Fundamental analysis
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Fundamental analysis distinguishes various factors influencing the exchange rate. At the same time, the degree of their significance for the justification of market fluctuations is different. Thus, at the end of the last century investors carefully monitored the indicators of money supply and budget deficit, in the first half of this century they gave way to the state of the trade balance and the dynamics of interest rates, at present the attention of the world community is focused on the external debt and the volume of government lending. Nevertheless it should be taken into consideration that all fundamental factors are closely connected to each other. In order to predict the dynamics of exchange rates in the mid- or long-term perspective it is necessary to understand this interrelation. The interest rate differential can help.
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Just recently ECB governor Mario Draghi surprised financial circles by saying that he had serious concerns about the influence of political forces on the work of global central banks, especially, as he put it, central banks of leading jurisdictions. You don't have to be a jack-of-all-trades to understand that Mario Draghi's remarks refer to President Trump's harsh criticism of the Fed. We will try to understand how the relationship between the U.S. president and the Fed works, and whether Trump can have any real influence on Jerome Powell's agency. The history of the conflict Since 2015, the Fed has decided to raise interest rates as many as nine times. Tightening monetary policy has naturally led to a strengthening of the dollar. Seven of these...
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Just 10 years ago the EUR/USD had a fluctuation range of 2,400 pips in just one quarter. In the first quarter of this year, the fluctuation range barely reached 400 pips. The time of aggressive monetary policy is over. The sentiments of the world's central banks are getting more and more "dovish" and that is simply killing speculative trading at the foreign exchange market. Even a beginning trader knows that profit at currency market is formed due to difference in exchange rates. To buy cheaper and sell dearer is the essence of trading. The difference in price is a trader's profit, and the bigger it is, the more trader can earn. The central banks of the world, not excluding...
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Fundamental analysis on the Forex market is an approach that helps to understand the underlying processes that determine the dynamics of a particular currency. As a rule, we are talking about long-term trends. Basically, everything is very simple: the currency of the country, which has a higher economic growth and a higher interest rate of the Central Bank, strengthens in the currency pair. However, there are situations when these principles do not work: economic and political crises or natural disasters. Many traders, especially beginners, give up on fundamental analysis (FA), because the way they see it, it is too haphazard - there is too much economic information and there is no convenient functional to formalize it. Today we'll try to change your mind, because in fact...
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If we are trading a particular currency pair, I think it is logical to try to understand what other factors can influence its rate. In addition to strong correlations of certain currencies and equity markets, you should also remember about correlations of commodity markets with currencies of commodity nature because they move in strong interrelations - fluctuations in one market will certainly lead to changes in the other. It is necessary to see the whole picture. This will allow you to protect yourself from sharp, unpleasant fluctuations and also to make profit by taking advantage of trend trading. Oil - interest rates - commodity currencies Let us consider the interrelation of changes of quotes of certain currencies with the dynamics of interest rates...
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Despite the fact that carry trade operations are available mostly to large market participants, their actions can become a pleasant surprise for us as well as a surprise, in case our trading instrument is a currency pair, which includes a funded currency. What is the profitability of carry trade operations? When the interest rates on bonds or deposits in some country begin to rise because of the actions of the Central Bank, hedge funds, currency dealers of corporations, asset managers and other participants of financial markets try not to miss the moment to take advantage of this fact. The most common are carry trade transactions. Carry trade transactions with currencies are loans of one...
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"Quantitative easing", aka QE, aka quantitative easing (easing) - articles of economic publications, traders' forums and communities are full of this term. When it is mentioned, it immediately comes to mind the Fed chief Ben Bernanke, a bearded-eyed, intelligent-looking guy. But if you ask anyone what "quantitative easing" is and what it does, only one in ten people will give an intelligent answer. This is not surprising, since even economists and financial experts disagree on its meaning, application and effectiveness. So what and with what is quantitative mitigation? Other articles of the master class "Be a Trader: Fundamental Analysis" Credit rating: do you have any...
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There is an opinion that the fundamental analysis of the currency market is a work with news flow and trading on the news itself, but this opinion is wrong! In fact, trading on the news is catching volatility; you do not even need to analyze the values of this or that macroeconomic indicator. The Essence of Fundamental Analysis Most of what we see in the economic calendar is not necessary for intraday trading. To be fair, it should be noted that it is difficult to apply the findings of the fundamental analysis to intraday trading, rather this information will be useful for position traders, ie, those who trade on a medium- and long-term basis. In my opinion, the whole essence of the fundamental analysis comes to...
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Articles in the economic media are full of the word "default," and the average reader with no economic education gets the impression that default is at least the local end of the world. And there is a widespread desire to urgently exchange the dollars (euros, Mexican pesos or Mongolian tugriks) stashed away for something that this "terrible default" will not touch. Let's find out what "default" really means. There are no shortage of defaults in the world First of all, we should note that the term "default" (Default) means any refusal to fulfill a debt obligation. In fact, default is the worst kind of bankruptcy. However...
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Markets have been waiting for more than a year for the U.S. Federal Reserve to raise the interest rate. The deadline for this event was set far away, but even they have not been fulfilled under the power of external circumstances. The world economy is shaking, the dollar exchange rate is actively growing, and the Central Bank of America is in no hurry to act. In this situation, we would like to approach this question from a mathematical point of view and find out if the markets are expecting the Fed to tighten its monetary policy for a reason. Is there a realistic case for it? Janet Yellen has repeatedly said that the U.S. Federal Reserve is not guided by some "mechanical rule" when deciding on the key interest rate. As we know, the central bank can influence mainly the...
