Forex Fundamental Analysis

Forex Fundamental Analysis

One of the two major strategies when trading foreign currency is through the use of what is known as fundamental analysis. Loosely defined, it is the approach based on studying current events, political and financial policy trends, and overall economic movement. In general traders using this technique are usually interested in long-term trades when trying to create returns. Economic conditions and environments are the major factor in determining the potential movements or upcoming trends that fundamental traders will use to not only predict future valuations of currencies, but also correct present values as well. Unfortunately one of the downfalls of fundamental trading is that during periods of little activity, and quite markets it is hard to find any useful data. Fundamental analysis itself is broken down into two broad subcategories, capital flows, and trade flows.

Tracking Balance of Payments

These study the demand of a currency over a given period of time, which is also known as the balance of payments. Capital flows are the net amount of currency being bought or sold through capital investments, which can include anything from foreign direct investments, joint ventures, third party licensing agreements, equity market investments, and fixed income market investments. The first three types of investments mentioned are physical flows of capital that can reflect the financial stability and economic growth of a country and its currency. The latter two are the flow of more common portfolio investments and international government bonds.

Trade Flows

The second type of fundamental analysis is trade flows, measuring imports and exports of a nation and its impact on the valuation of its currency. International trade plays a large role in the forex market, since importers must sell currency in order to purchase foreign goods or services. It is a one of the first ways used to understand the changes in exchange rates, and still among the most predictable ways to study the value of currencies. Net importers, or countries that run trade deficits traditionally experience devaluation of their currency, while those that run trade surpluses increase the value of theirs. The balance between trading partner and their affect on international trade transfer to the balance of payments and capital flows.

Monitoring Global Events

Fundamental traders follow global events, and their impacts on international investments. This makes both political relations, as well as financial status important to the trade process. Any changes in the relationship of one country’s government with another’s can effect the pricing of any currency pair in the forex market. Thus when using fundamental analysis it is important to stay abreast of current breaking news in order to produce profits.