SCHOOL BEGINNINGS trader. Lecture 4

SCHOOL BEGINNINGS Trader
Lecture 4. Fundamental factors and market analysis

2.1. Introduction to fundamental analysis
The most important and difficult part of the currency dealing is the ability to analyze trends in the market, and consequently predict what factors and how to affect exchange rates. In the movement of prices laid down as quick profit, or otherwise - the possibility of rapid and substantial losses. Therefore, the correct prediction of market movements, assessment of events, as well as the manipulation of rumors and expectations - a necessary part of the broker or dealer and the pledge of his success. There are quite a number of factors that impact on the entire foreign exchange market as a whole and for individual currencies.

There are two basic ways to analyze the situation on the market - a fundamental and technical. The first is assessing the situation from the standpoint of political, economic and financial-credit policy. The second is based on the methods of graphic studies and analysis based on mathematical principles.

As part of fundamental analysis examines the various reports of the Monetary - the financial developments in the world, the phenomenon of political and economic life of both individual countries and the world community as a whole, which may influence the development of the foreign exchange market, the analysis, to a change in exchange rates are may result. Here is important information on the stock exchanges and large-type market-makers, interest rates of central banks, government economic policy, possible changes in the political life of the country, as well as all sorts of rumors and expectations. Fundamental analysis - one of the most difficult parts - and at the same time, one of the key parts of the work in the foreign exchange market. Conduct fundamental analysis is much harder than any other, because the same factors in different contexts is not the same impact on the market, or may become a critical absolutely insignificant. It is necessary to know the mutual communication and mutual influence of two different currencies, reflecting the linkages between the various States, the history of currencies to determine the combined effect of various economic measures and to establish a link between totally unrelated at first glance, the events. In addition to some original and most formal rules, it is most needed experience of working in the foreign exchange market.

Fundamental factors are estimated, usually from two positions:
In terms of impact on the official discount rate;
From the viewpoint of national economy.

2.2. Fundamental factors influencing the market FOREX

In general, fundamental analysis identifies four factors that directly influence the market:
Economic;
Political;
Rumors and expectations;
Force majeure.

Classification of news about the extent to which they expected:

Random and unexpected - usually news of political and natural origin, less economic (political instability in the country, war, natural disasters, etc.);
Planned and expected - usually economic news, less political nature.

The economic effects and its influence on market rates is based on the axiom that any currency is a derivative of the country's economic development and its value can be regulated with the help of certain economic measures.

Economic group influences on the market can be divided into the following components:
Data on the economic development of the country;
Trade negotiations;
Meetings of central banks;
Any change in monetary - credit policy;
Meeting of the G, economic or trade unions;
Statements of heads of central banks, heads of governments, eminent economists on the situation at the market rates, changes in economic policies, economic situation in the country, or their projections;
Intervention;
Adjacent markets;
Speculation.
Let us consider each group in more detail.

2.3. This country's economic development.
The principle effects of this subgroup is based on the axiom that the value of any currency is a derivative of the state of the economy of this country. The stability of the economy determines the interest of foreign investors to invest in it and, consequently, the demand for a currency. They include such key indicators as trade and balance of payments, inflation, unemployment, gross national product, etc.

In the FOREX market to develop a common system of quotations of currencies after the U.S. dollar. Thus, the development of the American economy and the value of U.S. dollar is an important, if not decisive, factor in determining the direction of the market, common to the major currencies. Therefore, the main attention of foreign exchange brokers or dealers sent to the U.S. dollar and his "behavior" that causes some reaction from other currencies. However, this does not diminish the influence of other factors - the policy of national banks, or the influence of related markets, which are described in brief below. Monthly or quarterly in the United States published the main indicators of economic development.

Trade negotiations.
Trade negotiations are an important part of economic policy in any country. In particular, the ratio of import and export provides an important indicator of economic development as the trade deficit. For the U.S. trade deficit is a major problem in the past few years, playing a major role in the fall of U.S. dollar against major European currencies. The result of trade negotiations is an immediate response to the market, sometimes more than significant.

