FUNDAMENTAL ANALYSIS
Fundamental analysis focuses on the underlying economic factors that move the FX market. Traders who use this method tend to be long term traders. Fundamental analysis is purely focused on economic, geo-political and social events that drive supply and demand. Supply and demand play the biggest roles in reflecting the currency prices fluctuations.
From a fundamental perspective, the two main factors that impact exchange rates are:
- Interest Rates
- Capital and Trade Flows
- Economic conditions (Unemployment, inflation, etc.)
INTEREST RATES
Any news about interest rates may affects exchange rates. When the interest rate of a currency goes up, this currency sometimes becomes more attractive to investors who seek higher returns. More investments are placed in the country and hence the value of this currency in relation to other currencies increases in value.
CAPITAL AND TRADE FLOWS
Capital flows represent funds sent from one country to another. This determines the net amount of a currency bought or sold for a foreign investment. Positive capital flow means money coming into a certain country for investments exceeds the investments going out of the country. Negative flow indicates the opposite: more money is flowing out of the country for investments in foreign markets. Trade Flows measure the balance of trades (exports－imports).
Trade flows are the buying and selling of goods and services between countries. Net exporters run a trade surplus because they sell more goods to other countries than buying. Net importers run a trade deficit since they buy more goods than they sell. A net exporting country usually has a higher demand for their currency because more people are buying their goods and hence need this currency to pay for these goods.
