In Depth: Fundamental Analysis of Trading

There are two methods of analysis in the foreign exchange market, one is fundamental analysis and the other is technical analysis. This article will give you a detailed introduction to fundamental analysis.

Fundamental analysis is a typical market analysis. It is generally based on the study of the status and changes of macro-fundamental factors and their impact on exchange rate trends, and then draws conclusions about the supply and demand relationship between currencies, and judges exchange rate trends based on this analysis method. For example, the non-agricultural employment data of the United States is one of the economic data that the foreign exchange market pays close attention to every month. Once the data is released, it may become a turning point in the direction of the foreign exchange market, and even bring violent fluctuations to the foreign exchange market.

Analyzing the future long-term development trend of the exchange rate from the fundamentals is more reliable and has advances. But the disadvantage is that it is unable to provide the starting point of the exchange rate rise and fall and the time of the change. In addition, sometimes exchange rates do not strictly follow changes in fundamentals. Therefore, the analysis of the fundamentals should be combined with factors such as technical aspects and market psychology.

I. Analytical position 

Since changes in the exchange rate are the result of changes in the overall economic conditions between the two countries, when analyzing the foreign exchange market, investors should analyze the political and economic situation of the country as a whole, that is, macroscopically, and abandon the analysis of the microeconomic conditions. 

2. Analysis of economic data 

Investors' fundamental analysis of foreign exchange trends is the analysis of a series of national economic data. Different countries have different economic data associated with changes in foreign exchange rates. It is necessary to master the data names of the fundamentals of each country and the impact of changes in these data on exchange rates. Investors are faced with a lot of data, not all of which require analysis. Investors should learn to find market hotspots from fragmentary news and data based on the current world political and economic situation. When analyzing the fundamentals, it is enough to mainly analyze the hot spots of these markets. However, investors should note that hot spots in the market are not fixed. As the political and economic environment changes, hot spots will also change. 

3. Important factors required for fundamental analysis

1. Economic factors

(1) Macroeconomic conditions: From a long-term and fundamental point of view, the trend and change of the exchange rate are determined by a country's economic development level and economic prosperity, which is also the most important and direct factor affecting the exchange rate. The foreign exchange market is directly affected by the economic situation and will inevitably present a cyclical fluctuation. Among them, the level of economic growth, the balance of payments, the level of inflation, and the level of interest rates are mainly considered.

(2) Interest rate level: Among the many factors affecting the exchange rate trend, interest rate is a relatively sensitive factor. When the interest rate is raised, credit tightens, loans decrease, investment and consumption decrease, and commodity prices fall. To a certain extent, imports are restrained, exports are promoted, foreign exchange demand is reduced, and foreign exchange supply is increased. When the national interest rate rises, it will attract international capital inflows, thereby increasing the demand for local currency and the supply of foreign exchange, causing the exchange rate of the local currency to rise and the exchange rate of foreign exchange to fall; when the interest rate falls, credit will expand, money supply will increase, and investment and consumption will be stimulated. Promoting rising prices is not conducive to exports and is conducive to imports. In this case, the demand for foreign exchange will be increased, leading to an increase in the foreign exchange rate and a decrease in the exchange rate of the local currency. At the same time, when the interest rate is lowered, it may lead to the outflow of international capital, increase the demand for foreign exchange, reduce the surplus in the balance of payments, and promote the rise in the foreign exchange rate. , The exchange rate of the local currency fell.

(3) Inflation The level of the inflation rate is the basis for affecting exchange rate changes. If a country issues too much currency, the amount of currency in circulation exceeds the actual demand in the process of commodity circulation, which will cause inflation. Inflation reduces the domestic purchasing power of a country's currency and causes the currency to depreciate internally. When other conditions remain unchanged, the internal depreciation of the currency will inevitably lead to external depreciation. Because the exchange rate is the comparison of the currency values ​​of the two countries, a country that issues too many currencies will reduce the value represented by its unit currency. Therefore, when the country's currency is converted into a foreign currency, it is necessary to pay more than the original currency of the country. Changes in the inflation rate will change people's demand for currency transactions and expectations for bond returns and foreign currency values. Inflation causes domestic prices to rise. When the exchange rate remains unchanged, exports lose money and imports benefit. In the foreign exchange market, the demand for foreign currency increases and the demand for domestic currency decreases, which causes the foreign exchange rate to rise and the domestic currency to depreciate. On the contrary, if a country's inflation rate decreases, the foreign exchange rate will generally fall.

