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Aside
from technical analysis,
another primary approach to analyzing
currency market fluctuations is called fundamental analysis.
Fundamental analysis is the examination of economic indicators, asset
markets and political considerations when evaluating a nation's
currency in terms of another. The key to fundamental analysis is to
gather and interpret this information and act before the information is
incorporated into the currency price. The lag time between an event and
its resulting market response presents a trading opportunity for the
fundamentalist.
Here some major fundamental factors that can affect currency prices:
- Decisions
on interest rates made by central banks such as the US Federal Reserve
or the European Central bank (ECB) monthly.
- Quarterly
GDP figures. Only
preliminary national GDP figures generally have the effect of changing
market sentiment.
- Market
sentiment data. Market expectations are formed from one week to two
days before the event. Participants become well positioned based on
expectations. If the figures are not a surprise, profit taking is often
the only result.
- Political
Events. National
elections, the
September 11th attacks, and the war in Iraq are examples of events that
have affected currency values.
- Major
indices. Inflation
indices, Institute of Supply Management (ISM) in the US and the
Purchasing Management Index (PMI) in Europe are also carefully followed
by traders.
- National
industrial production
figures.
- US
nonfarm payrolls (indicating new jobs created), Michigan sentiment
figures in the US, the western German business climate or IFO index,
and the Tankan quarterly survey in Japan.
There
are times that governments through their
Central Banks stand in the way of market forces impacting their
currencies, and hence, intervene to keep currencies from deviating
markedly from undesired levels. Currency interventions have a notable
and oftentimes temporary impact on FX markets. A central bank could
undertake unilateral purchases/sales of its currency against another
currency; or engage in concerted intervention in which it collaborates
with other central banks for a much more pronounced effect.
Alternatively, some countries can manage to move their currencies,
merely by hinting, or threatening to intervene.
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