Fundamental Analysis
What is it?
Fundamental
analysis is the application of micro- and macro-economic theory to
markets to predict future trends. Major fundamental forces are
frequently one of the key drivers of FX rates.
The following are a list of key US economic indicators:
The
trade balance reflects the difference between a nation's exports and
imports of goods. A positive trade balance, or a surplus, occurs when a
country's exports exceed imports. A negative trade balance, or a
deficit, occurs when more goods are imported than exported.
Trade balances are closely followed by players in
FX, because of the influence they can have. It is often used as an
assessment of the overall economic activity in a country’s or region’s
economy. Export activities not only reflect the competitive position of
the country in question, but also the strength of economic activity
abroad. Trends in the import activity reflect the strength of domestic
economic activity.
A country that runs a significant trade balance
deficit tends to generally have a weak currency. However, this can be
offset by substantial financial investment inflows.
The
current account is an important part of international trade data as it
is the broadest measure of sales and purchased goods, services,
interest payments and unilateral transfers. The trade balance is
contained in the current account. In general, a Current Account deficit
can weaken the currency.
The
Consumer Price Index (CPI) is a measure of inflation. It takes the
average level of prices of a fixed basket of goods and services
purchased by the consumers.
CPI is a primary inflation indicator because
consumer spending accounts for nearly two-thirds of economic activity.
A rising CPI is often followed by higher short-term interest rates,
which can be supportive for a currency in the short term. However, if
inflation becomes a long-term problem, confidence in the currency will
eventually be undermined and it will weaken.
Durable
goods orders are a measure of the new orders placed with domestic
manufacturers for immediate and future delivery of factory hard goods.
Monthly percent changes reflect the rate of change of these orders.
The durable goods orders index is a major indicator
of manufacturing sector trends. Rising durable goods orders are
normally associated with stronger economic activity and can lead to
higher short-term interest rates, which is usually supportive for a
currency.
Gross
domestic product (GDP) is the broadest measure of aggregate economic
activity available. It is an indicator of the market value of all goods
and services produced within a country. GDP is reported quarterly and
it is followed very closely as it is the primary indicator of the
strength of economic activity.
The GDP report has three releases: 1) advance
release (first); 2) preliminary release (1st revision); and 3) final
release (2nd and last revision). These revisions usually have a
substantial impact on the markets.
A high GDP figure is usually followed by
expectations of higher interest rates, which is mostly positive for the
currency concerned at least in the short term, unless there are also
inflationary pressures.
In addition to the GDP figures, there are the GDP deflators,
which measure the change in prices in total GDP as well as for each
component. The GDP deflators are another key inflation measure beside
the CPI. In contrast to the CPI, the GDP deflators have the advantage
of not being a fixed basket of goods and services, which means that
changes in consumption patterns or the introduction of new goods and
services will be reflected in the deflators.
Housing
Starts measure initial construction of residential units (single-family
and multi-family) each month. Housing Starts are closely watched as it
gives an indicator of the general sentiment in the economy. High
construction activity is usually associated with increased economic
activity and confidence and can be predictive of higher short-term
interest rates.
The
Payroll employment (also known as the Labor Report) is currently
regarded as the most important among all US economic indicators. It is
usually released on the first Friday of the month. The report provides
a comprehensive look of the economy and it is a measure of the number
of people being paid as employees by non-farm business establishments
and units of government. Monthly changes in payroll employment reflect
the net number of new jobs created or lost during the month and it is
widely followed as an important indicator of economic activity.
Large
increases in the payroll employment are considered signs of strong
economic activity that could eventually lead to higher interest rates,
which is generally supportive of the currency at least in the short
term. If, however, it is estimated that an inflationary pressure is
building up, this may undermine the longer term confidence in the
currency.
The
Producer Price Index measures the monthly change in wholesale prices
and is broken down by commodity, industry, and stage of production.
The PPI gives an important inflation indication as
it measures price changes in the manufacturing sector – and inflation
at the producer level often gets passed straight through to consumers.