In previous publications (No. No. 27-36 FOREX MAGAZINE), we decided on the tools of fundamental analysis of foreign exchange market. With his assistance, we examined the relationship of major processes occurring in the economy with the dynamics of exchange rates. It is time to bring the intermediate results to move forward.
Thus, the use of FA is unlikely to help us determine the level of support and resistance and, consequently, the point of entry and exit. However, FA could be a very valuable tool for identifying (predicting) the mean long-term trends of exchange rate changes (trends). A correct prediction of the trend (the main directions of the transactions) provides a statistical advantage in trade.
Fundamental analysis is often associated with the analysis of the impact of withdrawal of important macroeconomic data (news) on the movement of exchange rates. It is rather a false understanding of the issue, although the actual market reaction to the news output (caused by the crowd psychology of stereotypes and assess the current situation - "Nonfarm out in the black - it's good for the dollar, and the ISM is less than 50.0 - it is bad", with little wonders why ) can be regarded as one of the fundamental factors, however, affects the dynamics of exchange rates for a limited time period, usually from several hours to several days.
In fact, the withdrawal of certain macro-economic data means is that most market participants became aware that in a national economy took place (in most cases), there are now or are expected in the future, certain economic processes and events. This fact reinforces the role of speculative factors in the market, leading to a sharp increase in volatility and to some extent, accelerates the alignment of the economic situation in the various national economies and nominal exchange rates of their currencies. However, the overall impact of the news factor on the medium-and long-term changes in exchange rates is very limited.
The first and simplest theory of exchange rates became known as the theory of purchasing power parity (PPP). She argues that the unit of any currency should be given the opportunity to acquire the same amount of goods and services in any country, ie Any currency should have a single real value. One of the main conclusions of this theory is that the nominal exchange rate between the two currencies should reflect the ratio of price levels in these countries. If in one country, the price level rising at a faster rate, the nominal exchange rate of the country should decrease, and vice versa. The provisions of the theory of PPP is not no doubt, but in general reflect the true relationship of prices and exchange rates in the long run.
On the currency market, as well as any other, laws of supply and demand. It is they who determine the value of the nominal exchange rate at a given point in time. From this perspective, the task of FA can be described as defining the impact of economic processes to changes in supply and demand in the currency exchange market. Given that the buying and selling currencies on the one hand via the international flow of goods and services, and on the other - the international flow of capital, it is possible to construct an analysis of supply and demand in the foreign exchange market.
It is important to note that the imbalance of these flows in rough approximation should compensate each other (net exports equal net foreign investment). For the purpose of analysis, we adopted the assumption that these imbalances and determine the supply and demand in the currency exchange market. Moreover, net exports determines the amount of demand for domestic currency (foreign importers to buy domestic goods have a demand for domestic currency), and net foreign investment proposals determine the national currency (for the acquisition of foreign assets acquired in foreign currency exchange at the national, which in turn increases sentence).
The value of net exports depends on the real exchange rate, while the value of net foreign investment - from the real interest rate. The real interest rate in turn is set at the market borrowing.
Thus, using the above assumptions, we built a model for economic impact analysis of economic processes on the exchange rate. It looks like this:
Fig. 1. Model analysis of the impact of economic processes in the exchange rate
Key economic parameters that influence the exchange rate:
• State budget deficit and debt (as a consequence)
• Status of international trade in the domestic economy (balance of trade)
• Discount rate of central banks (and its relationship to the real rate of interest)
• Inflationary processes (and their relationship with the dynamics of nominal and real interest rate) - the theory of PPP is considering this factor
• Status of the labor market
• Economic growth (GDP dynamics)
Statistical information on relevant macroeconomic indicators can be found on the Internet. The publication of these data is usually done once a month (sometimes quarterly or weekly). Of particular impact should be given to statements or comments of officials because they can not only answer to the question when, once again raise interest rates, but also about the prospects of monetary and fiscal policy of the state as a whole.
Separately worth of census data (or estimates) of indices, characterizing the state of the national economy (the most significant of them - ISM Index). Their interpretation is difficult and ambiguous. In any case, the analysis should be conducted from the standpoint of predicting future values of real macroeconomic performance.
Summarizing the interim results, we can say that the real processes occurring in the global economy, much more complex than the model adopted for analysis, but to identify the major relationships between macroeconomic processes (events) and changes in exchange rates, it is quite adequate.
