Long-term success at investing is directly proportional to the degree to which we are able to moderate
our emotions. To be the perfect investor is to become emotionally inhuman ... that is, to control the swaying human emotions
of fear and greed.
Harold Gourgues, Jr.
Fundamental Analysis
Familiarize yourself with the following
economic indicators as they will influence change in the overall
health of the US economy. As a trader you want to be able to derive
market direction and impact from the following.
Summary of Federal Reserve Board
Policy
Fed Raises Discount Rate - An
increase in the borrowing rate for banks from the Fed usually
result in increased rates for banks' clients. This action is used
to slow credit expansion. Market Impact: Market price of foreign currency relative
to USD to fall.
Fed Buys Bills - Fed adds to
banking system reserves that may lead to a drop in rates. Market Impact: Market price of foreign currency relative
to USD to go up.
Consumer Price Index (CPI) Rises
- Reflects the trend of the average price of consumer goods. This
figure is positively related to inflation and if the CPI rises
this indicates rising inflation. Market Impact: a. Increase in gold prices.
b. Market price of foreign currency relative to USD may fall.
Durable Goods Order Rises -
Pickup in business activity usually leads to increased credit
demand. This may subsequently cause interest rates to rise. Market Impact: Market price of foreign currency relative
to USD to decrease.
Gross National Product (GNP) Falls -
This figure reflects the growth and the economic situation of
a country. If GNP falls, this reflects a slowing economy. Fed
may loosen money supply prompting a decline in interest rate. Market Impact: Market price of foreign currency relative
to USD to rise.
Housing Starts Rise - Shows
growth in economy and increased credit demand. Fed less accommodating
and any attempt tightening by allowing interest rates to rise. Market Impact: Market price of foreign currency relative
to USD to drop
Industrial Production Falls -
This indicates slowing economic growth. Fed may be more accommodating
in allowing interest rates to fall to stimulate the economy. Market Impact: Market price of foreign currency relative
to the USD to go up.
Inventories Up - This indicates
a slowing economy since sales are not keeping up with production. Market Impact: Market price of foreign currency relative
to USD to rise.
Leading Indicators Up - This
signals strength in the economy leading to greater credit demand. Market Impact: Market price of foreign currency relative
to USD to go down.
Oil Price Falls - This reduces
upward pressure on interest rates, thereby enhancing prices of
debt securities. Market Impact: Market price of foreign currency relative
to USD to increase.
Personal Income Rises - The
higher one's income, the more is consumed prompting increased
demand and higher prices for consumer goods. Market Impact: Market price of foreign currency relative
to USD to drop.
Precious Metals Prices Fall -
This reflects decreased inflation. Demand for inflation hedges
abates. Market Impact: a. Market price of foreign currency relative
to USD to increase. b. Market price of gold to decrease
Producer Price Index Rises -
This indicates rising inflation. Demand for goods rises as well
as prices. Investors require higher rates of return. This pushes
rates up. Market Impact: a. Market price of foreign currency relative
to USD to drop. b. Market price of gold to rise
Retail Sales Rise - This indicates
stronger economic growth. Fed may have to tighten interest rates. Market Impact: Market price of foreign currency relative
to USD may drop.
Unemployment Rises - This indicates
slow economic growth. Fed may ease credit, causing rates to drop. Market Impact: Market price of foreign currency relative
to USD to increase.
Fed Repurchase Agreements -
Fed puts money into banking system by purchasing collateral and
agreeing to resell later. This helps bring rates down. Market Impact: Market price of foreign currency relative
to USD to go up.
Fed Reserves of Matched Sales -
Fed takes money from the system by selling collateral and agreeing
to repurchase same at later date. This decrease in money supply
generally raises interest rates. Market Impact: Market price of foreign currency relative
to USD to go down.
Money Supply Increases (M1, M2, M3) -
Excess money supply growth potential can cause inflation and generate
fears that the Fed may tighten money growth by allowing the Fed
funds rates to rise which in turn, lowers future prices. Market Impact: Market price of foreign currency relative
to USD to drop.
Institute of Supply Management Index
(ISM) - For retail, financial services, construction
and other non-manufacturing businesses. An index reading of "anything
over 55 is a strong number and signals expansion."
Terminology Used
in Fundamental Analysis
Trade Deficit - When the merchants
export value is smaller than import value, the outflow of currency
results.
Balance of Payment - A statement
in which all the revenues and expenditures of country are recorded.
Gross National Product (GNP)
- This figure reflects the growth and the economic situation of
a country.
Unemployment Rate - A rate showing
the percentage of the unemployed workers within the total population.
Non-Farm Payroll - This figure
reflects the health of the commercial and industrial sector of
an economy. The size of this figure is positively related to the
growth rate of an economy.
Industrial Productions - It
shows the industrial output of an economy. The higher the figure,
the better the economy.
Factory Orders - The amount
of orders received by manufacturers. The higher the figure, the
better the economy.
Business Inventory - Unsold
output. When this figure is high, an economy is slow and the currency
of this country would be weakened.
Capital Utilization - This figure
is high when an economy is strong. A high figure is beneficial
to the currency of a country.
Leading Indicator - It
can be used to predict the health of an economy. A high figure
reflects high inflationary pressure. The following indices are
related to inflation.
Consumer Price Index - Reflects
the trend of the average price of consumer goods. This figure
is positively related to inflation.
Producer Price Index - Reflects
the trend of producer costs. This figure is positively related
to inflation.
Retail Sales - Reflects
the purchasing power of an economy.
Personal Income - Shows
the growth in average income.
Personal Consumption Expenditure
(PCE) - Shows the growth in average expenditure.
Prime Rate - The interest
rate (lower than market interest rate) charged to highly reputable
customers.
Discount Rate - Interest
charged by central banks to commercial banks when borrowing
money. Higher rates attract short-term inflow of investments.
Federal Fund Rate - The
inter-bank rate for borrowing or lending reserve to meet margin
requirement.
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