I see so many questions relating to "How do Hedge Fund/Investment Banks/Trading Firms trade?". While most people on Forex
have no idea, they like to tell people their two cents. Top funds/banks/traders do not use technical analysis as they are solely a derivative of price. They use Fundamental analysis and leading indicators such as Volume. Be warned, the following is not for the faint-hearted and requires some (albeit basic) economic understanding. However, this might demystify fundamental analysis for you. If you can understand what I'm saying here, you are doing better than 90% of most retail traders. Enjoy.
1. Explain how factors that affect the demand for a currency, or the supply of a currency, affect the determination of an equilibrium exchange rate.
• In a floating exchange rate regime, the exchange rate is determined by the demand for and supply of a currency.
• The demand for a currency is represented by a downward-sloping demand curve. A lower exchange rate will increase the competitiveness of a country’s exports, thus attracting buyers of the local currency in order to purchase those goods, services, and financial assets.
• The supply of a currency is represented by an upward-sloping demand curve. As the local currency appreciates, the relative cost of foreign currencies falls, thus attracting sellers of the local currencies (i.e. buyers of the foreign currency).
• The equilibrium exchange rate is at the intersection of the demand and supply curves. In an efficient market, any other exchange rate would result in an increase in either demand or supply, thus maintaining the equilibrium exchange rate.
• A country that maintains a linked exchange rate, crawling peg or managed float exchange rate regime, whereby the local currency is tied to another currency such as the USD, or a basket of other currencies, is effectively tied into supply and demand factors that affect the currency or the basket of currencies to which it is linked or pegged.
2. Understand how the major factors that influence exchange rate movements operate, particularly:
a. Relative inflation rates
• Of the theories advanced to explain the exchange rate, and changes in the equilibrium rate, the Purchasing Power Parity (PPP) theory is the longest standing.
• PPP theory contends that movements in exchange rates will ensure that the cost of identical goods and services will be equal across countries. A change in inflation represents a change in prices in a country; PPP argues that a change in relative inflation rates between countries will be offset by a change in the exchange rate.
• Under PPP, a country with a higher inflation rate relative to another country can expect its currency to depreciate.
• Perhaps the most critical shortcoming of PPP is that there are variables in addition to inflation that affects the value of a currency.
• PPP calculations that apply inflation differentials between two countries can be used to determine the expected change in the exchange rate.
b. Relative national income growth rates
• Changes in relative national income growth rates also affect an exchange rate. For example, increased national income will typically result in increased imports and therefore an increase in the supply of the local currency on the FX markets. However, in a dynamic market, increased national income might encourage business growth, with associated local and overseas investment. This will also have an impact on demand and supply factors in the FX markets.
• An increase in the relative rate of growth is likely to result in an increased demand for imports, which will result in a depreciation of the currency.
• On the other hand, an increase in the growth rate may also result in an increase in foreign investment inflows, which will cause the currency to appreciate.
• Both the above mechanisms are likely to operate, with the balance between the two changing from time to time.
c. Relative interest rates
• Relative interest rates also affect an exchange rate. For example, a relative increase in local interest rates will attract overseas investors; these investors will purchase the local currency and sell their own currency. Investors need to consider interest rate differentials in conjunction with forecast changes in the exchange rate. Future exchange rate changes will affect the value of future cash flows associated with international investments.
• It is important to determine whether the change in interest rates are due to inflationary expectations, or a change in the real rate of interest.
• If the increase in interest rates is a result of an increase in inflation expectations, a currency should depreciate. However, if the increase is due to a rise in the real rate of interest, then the currency should appreciate.
d. Exchange rate expectations
• In addition to the economic fundamentals, exchange rate expectations are important in determining the FX value of a currency.
• Exchange rate expectations have a strong influence on exchange rates. Market participants analyse new information in order to try and forecast future impacts on an exchange rate. It may be possible to adopt a specific market indicator as a proxy for exchange rate expectations. For example, in Australia, the commodity price index is often used as a proxy. If sufficient participants form a view, the exchange rate will move; speculators play a large role in forming exchange rate expectations.
• The modelling of expectations is a particularly difficult task. Theoretically, expectations should be formed on the basis of the expected values of economic fundamentals. However, the FX market often reacts to new information before the impact on the longer-term economic fundamentals is fully analysed.
e. Central bank or government intervention
• The actions of governments or central banks are another variable that may be important in the FX markets.
