.

The very idea that the FOMC could be contemplating a cut in interest rates would add a great deal of volatility into global markets.

Thinking of the Forex Market, the above would result in the US Dollar will declining as investors will exchange the Green Back for currencies that have higher interest rate yields.

There are other important data sets and news release such as the Federal Open Market Committee Statement also known as the FOMC.

The unemployment rate is also closely watched, as is inflation date such as the Core CPI.

2. “Gross Domestic Product (GDP)”

The GDP is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, the GDP is calculated on an annual basis.

The GDP is a barometer of a countries health.

The reason being that rising numbers would indicate that a country is producing more and more goods and services.

A productive and healthy economy is an attractive economy to both investors who would like to inject fresh capital into the economy, as well as the Forex Market where traders will flock to purchase a sought after currency.

There is also a flip side of course, where declining growth numbers indicate that the country is going through a slowdown.

A slowdown which could be due to some cyclical or structural problems of the country’s economy.

There is another problem called runaway growth where economic bubbles are created and eventually collapse; such as in the US subprime crises which created a growth expansion that was fueled by a lax rules on credit.

3. “Unemployment Rate”

Economic data that is derived from readings of the labour market has a huge impact on the financial markets.

The most important data sets originate from the United States with the Non-Farm Payrolls (NFP) data dominating all other releases.

These other releases being the Unemployment Claims and Average Earnings data.

The labour data are hugely important as they can be directly linked to the health of an economy.

As such a buoyant labour market is an indication that an economy is growing with the labour force being economically productive and contributing to a countries economic activity.

Whereas increasing and high levels of unemployment is a strong indicator that the economy is suffering from a drop off in demand and then associated with a fall in growth levels.

In times of rising or full employment the Central Bank will seek to curb a tendency for inflation to get out of control by increasing interest rates and reducing the money supply.

Whereas at times when the labour market is shrinking and the economy is experiencing a contraction the Central Bank will reduce the interest rates as a means to increase the money supply and stimulate the economy through an expansion of credit.

4. “Consumer Data”

Demand and sentiment based data releases give important and significant insights on the health of an economy.

Consumer led demand has an overbearing hold on economic activity.

Through employment and the income that is received for production,s citizens contribute by purchasing goods and services.

When consumer based data and sentiment indicators begin to trend lower or higher the Central Bank is alerted so that it can bring the economy back into balance through means of implementing effective interest rate policy.

The Central Bank will of course also simultaneously monitor other important economic indications such as GDP growth, the labour market and inflation.

Traders therefore will be in anticipation of changes in monetary policy monitoring important economic data releases such as, Retail Sales, Durable Goods Orders, Consumer Confidence, Consumer Sentiment and the German ZEW and iFO.

5. “Balance of Trade”

The Balance of trade is a very simple calculation which measures the difference between the value of all the goods and services that a country will import against those that are exported.

A country is said to have a surplus if the value of its exports surpasses the value of its imports.

On the other hand a country is said to be in deficit if the value of its imports surpasses the value of its exports.

The trade balance numbers are made available on monthly basis.

Traders not only look for the absolute number in the monthly Balance of Trade number but are also interested in the trend of the numbers, and of course if the latest release is higher or lower than market expectations.

A positive trade balance is a reflection of good economic health as a surplus would bring external revenues to the economy, which will further bolster company earnings which In turn feeds through to the labour force through salary increases.

6. “Statements, Speeches and Conference”

In recent years some of the most important and influential figures in the global economy are the governors and senior board members of the Central Banks.

The Major Central Banks are the:

  • United States Federal Open Market Committee (FOMC)
  • European Central Bank (ECB)
  • Bank of England (BOE)
  • Bank of Japan (BOJ)
  • Bank of Canada (BOC)
  • Swiss National Bank (SNB)
  • Reserve Bank of Australia (RBA)
  • Reserve Bank of New Zealand (RBNZ)

Statements and speeches by the managers and key members of these Central Banks can have a large and immediate impact on the financial markets.  The reasons being that this key individuals are the decision makers who are able to influence and change monetary policies.

The financial markets use the terms dovish and hawkish or Doves and Hawks with respect to the intentions of the intentions of key Central Banks with respect to monetary policy.

A Central Banker who is a Dove is inclined to want a relaxation of monetary policy and a reduction of interest rates.

Whereas a Central Banker who is a Hawk is inclined to want a tightening of monetary policy and an increase of interest rates.

7. “Inflation Data”

Inflation in an economic context occurs when underlying data indicate that the trend in prices for goods and services experiences a sustained increase over a predefined time period.

Governments, Central Banks, business, traders and investors monitor data releases for the Consumer Price Index (CPI) and the Producer Price Index (PPI), which are released regularly, on a monthly and quarterly basis.

Inflation is viewed negatively by the general public as it limits their purchasing power

The reason being that it erodes the value of a given currency.

However some inflation is needed to ensure that an economy grows at a consistent and sustainable level.

During periods when the inflation rate is rising at a decreasing speed or when prices are actually falling, can have a detrimental effect on the growth and therefore impact on the Gross Domestic Product.

The reason being that during periods of falling or negative inflation (also known as deflation) both the general public and businesses could put off the purchase of goods and services.

The resulting drop off in demand could lead to a reduction in the rate of economic growth.

Examples of “Inflation Data” Impact

In recent years the Central Banks of developed nations such as the United States Federal Reserve, the Bank of England and the European Central Bank have managed inflation targets of between 2-3%.

If the rate of inflation data begins to indicate that increasing prices are above and beyond this threshold, the Central Bank will raise interest rates.

The action of raising interest rates has the effect of reducing the money supply in the economy.

This under normal circumstances should lead to some of the heat being taken out of an economy that is growing too quickly.

In turn the drop off in demand causes the inflation rate to fall back into target levels.

The rate of interest has a direct link to the value of a currency.

An increase in interest rates will make a currency more attractive to invest in.

This is due to the higher interest yield an investor will receive for a deposit if compared to a currency that has a lower rate of interest.

Traders and investors therefore attempt to anticipate increases in the rate of interest before it happens.

By doing this a trader will benefit from the appreciation in the value of the affected currency.

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