Learn fundamental analysis 14

In previous publications (No. No. 27-44 FOREX MAGAZINE) our methods of fundamental analysis to predict long-term changes in exchange rates. Now it is time to consider what we can be useful FA for more short-term trading.

Can I use fundamental analysis to predict the dynamics of exchange rates in a relatively short term, say, from one week to several months?

Yes, probably. But it will have no FA in the classical sense (the analysis of long-term impact of macroeconomic factors on the supply and demand of currencies). Here we should consider the impact on the dynamics of exchange rates of two groups of factors: the expectations of market participants regarding the future value of any economic data, as well as memory and reaction of market participants regarding the release of any economic data and political news. In this publication we describe the first group of factors - the expectations of market participants regarding the future value of any economic data.

So, the future value of emerging economic data (as in the long-term FA) can be considered the market in terms of their possible impact on the dynamics of supply and demand in the market valyutnoobmennom. An important difference is here is the predominance of short-term speculative factors, and thus determining the impact of TA in the host market solutions. This concerns first of all define the objectives of market movements (turning points).

Thus, the FA to predict the market in the time horizon of weeks to several months should be consistent with the findings of TA (to take into account the speculative factor).

Macroeconomic data output mode which can affect the dynamics of exchange rates.
On the way out there in the market for data-oriented selection of short-term direction of its motion (in descending order of importance)?
1. Data on changes in interest rates of Central Bank. As we have already dealt with one of the previous publications, the Central Bank interest rates largely determine the inflow and outflow of foreign investment in the national economy, directly affecting, thus, the value of the proposals of national currency exchange rates on the market. For the same reason, the market is particularly looking forward to official statements concerning the prospects for the development of national economies, in the calculation to predict future changes in interest rates. It should be noted that recently the market has become sufficiently accurate to predict the movement of rates, so by the time of release of official data, these changes are usually already taken into account the market and strong currency fluctuations do not cause.

2. Information about possible changes in the external trade policy. Changes in foreign trade policy has also been examined in detail in a previous publication. Introduction of foreign trade incentives or restrictions in order to improve performance in the balance of trade or for the protection of domestic producers can give effect only in the short run, in the long run, such actions appear only at the level of the nominal exchange rate. Having said that, changes in foreign trade policy, such as quotas or raising taxes, in the modern economy of developed countries does not happen often. The above figures have a direct impact on supply and demand for the currency exchange market. Other important data are usually secondary effects, usually affecting the decision to change interest rates, much less on changes in foreign trade policy.

3. Data on the labor market. The most important indicators in this group are: the number of jobs in non-agricultural sector, unemployment and the number of requests for unemployment benefits. Such indicators as the average weekly working hours, etc. have on the market much less influence. In general, the relationship of the state of the labor market and the foreign exchange market is obvious. Nevertheless, it is present, and was considered one of our publications. At the same time, it should be noted that increased attention to market to this group of indicators is due to psychological factors rather than fundamental.

4. Data on gross domestic product. This is the most objective indicator of the state of the national economy, the same as directly related to the state of foreign trade, and the dynamics of official interest rates. The fact that the market is giving it far less attention than the data on the labor market is explained by the fact that the information on GDP is much later than the end of the quarter, and, consequently, by the time the output data, it has long been reflected in currency markets.

5. Data on inflation. Here you can select the following indicators: GDP deflator, consumer price index, producer price index, the index of import prices and the price index for export. As was shown in one of our publications, the inflation rate well correlated with changes in official interest rates. The growth of inflation, the market perceives as an additional argument in favor of the fact that interest rates in the country will be increased, and vice versa.

6. Data on the status of the aggregate domestic demand. It's no secret that aggregate demand is perhaps the most important driving mechanism for the growth of national economy. Among the indicators of the state of aggregate demand, there are data on retail sales, inventories in warehouses, orders of durable goods and sales of real estate.

7. The dynamics of prices for strategic imports and exports, as well as the export-oriented industries and industries that compete with imports. It is this information could encourage
Government to introduce changes in its foreign policy. Here is an indicative list of data, the expectations which could induce the direction of the market in one direction or another, certainly in the price benchmarks defined speculative factor (as defined by TA).

Andrew Khamidullin
to Forex Magazine
fxtrade@tomsk.ru