Fundamental Analysis

Fundamental analysis and economic indicators

Fundamental analysis is a study regarding how a country’s economy affects its currency exchange rate, mainly involving the interpretation of statistical reports and economic indicators. Hundreds of reports and economic news are published per day, making it possible for us to predict the current economic uptrend or downtrend.

Some specific reports and indicators will be published on a fixed date referred to some financial calendar. This is a primary tool for analyzing the impact of reports or news. It will also provide some expert’s predication on the market trend.

Central bank and interest rates.

In general, the central bank is in charge of the state finance, the policies it adopts have a profound impact on interest rate. For example, the central bank may purchase and reserve its own currency in a bid to appreciate its currency value. On the other side, the central bank may sell its own currency to the market to depreciate its currency value.

When it is necessary to stimulate consumption, the central bank may lower its interest rate related to loans for commercial banks. If the central bank has to slow down inflation, the interest rate will be risen for stimulating consumption.

The policies adopted by the central bank can be classified into “hawks” or “doves” according to its focus on either inflation control or economic growth boosting. The former always leads to a higher interest rate and tightening monetary policy, and the latter usually means lower interest rates and loose monetary policy.

Central banks in the world

Inflation.

Inflation is an indicator for assessing the price rising rate of commodities and service in a given economy, it has a direct impact on the demand and supply of the currency. The main inflation indicators are:

Gross Domestic Products(GDP)

GDP refers to the total market value of final products and service of all resident units over a certain given time. GDP growth means the upward trend of economy, as such, it usually used to measure inflation.

Release time: first time – within four weeks after the end of a quarter; final time –within three months after the end of the quarter, time: 15.30 (EST.30 EST).

Consumer Price Index(CPI)

CPI is an indicator indicating the price fluctuation of consumer goods and service in a certain time in urban and rural areas combined. Compared with the previous index, CPI showshow consumption changes and how it is affected by inflation.

Release time: monthly in every mid-month, time: 15.30 (EST) at EST.

Producer Price Index(PPI)

PPI is an indicator that shows fluctuation in the price of production materials, it can be used to assess fluctuation in prices at the consumer level.

Release time: Second or third week of each month, time: 15.30 (EST) at EST.

Employment.

The employment rate affects directly the interest rate due to its affection on current and future consumption capability. The increase of unemployment is deemed as the weak economic growth, which, in turn, will reduce the demand for currency. On the other side, higher employment rate means strong economic growth, which will lead to a strong demand to currency.

Below are the most important employment reports from some countries:

US non-agricultural employment - employment trend assessment, government, non-profit organizations and agricultural employment are excluded.

US First application for unemployment insurance–the new unemployed amount can be estimated through the numbers of applications.

Labor force survey - Measure the change of current employment rate in Canada.

Wage Price Index - wages changes in Australian.

Change in claim rate - changes in unemployment insurance claims in UK over time.

Retail sales.

This index is so vital because consumer spending is a very important part of the economy. It is the statistical summary of all retail sales, including the consumption of various commodities and service in a certain time. The growth of retail sales shows that the consumers enjoy an extra income for consumption, and are confident in the economy.

Release time: monthly in each mid-month, time: 15.30 EST (14.30 EST).

House sales.

A continuous housing market is one of important indicators of economy. It is based significantly on the consumer’s confidence and mortgage rate, the House Sales report indicates the general demand for housing in the market.

Release time: Fourth week of each month, time: 15.30 (EST) at EST.

Wholesale trade report.

The wholesale trade report is a survey of the sales, inventory and inventory-sales ratio of 4500 wholesale merchants in every month. The survey indicates the supply and demand fluctuation in the market, and may help to predict the quarterly GDP report; however, this indicator does not strongly have an impact on the market.

Release time: around the 9th of each month, time: 17.00 EET (16.00 EST)

Balance of Payment(BOP)

BOP indicates the payment flow of all trading between two countries in a certain given time. The trading includes commodities, service and income, and capital account with financial tools. Those data are critical for economic and national policy-making.

Release time: around the 19th of each month, time: 15.30 EST (14.30 EST).

Trade balance

The trade balance report shows the difference between the amounts of imports and exports in a country in a given time, it is an important part of BOP. The trade deficit means the imports are greater than that of exports, while the trade surplus is the opposite condition. The declining of surplus and deficit mean the increase demand for the currency.

Release time: around the 19th of each month, time: 15.30 EST (14.30 EST).

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