Forex Fundamentals: Moving the Markets: For Many Traders, Foreign Exchange Is All about Technical Analysis, but Regardless of What Technical Studies You Use to Signal a Trade, a Solid Understanding of the Fundamental Drivers Is Necessary for Long-Term Successful Trading
McMahon, Chris, Futures (Cedar Falls, IA)
Because of higher housing prices and increased consumer confidence, the Bank of England was widely expected to temper rejuvenated economic growth with an interest rate hike at its meeting on Nov. 9. And it did, boosting the bank rate 25-basis points to 5.0%. That same week, the Reserve Bank of Australia was meeting as well. The consensus was that it too would raise interest rates, and that it would be the last hike of the year, as rates were already high at 6%. And it did, lifting the cash rate by 25-basis points to 6.25%.
"For the Aussie, it became: buy the rumor, sell the fact," says Brian F. Dolan, director of research at Forex.com. "And for the pound, it became: buy the pound and keep buying the pound." In that period, the GBP/AUS cross pair moved from 2.4600 to just shy of 2.500, a nice score based on knowledge of forex fundamentals. "It worked out very well in a short period," Dolan says. "This was one where it struck me that they were at different junctures on monetary policy and it suggested a trade to me."
Trading forex is all about betting on the value of one currency against the value of another, a pretty simple concept that lends itself very well to technical analysis. But the foreign exchange market also is a reflection of our changing global economy, which is dependent on complex relationships between producers and consumers of goods and services world wide. So even technical traders, who make their buy and sell decisions based primarily on price action, need an understanding of fundamental factors. For the trader who wants to go beyond "buy on green, sell on red," here is a look at the fundamental factors that affect the value of currencies and drive the forex market.
The broadest measure of a country's economic growth is described by its gross domestic product (GDP), which is the total value of all the goods and services created internally and externally by that nation's producers. The U.S. GDP is tracked by the U.S. Bureau of Economic Analysis and is released on a quarterly basis. For the second quarter of 2006, U.S. GDP increased by 2.6% and is at 2.2% for the year.
Other measures of growth are the monthly non-farm payroll report, issued by the U.S. Department of Labor, and the real earnings report. Both of these reports and many others are available on the U.S. Department of Labor's Web site (see "Forex Fundamental Sources," right).
FOREX FUNDAMENTAL SOURCES
While many forex brokers and platform providers offer analysis and trade recommendations, you should know where to find the original data sources.
Treasury International Capital System (TICS data): Release dates: Jan. 17, Feb. 15, March 15, April 16, May 15, June 15, July 17, Aug. 15, Sept. 18, Oct. 16, Nov. 16 and Dec. 17. www.treas.gov/tic
Coordinated Portfolio Investment Survey (CPIS): Non-U.S. trade flow report. www.imf.org/external/np/sta/pi/cpis.htm
Institute for Supply Management (ISM): www.ism.ws
U.S. Department of Labor: Non-farm payroll, the employment situation. www.bls.gov/ces
U.S. Bureau of Economic Analysis: Gross domestic product and balance of payments reports. http://bea.gov/bea/dn/home/gdp.htm
The International Monetary Fund Dissemination Standards Bulletin Board: A searchable database of economic releases and calendars. http://dsbb.imf.org/Applications/web/calmultiarccountry
Group of 7 (G-7) and Group of 8 (G-8):
The world's economic powers, including the United States, Japan, Germany, United Kingdom, France, Italy and Canada regularly meet to discuss and create economic policy. When Russia is included in policy-making, the body is referred to as the G-8.
Growing production and payrolls are good indicators of a healthy economy. However, if unchecked, rapid growth can lead to inflation, which devalues a currency relative to others and which consumers experience as rising prices and decreased purchasing power. …