Fundamental analysis

What is it?

When talking about fundamental analysis in the currency markets, most traders refer to this technique as the analysis of external events that affect a currency’s underlying value.  The range of these events can vary from economic data releases, political uncertainty, natural disasters and market moving news.  A broader scope has fundamental analysts evaluating a country’s underlying sovereignty through valuations of domestic assets, stock and bond markets and governmental budgets and reserves.

Some questions fundamental analysts ask:

• What is the rate of growth and inflation in the country?
• Are the country’s bonds in demand by other investors?
• How will the central bank react next month, will policy makers raise interest rates soon?
• Should one country’s political party win, what will it mean for the underlying economy?
• Will a building tsunami adversely effect the overall economy’s productive capacity?

Additionally, some analysts look to highly anticipated economic news and events:

• Current Account Deficit – the sum of balance of trade, net foreign income and foreign transfers
• Consumer Price Index – the pace of consumer inflation on a basket of goods
• Gross Domestic Product – basic measure of a country’s overall economic growth
• Manufacturing and Industrial Production – base production in an economy
• Consumer Spending – spending and consumption at the personal and retail level

Answering these particular questions is key to understanding the potential for an underlying currency’s fluctuations in the market.  As a result, there are many who attempt to understand this technique through both qualitative and quantitative styles, hoping to gain valuable insight into the future of a currency’s valuation.  But then again there is always Technical Analysis as well….