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As a rule, all discussions about trend reversal on the currency market are reduced to various tools of technical analysis: graphical formations and Japanese candlesticks, breakdown of trend lines and Fibonacci indicators. But is it possible to trace a trend change using fundamental analysis, you might ask? We answer: you can and should! Central banks are the "parents" of powerful trends If you look at the dynamics of currency trading from "great heights" it becomes obvious that all powerful trends are created by central banks. Regulators traditionally use monetary policy instruments to manage economic growth and inflation. The effectiveness of these measures can be viewed in different ways. For example, many economists believe that monetary authorities merely relieve the symptoms of disease, rather than...
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Fundamental factors in the foreign exchange market can be compared to air currents, without knowledge of which no pilot will be able to get a plane from point "A" to point "B". Marking lines alone are not enough to steer an airplane, just as successful news trading requires not only technical levels, but also understanding of the global macroeconomic picture. Unfortunately, many traders do not take into account the pitfalls hidden in the fundamental analysis methodology, and therefore fail one after another. Today we will discuss the mistakes investors make when analyzing the economic background and trading on the news. Mistake 1. Trading on upcoming news So, most market newbies are interested in...
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Political events sometimes influence the currency market even more than economic events, because the economic dynamics is largely determined by the course chosen by the country's leadership. Let us find out what is the political risk in trading, what kinds of political risks exist, how they are reflected on the Forex market and how you can profit from them. Why does politics affect currency rates? In the classical sense of the term, political risk for any entrepreneur is the threat of reduction of profits or incurrence of losses as a result of state policy. First of all, it is connected with possible changes in the rate or the very composition of the government. However for traders and investors on the currency market political changes...
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Everyone has heard about the "shale revolution" and the "shale boom" in the United States, but few people have any idea what shale oil is, how it is produced, or whether it is such a threat to "classic" oil. Types of shale oil Shale oil is a mineral and, like "classic" oil, is formed from organic residues that have fallen under the influence of certain geological factors. The modern energy industry distinguishes between two types of shale oil depending on how it is produced: Tight Oil This type of oil consists of light fractions and is found in reservoirs with low permeability, which is the reason for its name. Tight oil is produced by hydraulic fracturing and drilling...
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If you are new to trading and read analytical tapes, fundamental analysis can seem like a set of highly subjective conclusions and assumptions of analysts. Often experts hold diametrically opposed views on the same events, juggling information as they see fit to justify their own position. Meanwhile, an analysis based on clearly defined and verifiable rules can be called objective. Even if those rules are based on fundamental analysis, they can be objective and thus verifiable. For example, "buy when interest rates rise, sell when interest rates fall" is quite an objective rule, while the idea of technical analysis "buy on an uptrend and sell on a downtrend" smacks of subjectivity in...
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Under normal economic conditions, rational investors choose assets that bring high returns, but in the era of instability the determining factor in choosing trading instruments is their reliability rather than profitability. This is why there are the following types of currencies on the currency market: shelter currencies and high-yielding currencies. Let us try to figure out what factors influence the dynamics of these types of currencies and how to predict them. Sanctuary currency for investment preservation Sanctuary currency, or in other words, a safety currency, is a type of currency that strengthens during periods of anxiety and market uncertainty, when investors seek to preserve their savings. Currencies of countries characterized by political and economic stability, low inflation and confidence in the central bank are considered safe...
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Under the conditions of the global fall in quotations on stock exchanges and commodity prices, the attention of investors is increasingly attracted to the debt market, the dynamics of which has a direct impact on the change in exchange rates in the international market FOREX. To understand the mechanism of how government bond yields influence currency quotes, it is necessary to refer to the basics of fundamental analysis. State credit and bond yields The activity of any state in the financial sphere is characterized by budget deficit or surplus. In the first case, the country's expenditures for various purposes exceed its income in the form of taxes or non-tax payments, which forces the use of public credit in order to cover the difference between them. The main form of public credit in...
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The economic calendar and planned economic events and news increase volatility on the currency market and often cause unfortunate failures for "technical" traders. We advise to follow the economic statistics releases even to the most ardent opponents of the fundamental analysis and trading on the news: forewarned is forearmed. Below you can find the most important economic releases during the month for the key currencies. Economic Calendar for the US Dollar (USD) America starts the month on the foreign exchange market with the manufacturing and non-manufacturing PMI from ISM (the first and third day of the month, respectively). The first Wednesday of the month is NFP by ADP (non-farm payrolls) .....
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Fundamental economic factors and trading on the fundamental analysis of the Forex market is not an abstract concept. Every day traders encounter events in the form of news published in the economic calendar. Economic indicators are issued in the form of reports at a set time (weekly, monthly, quarterly). Approaches to using the economic calendar by a Forex trader There are different approaches to using the economic calendar in the market. Some traders trade "on the news", i.e. they open positions according to their expectations of a changing economic indicator (for example, growth of GDP in the Eurozone is expected - they buy Euros). Others, on the contrary, avoid the news, as trading on them involves some risk. Such traders prefer to wait for the market to "digest" the news,...
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There has been no more urgent topic in recent times than the imposition of economic sanctions. At the same time, few understand the forms, methods and goals of these sanctions. Restrictions always affect both sides, affecting the economy, the business climate and consumer sentiment. Figuratively speaking, sanctions are a weapon that shoots at both sides. Economic sanctions - concept and objectives Economic sanctions are measures of an economic nature applied by one or more countries against another country or group of countries. Economic sanctions can take the form of complete or partial bans on imports of goods from or exports to a country as well as restrictions on financial transactions. The purpose of...
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