Fundamental Analysis is All About the News

A trader in today’s markets by definition must be attuned at all times to any changes that could impact prices in his chosen medium of expertise. Nowhere is this truth more self evident than in the trading of foreign currencies. Currencies always come in “pairs”, which doubles the effort on the knowledge front. Domestic data and also information on the other country must be accessed and understood to anticipate relevant changes in the currency pair equation. The need for knowledge does not stop there either, because global issues outside the borders of the two chosen countries can create dramatic shifts in global capital as investors react to events whether economic or of a crisis nature.

Fundamental analysis is the moniker that has been assigned to this task of navigating through mountains of information to determine which bits of data will have a material impact on prices by reshaping investor perceptions and expectations in the market. Curreny trading is unique in that the global stage is the base for the world’s largest trading market. With volume exceeding $3.2 trillion every business day in markets that extend from New Zealand to Tokyo, London and New York and more, the forex market by its global nature reacts to a plethora of news releases across the planet. This changing universe of fundamentals can be broken down into four categories: economic, financial, and political factors, along with crises.

A degree of certainty can be attached to economic factors since their release is generally scheduled to occur on specific dates. When times are rough and it’s even hard to get people to get approved for usda loans then you have to look at certain aspects. For example, the release of non-farm payroll data by the U.S. Labor Department occurs typically at 8:30 A.M. EST on the first Friday of every month. Since this data is a general barometer of the relative health of our economy, analysts and traders alike eagerly await its release every month. After a period of assimilation of roughly thirty to forty-five minutes, the forex market reacts and new trends are born, some lasting as much as a few hours or days, for that matter.

Political factors can be anticipated due to scheduled election dates, but their outcomes cannot be so easily anticipated. Many markets moved in sideways patterns for months leading up to the actual election date, unsure of future implications of a power shift on Capitol Hill. In other less stable countries, the timing of elections may be more difficult or a “coup d’tat” may topple a government and reshape an entire political landscape.

Financial factors relate more to the ongoing policy changes and direct intervention by a central bank to impact a domestic economy. Interest rate changes can definitely influence the flow of capital both in and out of a country. These flows can have a dramatic effect on currency valuations in the short term and result in volatility as a new equilibrium is established.

A crisis, the last factor, is unpredictable in its impact since it may only have minimal domestic implications in some cases and widespread global import in others. The past two years have emphasized how greatly a crisis can influence currency markets by discounting fundamental data in deference to concerns of risk and safety of capital. From the failure of Lehman Brothers in 2008 to the recent debt crisis in Europe, capital flows took flight in search of “safe havens”, primarily U.S. Treasury offerings and precious metals.

To be effective and prepared, forex traders must be aware of important scheduled data releases and employ prudent risk management techniques in order to try to protect their downside.

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