• The monetary policy setting of a central bank will impact upon the demand and supply factors that affect an exchange rate. Also, a central bank or government may intervene in the FX markets to influence directly the level of an exchange rate by intervening in international trade flows, intervening in foreign investment flows or conducting FX transactions in the markets.
• For example, in an attempt to increase the FX value of its currency, a central bank may sell foreign currency and buy the local currency; alternatively, to reduce the value of its currency, the central bank may buy foreign currency. Alternatively, a government may implement policies that change tariff, quota or embargo settings relating to goods and services.
3. Explore regression analysis as a statistical technique applied to variables that impact on an exchange rate.
• Regression analysis is a quantitative method that measures how movements in variables impact on another variable.
• A regression model that measures percentage changes in an exchange rate should include variables of relative inflation rates, relative national income growth, relative interest rates, government or central bank invention and exchange rate expectations.
• The model will calculate regression coefficients that measure the responsiveness of the exchange rate to a particular variable.
• A dummy variable may be used for variables that do not have a data set (e.g. government intervention). A value of one would be assigned to periods where intervention occurred and the value zero to non-intervention periods. An indication of periods when central bank intervention occurs may be changes in the central bank’s holding of local and foreign currency reserves.
Fundamental analysis is the numeric study of the market by taking into account the different economic, political, and social occurrences that will highly likely affect the price of an asset. Moreover, the fundamental analysis aims at determining specific factors or reasons behind market price movements. The forex fundamental analysis is focused on studying drivers of currency prices. Some of ... Fundamental Analysis is a broad term that describes the act of trading based purely on global aspects that influence supply and demand of currencies, commodities, and equities. If you happen upon someone whom is touting chart patterns or overbought/oversold levels, you have crossed over into the technical analysis realm. Many traders will use both fundamental and technical methods to determine ... In forex market the fundamental analysis lays stress on the overall economic parameters of a particular company. It boils down to studying a nation as a company or a corporation. There are number of variables that determine the weakness or strength of currency rate of any country. Besides the economic variables, the social and geopolitical events can also greatly influence the ups and downs in ... There are four basic types of forex market analysis, namely fundamental analysis, technical analysis, weekend analysis, and sentiment analysis, of which fundamental analysis and technical analysis are the most prominent ones. The focus of this article will mainly be on these two types, with short references to the other two. 1. Weekend Analysis. Weekend analysis refers to a strategy where a ... Fundamental Analysis and Technical Analysis (FA and TA) go hand-in-hand in guiding the forex trader to potential opportunities under ever changing market conditions. Both beginner and veteran traders can benefit from the material that follows, but veterans have learned to make one important distinction. They do not spend an inordinate amount of time on the FA side of the equation, primarily ... It would be really useful to know the short list of fundamental factors that professional Forex traders use when making trading decisions. The problem is that no such list exists, or at least it does not exist for long. The list is constantly changing, depending on whatever factor is uppermost in the mind of the global investing community at any one moment in time. Forex und Analytics für Unternehmen. English; Español; Polski; Main; Forex-Handel; Analytics; Makler; Datenschutz-Bestimmungen; Kontakt; Dec 24. Fundamentale Analyse. Beim Handel ist es wichtig, strategische Wege für den Einstieg in die Finanzmärkte zu finden, um profitable Trades zu erzielen. Eine dieser Möglichkeiten ist als fundamentale Analyse bekannt. Fundamentale Analyse ist die ...
Fundamental Analysis by Rowena Harris-Doughty of LCG http://www.financial-spread-betting.com/spreadbetting/LCG-compare.html Fundamental Analysis is a way at ... Hey guys I hope you like this video about how US Stimulus talks affect the forex market and currencies such as the AUD and JPY. If you enjoyed this video giv... how to do forex fundamental analysis Fundamentals for Currencies There are many reasons behind how and which direction a currency can move. Politics, interest rates, commodity price etc. can ... This is the first in a series of videos covering the basics of the Forex market. We look at a simple example of exchanging currencies and the effect of fluct... CLICK HERE FOR MORE INFO: https://rebrand.ly/forex33 And start earning in the Forex Market Now! In our expanding international company setting, there are fir... Fundamental developments in the economy and monetary policy can have significant impact on currencies and forex trading. Understanding the relationship betwe...