The meetings of central banks.
The main task of central banks is to adjust the domestic economy - as the main task. In addition, the adjustment of the internal and external value of the currency as part of his duties. Therefore, any meeting of the central bank - or more precisely, its working committee - drew attention to the participants in the foreign exchange market. One of the main means of promoting, or, conversely, slowing economic growth, attracting foreign capital, the attractiveness of government bonds, and, as a result, the value of currency is the interest rate.

2.4. Changes in monetary - credit policy.
Such measures are rarely taken to regulate the value of currencies, most central banks or governments prefer other measures the impact on the market. Nevertheless, one example may be the recent package of measures developed by the Government of Japan exclusively for the purpose of reducing the cost of the Japanese yen on the world market (also known as supplementary budget). Its main objective is to reduce the attractiveness of investment in the Japanese economy, stimulating the outflow of Japanese capital abroad, tightening rules on foreign clients who have accounts at Japanese banks, etc.

Only the expectations on this package of measures the Japanese yen had dropped in price by nearly 400 points within two - three days. However, when expectations are not met, the reverse reaction of the market is several times higher than the original cheaper.

Meetings of Seven (G7), trade and economic alliances.
One of the objectives of the G is a regulated world economy and in particular to the specific situation in the world market rates. There is some agreement among the members of the G in this regard - Agreement SVOP. The outcome of the meeting of Group of Eight may be a decision for a joint intervention in the global foreign exchange market by several central banks or other measures to limit or, conversely, to stimulate the growth of the value of a currency. In recent times, such agreements may be even, not only by members - for example, is often manifested in the joint agreement of policies on the market rates between Japan, USA and Germany.

Meetings of trade unions, govern trade relations between countries or policy of the region may also have a strong impact on a particular currency. Appeal against the U.S. and Japan in the WTO (World Trade Organization, established in January 1994 to replace GATT) after the failure of the end of the next round of trade negotiations yen left with virtually no movement by nearly a week. Meetings IIF (international monetary union), giving estimates and assumptions about the current state of the world economy, and distribute credits, does not have a direct impact on the currency, although it may cause some reaction in the market. Rather, in this situation you can count on the determination of long-term development strategy for the market as a whole than on the immediate reaction.

2.5. Statements of Heads of Government, heads of central banks, leading economists about the market situation.

This is one of the factors that, in most cases, which was an immediate response to the market. Speech by the Swiss chapter of the National Bank of Lumera disinterestedness of Switzerland in its own strong currency 29 September 1995 led to a leap in the Swiss franc from 1.1400 to 1.1480 level for several minutes, and further to 1.1580 over the next hour. Another example could be a statement by a prominent economist Bergsteyna, who, along with unexpected numbers, impaired balance of trade dollars and unreasonable expectations about the supplementary budget of Japan, led to a catastrophic collapse yen in less than two days from 97.15 to 104.55 marks, offset by a two-week efforts of the Central Bank of Japan and the U.S. Federal Reserve. Quite often, especially under certain conditions, an address of a person can not only severely affect the behavior of a currency, but also fundamentally change the situation on the market.

If the fundamental news contradict the trend, while its impact on the dynamics of the market may be limited to an hour or several hours. If, however, a fundamental factor confirms the trend, it is his acceleration, followed by a rollback.
The cycle life of the fundamental factors:
Short cycle: no more than one day, for all the unexpected news.
Long cycle: from a few weeks to several years, all factors associated with the overall state of national and world economy (the dynamics of inflation, unemployment and interest rates, etc.).

2.6. The interdependence between different countries is

The dollar zone - the Americas, led by the United States;
sterling area - UK and its former colonies;
yenovaya zone - Asia, led by Japan;
Zone EURO - Western, Central and parts of Eastern Europe led by Germany.

"Buy rumor - sell the facts":
- At the time of occurrence of hearing the main thing - to make a deal quickly because the market begins a new and powerful wave that can form strong trends;
- Traders are interested in listening to its confirmation or refutation. It is important to have quickly "jumping off the train."