Thus, the use of FA is unlikely to help us determine the level of support and resistance and, consequently, the point of entry and exit. However, FA could be a very valuable tool for identifying (predicting) the mean long-term trends of exchange rate changes (trends). A correct prediction of the trend (the main directions of the transactions) provides a statistical advantage in trade.
Fundamental analysis is often associated with the analysis of the impact of withdrawal of important macroeconomic data (news) on the movement of exchange rates. It is rather a false understanding of the issue, although the actual market reaction to the news output (caused by the crowd psychology of stereotypes and assess the current situation - "Nonfarm out in the black - it's good for the dollar, and the ISM is less than 50.0 - it is bad", with little wonders why ) can be regarded as one of the fundamental factors, however, affects the dynamics of exchange rates for a limited time period, usually from several hours to several days.
In fact, the withdrawal of certain macro-economic data means is that most market participants became aware that in a national economy took place (in most cases), there are now or are expected in the future, certain economic processes and events. This fact reinforces the role of speculative factors in the market, leading to a sharp increase in volatility and to some extent, accelerates the alignment of the economic situation in the various national economies and nominal exchange rates of their currencies. However, the overall impact of the news factor on the medium-and long-term changes in exchange rates is very limited.
The first and simplest theory of exchange rates became known as the theory of purchasing power parity (PPP). She argues that the unit of any currency should be given the opportunity to acquire the same amount of goods and services in any country, ie Any currency should have a single real value. One of the main conclusions of this theory is that the nominal exchange rate between the two currencies should reflect the ratio of price levels in these countries. If in one country, the price level rising at a faster rate, the nominal exchange rate of the country should decrease, and vice versa. The provisions of the theory of PPP is not no doubt, but in general reflect the true relationship of prices and exchange rates in the long run.
On the currency market, as well as any other, laws of supply and demand. It is they who determine the value of the nominal exchange rate at a given point in time. From this perspective, the task of FA can be described as defining the impact of economic processes to changes in supply and demand in the currency exchange market. Given that the buying and selling currencies on the one hand via the international flow of goods and services, and on the other - the international flow of capital, it is possible to construct an analysis of supply and demand in the foreign exchange market.
It is important to note that the imbalance of these flows in rough approximation should compensate each other (net exports equal net foreign investment). For the purpose of analysis, we adopted the assumption that these imbalances and determine the supply and demand in the currency exchange market. Moreover, net exports determines the amount of demand for domestic currency (foreign importers to buy domestic goods have a demand for domestic currency), and net foreign investment proposals determine the national currency (for the acquisition of foreign assets acquired in foreign currency exchange at the national, which in turn increases sentence).
The value of net exports depends on the real exchange rate, while the value of net foreign investment - from the real interest rate. The real interest rate in turn is set at the market borrowing.
Thus, using the above assumptions, we built a model for economic impact analysis of economic processes on the exchange rate. It looks like this:
Fig. 1. Model analysis of the impact of economic processes in the exchange rateKey economic parameters that influence the exchange rate:
• State budget deficit and debt (as a consequence)
• Status of international trade in the domestic economy (balance of trade)
• Discount rate of central banks (and its relationship to the real rate of interest)
• Inflationary processes (and their relationship with the dynamics of nominal and real interest rate) - the theory of PPP is considering this factor
• Status of the labor market
• Economic growth (GDP dynamics)
Statistical information on relevant macroeconomic indicators can be found on the Internet. The publication of these data is usually done once a month (sometimes quarterly or weekly). Of particular impact should be given to statements or comments of officials because they can not only answer to the question when, once again raise interest rates, but also about the prospects of monetary and fiscal policy of the state as a whole.
Separately worth of census data (or estimates) of indices, characterizing the state of the national economy (the most significant of them - ISM Index). Their interpretation is difficult and ambiguous. In any case, the analysis should be conducted from the standpoint of predicting future values of real macroeconomic performance.
Summarizing the interim results, we can say that the real processes occurring in the global economy, much more complex than the model adopted for analysis, but to identify the major relationships between macroeconomic processes (events) and changes in exchange rates, it is quite adequate.
Andrew Khamidullin
to Forex Magazine
fxtrade@tomsk.ru
to Forex Magazine
fxtrade@tomsk.ru
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