Theory Of Economic Cycle

Fundamental analysis in Forex is a type of market analysis which involves studying of the economic situation of countries to trade currencies more effectively.

TradeVestment a forex trading strategy applies fundamental analysis to determine if a particular currency pair is to be bought or sold in long term period. Basically, forex trading strategy establishes long term fundamental trend of both the currencies in a pair.

Fundamental analysis in Forex is a type of market analysis which gauges the intrinsic value of a country's economy, and judging on its expected future performance, currency positions are opened to take advantage of the anticipated trends to trade currencies more effectively in currency market.

News that affects the economy both directly and indirectly is considered a fundamental factor.
These fundamental factors are separated into three major categories:

Economic factors,
Financial factors, and
Political factors including Crisis.

Economic and financial factors have the biggest impact on currencies' movements. Economic and financial data releases are watched closely because of the uncertainty concerning the outcome or results of the release.

The fundamental reports are kept under strict secrecy up to the time of the actual occurrence. Change in Interest Rate/Discount rate by Federal/Central banks are kept highly confidential and even though the markets closely watch these events, sometimes the outcome does not coincide with the predictions.

The deciding factor in whether a fundamental release will have an effect on the currency market is that, how close the actual results come to economists' predictions. If the fundamental release matches predictions then it should have already been "priced in" to the market beforehand.
However, if the release strays from the anticipated numbers, then it will have a bigger impact on the market.

The dates and times of economic data release are well known and are anticipated by the market. There are many resources available on the internet concerning financial and economic indicators.

Follow Economic Calendar for the dates of critical fundamental announcements and events.

Political factors can include elections, high level talks, and crises. Some political factors, such as a presidential election or a G-7 meeting are scheduled beforehand and can be anticipated.

A political crisis such as a nuclear test by a rouge nation such as N. Korea, or a terrorist attack such as 9/11 can have dramatic effects on the currency markets and are almost impossible to predict. However, only big political events that can affect the patterns of trade or working of an economy or group of economies will have an effect on the financial markets.


Following Forex Fundamental Factors may lead to many profitable trades as profitable trades are made moments prior to or shortly after major economic announcements. Following are fundamental indicators that directly or indirectly affect the forex market.

Difference between Fundamental Analysis and Technical Analysis

Fundamental analyst focuses on what should happen in a market and the technical analyst looks at what has actually happened.

The fundamentalist studies the cause of market movement, while the technician studies the effect.

In practice, many market players use technical analysis in conjunction with fundamental analysis to determine their trading strategy.

One major advantage of technical analysis is that experienced analysts can follow many markets and market instruments, whereas the fundamental analyst needs to know a particular market intimately.

Fundamental Analysis gives information on how big political and economical events influence currency market. Figures and statements given in speeches by important politicians and economists are known among the traders as economical announcements that have great impact on currency market moves. In particular, announcements related to United States economy and politics are of primary importance.

Monetary Policy- Interest Rate

Monetary policy is the process a government, central bank, or monetary authority of a country uses to control often targeting a rate of interest.

A. the supply of money,
B. availability of money, and
C. cost of money or rate of interest to attain a set of objectives oriented towards the growth and stability of the economy.

These goals usually include prices stable and High level of employment.

Monetary policy is referred to as either being an expansionary policy, or a contractionary policy, where an expansionary policy increases the total supply of money in the economy rapidly, and a contractionary policy decreases the total money supply or increases it only slowly.

Expansionary policy is traditionally used to combat unemployment in a recession by lowering interest rates, while contractionary policy involves raising interest rates to combat inflation. Monetary policy is contrasted with fiscal policy, which refers to government borrowing, spending and taxation.

Economic strategy chosen by a government in deciding expansion or contraction in the country's money-supply is usually through the central bank. Central/federal bank employs monetary policy through three major tools:

(1) buying or selling national debt,
(2) changing credit restrictions, and
(3) changing the interest rates by changing reserve requirements. Monetary policy plays the dominant role in control of the aggregate-demand and, by extension, of inflation in an economy.

In macro economics, we are more concern with prime rate of interest set by Central or federal bank of that country. Traditionally, if a country raises its interest rates, its currency will strengthen because investors will shift their assets to that country to gain higher returns.

