Fundamental analysis is analyzing the forces that influence the economy, such as production
capacity, consumer confidence, employment, etc. Fundamental analysis can help
to find causality in price movements, and also (help) predict future price
movements.
On the
forex market a perpetual war rages against everyone. Everyone is fighting for
themselves, there is no morality, no ethics and hardly any legislation. It is
the capitalist heaven and the communist hell.
Everyone
with a bit of mind and a lot of motivation can fight richly on the forex
market. A few hundred dollars, a lot of study, a lot of practice, a lot of
discipline and you have all the basic ingredients for the 'road to the top'. It
is certainly not easy to get rich, but the forex market does not have a glass
ceiling. Too few diplomas / wrong education / too young / too old / too black /
too white / too whatever, it does not matter. So when it comes to something, it
is always yourself.
To be able
to fight successfully on this eternal battlefield you have to know who your
enemies are and how / what they think. All enemies together determine for an
important part the course of the war.
The players
There are
three major players on the currency market:
1)
governments
2)
multinationals
3) traders
large * (including the obscene large hedge funds) and small
Of these
three players, only the third is proactive, ie: he tries to predict which way
the prize goes.
Governments
mainly react reactively to the currency market through their central (national)
banks, for example to prevent the price of their own currency from rising /
falling too far relative to the others. The role of governments has, however,
decreased over the past few years, because it is becoming increasingly
difficult to really influence the ever expanding foreign exchange market.
However, it still happens that a government tries to influence the market
A good example of this is the Japanese Central Bank,
which spent more than 300 billion dollars in a few months in 2003 to ensure
that the Yen remained cheap against the dollar. This was to ensure that
Japanese exports could remain competitive on the world market.
Multinationals also play a particularly reactive role
(the hedge funds excluded, because they acted for profit). Companies such as
Shell, Philips, Microsoft etc have many activities abroad. In order to hedge
the foreign costs of revenues, they 'hedge' them using foreign currencies. For
example, they buy euros and sell dollars at the same time (position: Long on
EUR / USD) in order to hedge their product sales in the US against the exchange
rate of the dollar (since they have a position 'the other way' in the EURO).
They also influence the prices by investing more or less, selling, etc, in
other words: by the economic activities that they develop.
Why economic news is important
Economic indicators give all sorts of hints about how a
country stands for economically. Moreover, it provides insight into the needs
of domestic and foreign companies.
Is the interest on a currency lowered by the Central
Bank? Then it becomes cheaper to borrow money and thus cheaper to invest. As a
result, the money market is getting broader, which in turn means that the price
of the currency in question will usually fall relative to other currencies.
Governments and large companies 'make' the (economic)
news. This news has real value AND speculative value. The actual value is
determined by the reaction of companies and governments, the speculative value
by the traders.
Traders big and small react to the news because:
a) It says something about how multinationals (and
smaller companies) have operated over the past period and how they are likely
to operate in the upcoming period. (more / less economic activities in a
country and more / less hedging on the forex market)
Simple example: is the GNP of a country strongly
increased compared to other countries? Then there is a great need for the
currency of that country, because every company wants to invest in a country
where things are going well. The value of the currency against other currencies
will probably go up.
b) It says something about the likely future behavior of
the government / authorities to which the news applies.
Simple example: Has inflation in the Eurozone risen to
5%? There is a big chance that the ECB will raise interest rates, so that the
money market will become tighter and inflation will (hopefully) decrease. The
value of the currency will then (probably) increase.
c) Other traders large and small then also respond to
this. This is perhaps the main reason for reacting traders to news: the
expectation that the other traders will also respond to this. After all, it is
a war of all against all, and if everyone else decides to buy Euros and sell
dollars, then you better go do it .....
Virtually every successful trader keeps a close eye on
the news. To quote a very successful trader, asked what he thought was more
important, fundamental or technical analysis: 'This is like asking a doctor or
he would prefer to treat a patient with diagnostics or to monitor his
condition. You need both. '
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