2.7. Stock market and its key figures

At the exchange rate impact factors reflecting the state of the economy of the country:
Indicators of economic growth (gross domestic product, industrial production, etc.);
The trade balance, the degree of dependence on external sources of raw materials
The growth of money supply in the domestic market
Inflation and inflationary expectations
The level of interest rates
Solvency of the country and the credibility of the national currency in the world market
Speculation in the foreign exchange market
The development of other sectors of the global financial market, such as the securities market, competing with the foreign exchange market.

Money in a foreign country

Interest rates differential (the difference in interest rates)

In the form of securities: T-bills (treasury securities)

USA - Bonds
UK - Gilts
Germany - Bunds
Japan - JGB

USA - The budget deficit is negative
Japan - the budget deficit positively
This puts Japan in the main bonds USA about 60% of the market.
The Central Bank of Russia puts about 80% of its reserves in bonds USA.

Stock Indices
DJIA-USA
Nikkey - 225 - Japan
FTSE - 100 - UK
CAC - 40 - France
DAX - 30 - Germany
Hang Seng - HK (Hong Kong)

Dow Jones (DJI)
There are 4 of the Dow - Jones.
Industrial Dow - Jones (The Dow Jones Industrial Average - DJIA) - the simple average of the movement of share prices the 30 largest industrial corporations. Industrial Dow - Jones is the oldest and most common among all indicators of the stock market. Its composition is not constant: its components may vary depending on the positions of the largest industrial corporations in the U.S. economy and the market, but in the modern world, such cases are rare. In principle, it had to make up 15 to 20% of the market value of shares traded on the New York Stock Exchange. This index is calculated by adding up the prices of the included stock and dividing this sum for a fixed denominator (which is adjusted by the amount of splitting of shares and dividends in the form of shares, constituting over 10% of the market value of output, as well as replacement components, and mergers and acquisitions. Dow - Jones quoted in points. Recently he appeared on futures contracts in Chicago.

Transport Dow - Jones (The Dow Jones Transportation Average - DJTA) - average rate, which characterizes the movement of stock prices 20 transportation companies (airlines, rail and road companies).
Municipal Dow - Jones (The Dow Jones Utility Average - DJUA) - the average movement of share prices on 15 companies involved in gas and electricity.
Composite Dow - Jones (The Dow Jones Composite Average - DJCA) - an indicator on the base of industrial, transport and utilities Dow - Jones.

Index Standard and pauerz "(S & P)
The index is published independently by Standard & pauerz. It is made in two versions - for shares of 500 corporations and 100 shares of corporations.

S & P - 500 is a market value weighted index of 500 shares of corporations that are represented in it in the following proportions: 400 industrial companies, 20 transportation, 40 utility and 40 financial companies. It includes mainly shares of companies listed on the New York Stock Exchange, but there are also stocks of some companies that are traded on the American Stock Exchange and outside the stock exchange turnover. The index represents approximately 80% of the market value of all issues, listed on the New York Stock Exchange. This index is more complex compared to the Dow - Jones, but it is also more accurate because it represented a larger number of shares and corporate shares of each corporation are weighted by the amount of the value of all shares outstanding in the hands of shareholders. Futures and options thereon traded on the Chicago Mercantile Exchange.

S & P - 100. The index is calculated at about the same again as the index of 500 shares of corporations, but is made up of shares in corporations, for which there is recorded at the Chicago options exchange options. This is mainly industrial corporations.

Index of the New York Stock Exchange (NYSE Index)

This index is a weighted market value index movements in equity prices of all corporations, to register their securities on the New York Stock Exchange, that is, in fact, this figure represents the average price per share for all companies on the New York Stock Exchange, the weighted market value of shares in each corporation (with appropriate adjustments for the factors of the fragmentation of shares, mergers and acquisitions). In contrast, the Dow - Jones, which is expressed in points, the index of NYSE expressed in dollars. Transactions in options on this index are carried out at the New York Stock Exchange. Operations with futures contracts are carried out at the New York Futures Exchange, which is a unit of the New York Stock Exchange.

