Main Fundamental Forces In Forex
Fundamentals, what are they and what do they mean? Why do some consider them as evil and others as good? Well, let’s dive into all these questions and understand what part they play in the Forex markets.
Now it is key for me to highlight that fundamental analysis is a way of looking at the markets through the understanding of economic, social and political forces that may cause the market to react a certain way, according to those on Wall Street.
This kind of analysis is usually used by those who have studied in these different fields, say finance, accounting, economics, and politics or commerce subjects. Here’s the thing though, the Big Banks – your JP Morgan & Chase, Deutche Bank, BOA (Bank of America), BOE (Bank of England) and the likes all have trillions of dollars in the markets on a daily basis and with the ability to pump up markets creating liquidity, many fundamentals help justify this.
Listen, I am not a fundamental trader however from the research I’ve done as well as the number of years I’ve been trading, I can confidently say that fundamentals have a short and long term effect on the markets. The moment news is released, the effects are already priced into the markets.
Now you might be like what the heck does that even mean?? Simply the main reaction of the market usually takes place before that piece of information because macroeconomic releases are LAGGING INDICATORS. A bulk of traders, analysts, and investors act on the FORECAST while retail traders act on the actual release.
We need to realize that fundamentals affect the supply and demand of a currency pair and that’s where the national banks come into play because they print out the money to have a growing and lucrative economy through buying and selling, as well as other facts which we will discuss in a minute.
Before we do though, I would like to make you aware of the intense amount of detailed research these economists and analysts, as well as traders themselves, perform before making a judgment call, because all the pieces come together like one big puzzle. Now, let’s look at each factor that is considered – I won’t be going through all but I will go through the major one and the ones that have a significant impact on the currency market… The nuggets.
What are they and where do I get them?? Well you see, you’ve got to buy them from your local retail store. I’m just kidding!! – macroeconomic indicators are plenty fold, they help you in forming an educated opinion on the state of the economy. Merriam-Webster defined ‘economic’ as the production, distribution, and consumption of goods and services for growth. Macroeconomic indicators give a little edge for technical traders too, in terms of the currency they may be trading and its overall direction. These indicators include but are not limited to; labor markets, economic growth, trade, housing data, and even retail sales. I’m going to speak on 3 in-depth for us to get a clear picture of what fundamental analysis means.
This one is interesting because it looks at the production of a country, the country’s imports and exports. Ideally, a country wants to export more than they import because this then means they can have more money coming into the country, different currencies which will allow them to circulate that money within their economy, allowing the government to make the country better for tourisms (which also would bring money in) and take less money out.
Think of it this way, your investments don’t grow if you keep taking out of it, right? In this case, the country and its people are the investment and if you keep taking money out it won’t develop. An example of this would be the China and USA trade war that recently occurred due to imposed higher tariffs for exports and imports imposed by President Trump. That affected the way people traded Gold and all the USD and JPY pairs. If you pay close attention you will realize around the same time, Gold started rising in value because the demand was higher and investors needed to find other assets to invest their money.
2. Retail sales
This speaks to the amount of money circulating within businesses that contribute a significant amount to the growth of the economy (retail sector). The spending habits of the consumer are tracked through the CPI (consumer price index) and without the figures of retail stores which affect the value of indices and in turn the currency value of a countries currency.
The more the sales, the more money circulates from business to business in that economy, allowing businesses to grow/expand and further contribute more to the economy and the people in the economy through employment.
3. Employment (e.g. NFP)
This is the non-farm payroll, which is the number of jobs added in different markets, in the US. However, this employment factor affects all economies because the higher the unemployment rate the worse the economy may be. Because this then means that the working class are the people who suffer from taxes for everyone else in the society who may not be able to pay the taxes causing a downward spiral.
This leads me to a very recent example that is affecting markets daily which is the loss of millions of jobs due to the corona virus, which is an aspect we don’t have control over, but with the loss in jobs a lot of debt repayments aren’t going to be paid, so millions default causing the banks to take a knock progressively, translating once again to the currency of the country being devalued by investors, traders and analysts.
This may even go as far as forcing the Federal Banks to decrease interest rates, and this action would cause them to lose money because the value of that money in the present may be less than what it was when the client too the loan or mortgage.
Therefore as we’ve seen how economic indicators and data can cause massive upsets in the short term even though priced into the market before the event, traders can still lose a lot of their capital if they are unaware of how fundamental analysis works. So what do we do ladies and gentlemen?
We learn, learn and learn about the effects of these indicators and what the data would mean for currencies and we act accordingly.
If fundamentals happen to be your cup of tea.
Happy fundamental trading!