How Fundamental Analysis Method Works
Fundamental analysis is based on a study of the events that take place outside the quotes charts exchange rates. Fundamental news – all the events that are to some extent affect the exchange rate change. They can be divided into several types:
• Random
• Unexpected
• Expected
Random and unexpected news most often arise from political events and natural character. The unexpected news caused a greater stir in the market, which entails a drastic change of course.
Expected news – this economic change, sometimes added to them and the political. It is important to note that the same news in different time intervals may have different effects on currency depreciation.
The time factor also affects the significance of news. Therefore, the degree of influence they decided to share the news with a long-term and short-term impact.
As a rule, news of a long cycle (of several weeks to several years) determine the state of the economy as a whole. They are used for the opening of strategic positions. News with a short cycle (from several minutes to several days) – suspects include the influence of statistics and indicators on the exchange rate.
Do not forget that a great influence on the economic condition of the country has the power of the national currency. There are several formulas that can help you assess the rate of economic growth. So, for example, to account for economic growth, apply the formula:
Y = (A + B + C) * (1 – X), where Y – is the unknown quantity, A – the GDP of the country, B – balance of payments, C – the trade balance, X – the inflation rate.
If you want to analyze the specific cross-rates, then you need to take the ratio of the national currency to the U.S. dollar. Value of the euro to dollar rate is calculated as:
Y (euro) (A (euro) + B (euro) + C (euro)) (1 – X (euro))
Y (USD) (A (USD) + B (USD) + C (USD)) (1 – X (USD))
Changing the exchange rate will be followed in case the same magnitude of growth study of different production cycle (the length of the production cycle in the first country is shorter than the second).