Convertible Currency pair move upwards based on probability of interest rate going upwards of first currency and Convertible currency pair move downwards base on probability of fall in interest rate of first currency

Definition:
The percentage increase in the price of goods and services, usually annually. The overall general upward price movement of goods and services in an economy, usually as measured by the Consumer Price Index and the Producer Price Index. Over time, as the cost of goods and services increase, the value of a dollar is going to fall because a person won't be able to purchase as much with that dollar as he/she previously could. While the annual rate of inflation has fluctuated greatly over the last half century, ranging from nearly zero inflation to 25% inflation.

The primary aim of any government is to keep inflation rate under control. Developed countries' inflation rate is also predictable and stable and usually under 5% where as developing countries usually have high inflation rate and may be in double digit.

High inflation leads to reduction in Purchasing Power and wipes out the effects of economic growth and development.

Therefore, Government always aims at positive NET GROWTH RATE.
Net Growth Rate = GDP - Inflation.

If growth rate is positive, the economy is on the right path and negative means corrective measures are required. Currency value of a country strengthens on Net Positive Growth rate and weakens on Net Negative Growth rate.

Growth rate and Inflation rate always move in same direction as increase in Growth Rate is always associated with an increase in Inflation Rate. Main challenge every government faces is to keep Inflation as low as possible and to achieve growth rate as high as possible.

In order to maintain balance between Growth and Inflation Government has various fiscal tools to maintain an economic balance.

The Federal Reserve/ Central Bank controls the three tools of monetary policy :

* Open market operations or Bank Rate
* The discount rate
* Reserve requirements

Bank Rate

Open market operations regulated by Central / Federal Bank of the respective country. Bank Rate is that rate at which a Central / Federal bank is prepared to lend money to its domestic banking system through open market operations.

Bank rate is increased to control Inflation and decreased to boost economic growth.

These decisions are not as simple as they appear. Members of the central / federal bank evaluate the situation on an average 10 times a year from economic data like CPI, Employment, Trade Balance and all national economic indicators.

Consumer Confidence

Definition of Consumer Confidence:
Consumer confidence is a measure of the level of optimism consumers have about the performance of the economy.

How confident people feel about stability of their incomes determines their spending activity and therefore serves as one of the key indicators for the overall shape of the economy. In essence, if consumer confidence is higher, consumers are making more purchases, boosting the economic expansion. On the other hand, if confidence is lower, consumers tend to save more than they spend, prompting the contraction of the economy.

A month-to-month diminishing trend in consumer confidence suggests that in the current state of the economy most consumers have a negative outlook on their ability to find and retain good jobs.

The Consumer Confidence released is a leading index that measures the level of consumer confidence in economic activity. A high level of consumer confidence stimulates economic expansion while a low level drives to economic downturn.

Generally consumer confidence is high when the unemployment rate is low and GDP growth is high.

Consumer Confidence Index - Check out current USA Data

The Consumer Confidence Index (CCI) is an indicator designed to measure consumer confidence, which is defined as the level of optimism on the state of the economy that consumers are expressing through their activities of savings and spending.
Each individual country analysis differently indicate huge variance around the globe. In an interconnected global economy, tracking international consumer confidence is a lead indicator of economic trends.
There is no common Global standard to measure consumer confidence index.

In the United States consumer confidence is issued monthly by The Conference Board, an independent economic research organization, and is based on 5,000 households. Such measurement is indicative of consumption component level of the gross domestic product.
The Federal Reserve looks at the CCI when determining interest rate changes, and it also affects stock market prices.

The Consumer Confidence Index was started in 1967 and is benchmarked to 1985=100. This year was chosen because it was neither a peak nor a tough. The Index is calculated each month on the basis of a household survey of consumers' opinions on current conditions and future expectations of the economy. Opinions on current conditions make up 40% of the index, with expectations of future conditions comprising the remaining 60%.
The Conference Board defines the Consumer Confidence Survey as "a monthly report detailing consumer attitudes and buying intentions, with data available by age, income and region".

To whom is Consumer Confidence Index useful?

Manufacturers, retailers, banks and the government observe changes in the CCI in order to factor in the data in their decision-making processes.