2. Political factors

Political factors such as the international political situation, political events, relations between countries, the change of important political leaders, wars between countries, labor disputes or even strikes in some countries, etc., will have a huge impact on a country's exchange rate. sudden impact. This is also an important aspect that should be considered in fundamentals.

3. Market factors

The movement of investors, the intention and manipulation of large investors may all have a greater impact on stock prices. In the foreign exchange market, whether people buy or sell a certain currency has a lot to do with traders' views on the future situation. When traders expect that the exchange rate of a certain currency may fall in the future, they will sell this currency in large quantities in order to avoid losses or obtain additional benefits; to buy this currency. Some foreign exchange experts in the world even believe that the anticipation psychology of foreign exchange traders for a certain currency is now the most important factor in determining the exchange rate changes in this currency market, because under the domination of this anticipation psychology, funds will be induced in an instant. large-scale movement.

4. Government factors

Exchange rate fluctuations will have an important impact on a country's economy. At present, governments (central banks) of various countries often intervene in the foreign exchange market in order to stabilize the foreign exchange market and maintain the healthy development of the economy. There are four main avenues of intervention:

1. Buy or sell foreign exchange in the foreign exchange market; 

2. Adjust domestic monetary policy and fiscal policy;

3. Make public statements on an international scale to influence market psychology;

4. Cooperate with other countries to intervene directly or intervene indirectly through policy coordination.

This kind of intervention is sometimes very large in scale and momentum, and it is often possible to invest billions of dollars in the market within a few days. Of course, compared with the current foreign exchange market with a transaction size of more than 1.2 trillion, this is just a drop in the bucket, but To some extent, government intervention, especially international joint intervention, can affect the psychological expectations of the entire market, thereby reversing the exchange rate trend. Therefore, although it cannot fundamentally change the long-term trend of the exchange rate, in many cases it has a great influence on the short-term fluctuation of the exchange rate.

In addition to these main factors, there are also military factors, emergencies, etc. that will affect exchange rate changes.

Four. The basic theory of foreign exchange fundamental analysis

1. Purchasing Power Parity

Purchasing power parity theory is a theory about exchange rate determination, and it is one of the most influential theories in today's exchange rate theory. The theory holds that people demand foreign currency because they can use it to buy foreign goods and services, and foreigners need their own currency because they can use it to buy domestic goods and services. Therefore, the exchange of domestic currency for foreign currency is equivalent to the exchange of domestic and foreign purchasing power. Therefore, the price of foreign currency expressed in domestic currency, that is, the exchange rate, is determined by the ratio of the purchasing power of the two currencies. Since purchasing power is actually the reciprocal of the general price level, the currency exchange rate between two countries can be expressed by the ratio of the two countries' price levels.

2. Interest rate parity theory (Rate Parity)

The theory of forward exchange rate determination proposed by Keynes and Einziger. They believe that the equilibrium exchange rate is formed through foreign exchange transactions caused by international selling and arbitrage. In the case of a difference in interest rates between the two countries, money will flow from the country with low interest rates to the country with high interest rates to make a profit. However, when arbitrageurs compare the returns of financial assets, they not only consider the returns provided by the interest rates of the two assets, but also consider the changes in the returns of the two assets due to exchange rate changes, that is, foreign exchange risk. Arbitrageurs often combine arbitrage and swap operations to avoid exchange rate risks and ensure no risk of loss.

3. Balance of payments theory

The balance of payments adjustment theory is one of the main components of the international financial theory, and it is the theoretical basis for governments of various countries to analyze the reasons for the imbalance of the balance of payments and adjust policies in due course to maintain the balance of payments. The continuous development of the world's economies has promoted the development of the balance of payments adjustment theory. The theory holds that the foreign exchange rate must be at its equilibrium level, that is, the exchange rate that produces a stable current account balance.

4. Asset market model

The rapid expansion of trade in financial assets (stocks and bonds) has analysts and traders looking at currencies in a new light. Economic variables such as growth rate, inflation and productivity are no longer the only drivers of currency movements. The share of foreign exchange transactions stemming from cross-border financial asset transactions already dwarfs the share of currency transactions resulting from trade in goods and services.

The asset market model views money as asset prices traded in efficient financial markets. As a result, currencies increasingly show their close correlation with asset markets, especially stocks.