Fundamental analysis refers to the study of the country’s economy and its financial performance in relation to the value and future performance of its currency.
The country’s economy and financial performance is backed up by different factors such as monetary policies, macroeconomic activities, political events and natural factors.
This is very important when determining the country’s economic health and its future performance for the purposes of investing in a particular country’s currency.
The major fundamental economic factors are Monetary Policies, Interest Rates, Gross Domestic Product, Consumer Price Index, Trade Balances, Inflation, Unemployment, Speeches and Press conferences.
Monetary policy affects the currency value through use of either expansionary or contractionary policy. The expansion policy increases money supply which may lead to loss of value of the country’s currency and the contraction policy restricts money circulation and this leads to increase in the value of the country’s currency.
When the interest rates are cut, borrowing becomes cheap resulting to a lot of money in circulation for consumption and this leads to low value of the country’s currency. when the interest rate is raised, it makes borrowing expensive and the value of the currency appreciates.
So by adjusting the interest rates, the country is able to control the money in circulation and hence the value of its currency.
Inflation measures the persistent increase in the general prices of consumer goods and services. Very high inflation than targeted reduces the value of the country’s currency and most traders always expect the central bank to react by increasing the interest rates.
Low inflation is also not good for economic development so when that happens traders still expect the central bank to react by lowering the interest rates. Basing on that, traders are able to speculate the future economic status of the country they intend to invest in.
Inflation can be measured by looking at consumer price index (CPI) data, producer price index (PPI) and are usually released every month.
Gross domestic product (GDP).
The GDP reflects the total value of all goods and services produced with a country for a given period. It represents the health of the country’s economy which also reflects the value of the country’s currency. This can be used by making comparisons with the previous data to gauge the country’s future economic status. It is also released every month, quarterly and yearly.
This is also used to gauge the health of the country’s economy and its rate of growth. Unemployment is a lagging indicator to economic growth therefore is an important factor investors always look at to gauge the value of the country’s currency.
High unemployment leads to over dependency, low government revenues through taxes, increased government expenditure and low consumer confidence hence slowing down economic growth and currency value and the reverse is true. This can be measured using the unemployment rates data, non- farm payroll (NFP) in the US, job claims and other labor- related indicators.
The trade balances show the difference between the value of the country’s major exports and imports. When the experts are greater than imports, it indicates a surplus hence a healthy economy and when the import value exceeds the export value that is a deficit. It reflects a bad economy when a country registers a deficit.
The speeches and conferences.
Statements from very important people like the country’s president, Fed chairman, presidents of the central banks and governors influence the markets and the future of the country’s economy. This can also affect the value of the currency.
The other areas of interest that you should always consider when released or talked about are political crisis news and natural calamities. These rarely happen but when they occur, they are worth to be considered because they can also make a big change on the country’s economy.
The Economic data is released on the economic calendar every day of the months and can be easily accessed online.
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