If index changes less than 5% is usually dismissed as inconsequential, while index moves of greater than 5% or more often indicate a change in the direction of the economy.

A month-on-month increase trend suggests consumers have a positive outlook on their ability to secure and retain jobs.

In case of a rising trend in consumer confidence indicates improvements in consumer buying patterns.
Manufacturers can increase production and hiring.

Banks can expect increased demand for credit. Builders can prepare for a rise in home construction and government can anticipate improved tax revenues based on the increase in consumer spending.

In this case of month-on-month decrease trend suggests consumers have a negative outlook, manufacturers/retailers expect consumers to avoid retail purchases, particularly expensive items that require financing.

Manufacturers may reduce down inventories to reduce overhead and/or delay investing in new projects and facilities.

Whereas, banks can expects a decrease in lending activity, mortgage applications and credit card use. When faced with a down-trending index, the government has a variety of options, such as issuing a tax rebate or taking other fiscal or monetary action to stimulate the economy.

Consumer Price Index

CPI is the main indicator to measure inflation and changes in purchasing trends. A high reading is positive (or Bullish), while a low reading is negative (or bearish).

In economics,The consumer price index or CPI is a measure of the level of inflation. CPI measures how much the price of a basket of consumer goods has changed over a given time period.

the Consumer Price Index (CPI, also retail price index) is a statistical measure of a weighted average of prices of a specified set of goods and services purchased by wage earners in urban areas. It is a price index which tracks the prices of a specified set of consumer goods and services, providing a measure of inflation. The CPI is a fixed quantity price index.

The CPI represents changes in prices of all goods and services purchased for consumption by urban households. User fees (such as water and sewer service) and sales and excise taxes paid by the consumer are also included. Income taxes and investment items (like stocks, bonds, and life insurance) are not included.

Two basic types of data are needed to construct the CPI: price data and weighting data.

The price data are collected for a sample of goods and services from a sample of sales outlets in a sample of locations for a sample of times.

The weighting data are estimates of the shares of the different types of expenditure as fractions of the total expenditure covered by the index.

These weights are usually based upon expenditure data obtained for sampled decades from a sample of households. Although some of the sampling is done using a sampling frame and probabilistic sampling methods, much is done in a commonsense way (purposive sampling) that does not permit estimation of confidence intervals.

Therefore, the sampling variance is normally ignored, since a single estimate is required in most of the purposes for which the index is used. Stocks greatly affect this cause.

Consumer Price Index Current Global Rates

Durable Goods

Rising Durable Goods Orders are normally associated with stronger economic activity and can therefore lead to higher short-term interest rates, which is usually supportive for a currency.

Employment Level

Decreases in the payroll employment are considered as signs of a weak economic activity that could eventually lead to lower interest rates, which has negative impact on the currency.

Gross Domestic Product (GDP)

GDP is reported quarterly and is followed very closely as it is a primary indicator of the strength of economic activity.
A high GDP figure is usually followed by expectations of higher interest rates, which is mostly positive for the currency

Definition: GDP is a gross measure of market activity. It represents the monetary value of all the goods and services produced by an economy over a specified period. This includes consumption, government purchases, investments, and the trade balance (exports minus imports). The GDP is perhaps the greatest indicator of the economic health of a country. It is usually measured on a yearly basis, but quarterly stats are also released.

In every country, government makes economic policy, regulations and taxation with the main objective to achieve a high growth rate. Developed countries' growth rate is very predictable and stable and usually under 5% where as developing countries usually have a high growth rate sometimes even in double digit.

Higher growth rate increases the intrinsic value of a currency, which means Purchasing Power of the Country increases. This leads to cheaper imports and maintained price line. This increase in value of a currency is also relative as value against each paired currency differs.

Initial Jobless Claims

The Initial Jobless Claims released is a measure of the number of people filing first-time claims for state unemployment insurance. In other words, it provides a measure of strength in the labor market. A larger than expected number indicates weakness in this market which influences the strength and direction of the economy. Therefore, a decreasing number should be taken as positive or bullish for the currency.

Retail Sales

It is the first real indicator of the strength of consumer expenditure

Trade Balance

A country that has a significant Trade Balance deficit will generally have a weak currency as there will be continuous commercial selling's of its currency.