Indices of the American Stock Exchange (AMEX)

American Stock Exchange publishes two major index that is calculated on a completely different manner.
The main market index of the American Stock Exchange (AMEX Major Market Index) is a simple average of the price movement of 20 leading industrial corporations. He was conceived the American Stock Exchange as a sort of substitute for the industrial index Dow - Jones. Although it is calculated and published by the American Stock Exchange, it consists of shares of corporations listed on the New York Stock Exchange. Remarkably, 15 of which are also components of the industrial index Dow - Jones. Transactions in futures on the index are carried out at the Chicago Stock Exchange trading.

The index of the market value of the American Stock Exchange (AMEX Market Value Index) is calculated on a different basis: it is an indicator, weighted by market value of all issued shares in those corporations that are included in it as components. For the first time it was published in September 1973. It includes, as components of more than 800 issues of shares of securities of corporations of all major industry groups registered on the American Stock Exchange, including, in addition to ordinary shares, American depositary certificates and subscription certificates. From a technical point of view, it is unique by virtue of the fact that in his calculation, it is expected that dividends in the form of cash paid to members of its membership shares, reinvested, and on that basis they will be reflected in the index. Options on the index are traded on the American Stock Exchange.

Postcode off traffic (NASDAQ)

National Association of Securities Dealers calculates a number of indices, representing off-trafficking in general and paper companies of certain branches. The main index is the NASDAQ, which includes as a component stock of about 3500 companies (excluding listed on stock exchanges). This index is an indicator, weighted by market value of its components.
For the first time, it was calculated in February 1971.
Transactions in options and futures on this index are carried out at the Chicago Mercantile Exchange.
The drop in stock index led to the downfall of the currency.

Central banks

CB monitor inflation in the country, the national currency and seek to regulate them with the help of three key interest rates:

1. Discount Rate - Discount rate. The interest rate under which the Central Bank of commercial bank lending.
British rates are quite high, so they have a big interest of foreign investors.

2. Interest rate - Repo rate. Interest rate applicable to the Central Bank transactions with commercial banks and other lenders for the purchase (accounting) of the public treasury obligations. CB thus regulates capital market loan. Fed Funds (rate RepoUSA)

3. Lombard rate - Lombard rate. Interest rate applied by the Central Bank under the pledge of real estate, gold, currency values in issuing loans to commercial banks.

As the interest rates increased business activity and rising inflation. The decline in interest rates leads to a cheaper currency. Raising interest rates leads to a reduction in business activity, reducing inflation and the cost of the national currency. In modern conditions the method of influence on the rate of national currency continues to be the practice of buying and selling by central banks, foreign currency, known as currency intervention.

Central banks:

USA:
FED - Federal Reseve System;
The decision to change the rates adopted FOMC-Federal Open Market Committee, which met every six weeks, two days: Monday and Tuesday.
Chairman of the Board - Alan Greenspan

Germany:
Bundesbank (BBK, Buba) - The Central Bank of Germany
Buba cooncil meeting - meeting Buba - every 2 weeks on Thursdays;
Chairman - Ernst Welteke

Great Britain:
Bank of England - BOE;
Session 1 times per month;
President - Eddie George

Switzerland:
Swiss National Bank (SNB);
The meeting - every Thursday;
President - Hans Meyer

Japan:
Bank of Japan (BOJ);
Meeting 24 hours a day;
Chairman of the Board - Masaru Hayami

EU:
Europian Central Bank (ECB);
Chairman - Jean-Claude Trichet, President of the ECB
Along with central banks in the foreign exchange market operated brokerage firm, who, working with a specific bank, acted as intermediaries between the seller and the buyer's currency. To certain advantages of working through a broker can be anonymous when conducting transactions, continuous process, quotes, and the opportunity to propose their own prices.

In recent decades in the foreign exchange market has changed the nature of trade with the shift in the urgency of changing commerce: had a significant increase in transactions where performance is happening in the future. All this has led, on the one hand, to increased susceptibility of the foreign exchange market to market changes and the significant increase of currency fluctuations, and on the other hand, to increase opportunities for high-performance investment. In many markets, along with the widespread operations of buying and selling of currency transactions received from derivative financial instruments - currency and financial futures and options.

Examples of these exchanges have long been recognized by the world's centers of currency trading can be:
The London International Financial Futures Exchange (London International Financial Futures Exchange - LIFFE),
European option exchange in Amsterdam (European Options Exchange - EOE),
Urgent German Market in Frankfurt (Deutsche Terminboerse - DTB),
The Singapore Exchange (Singapore International Monetary Exchange - SIMEX) (Sydney Futures Exchange - SFE) and
Market immediate trade in Sydney.

Inflation

CPI (Consumer Price Index - CPI) - is the index of retail prices.

The index of producer prices (Producer Price Index - PPI) - this is wholesale price index.

The higher these indices, the more expensive local currency. It is believed the growth of these indices to 3% per year.

Monetary Aggregates:
M1, M2, M3, M4 - MONEY SUPPLY - monetary support.
M1 - cash in circulation, banknotes and coins;
M2 = M1 + funds settlement and current accounts in banks, traveler's checks;
M3 = M2 + time deposits in banks;
M4 = M3 + valuable state papers.
The rapid growth of money supply, both in cash and in non-cash form, has a downward impact on the currency.

Gross Product (Gross Domestic Product - GDP)
The higher the GDP, the better the economy. Optimal change - up to 3% per year if higher - feedback. You must enter a higher bid that would cause the national currency appreciation.
CPI and PPI are considered once a month, M / M.
GDP - quarterly Q / Q and are converted to year Y / Y.

Financial performance (Treasure Statement)
Income and expenses of citizens
Personal Income (Personal Income)
A sense of consumer willingness to spend money man (Consumer Sentiment)
The cost of construction (Construction Spending)
Construction (Hosing Starts)
Appeal for permission (Building Permits)
New home prices (New Houses Sales)
Current prices (Existing Houses Sales).
The unemployment rate (Unemployment Rate) - is considered to be once a month. If you raise the rate of national currency desheveet.
Primary treatment of unemployment (Imital Claims).
Ongoing Treatment (Continuing Claims).
The increase of these indicators leads to a cheaper currency.
Retail (Retail Sales) - better than the turnover, the stronger currency.
Dealer Orders for durable goods (Durable Goods).
All of the above information is on Moscow time, in 16:30 and 18:30 (Reuters, CQG)

JAPAN

Japan's fiscal year ends March 31. By the end of the year, usually to determine the balance transferred a large quantity of foreign currency into yen, which tends to rise in price. Many insurance companies of Japan are the largest players in the market: USD / JPI, USD / DEM, DEM / JPI, CHF / JPI, GBP / JPI. Big problem in Japan is an aging population. Hold on for many years, the interest rate has caused a small shift in the banking sector, but, nevertheless, Japan's banks remain the major world banks. Strengthening of South-east economy in the long term will give a chance to become the main currency of yen for the Asian region.

SWITZERLAND

Switzerland is not going to join the EU, thus stressing its independence. The attraction of CHF remains quite high, it's called "saving the currency." In moments of crisis traders from all over the world automatically buy Swiss francs, resulting in CHF usually much stronger. For example, it was on 11 September 2001, when the world learned of the terrorist attacks in New York.

UK

The availability of high interest rates in England sets the world's great interest of speculators, which affects the economic performance in general. England - a recognized global financial center, the main offices of the largest investment giants are located here in the country operates a very strict legislation governing the financial activities of companies, banks and stock exchanges.

CARLO, FOREXTRADER.RU
SUCCESSFUL SCHOOL Trader
trader_karlo@mail.ru