10. Fundamental Analysis in the Forex

Analyze fundamentals and technicals

We have found that traders tend to focus on one type of analysis or the other (fundamental or technical) in their trading and will often completely dismiss other types. We encourage traders to spend the time it takes to understand the underlying forces moving the market (fundamentals) as well as what is happening in price, volume and volatility (technicals.)

To that end, let’s define Fundamental Analysis. We separate fundamental forces into two categories:

A closer look at market traded fundamentals

The advantage of Market-traded/Intermarket Fundamentals is that they are exchange traded. For example, interest rate information is not being fed to you through a single official source that will lag the real market. Market traded information is usually real-time, and pulls from very distributed sources to reflect consensus information much more effectively than a survey ever could. Most technical analysts will argue that all the news is wrapped up in prices anyway so getting to the exchange traded information is much more efficient.

There are two things you need to know about market traded fundamentals:

• 1. Higher yields available in one economy should fundamentally strengthen its currency.
• 2. Yields are available returns from bonds, equities, deposits and other investments

Of course, since forex pairs move relative to each other, these fundamentals, or yields only have value when compared to the same measures across currency borders.

Imagine, for example that yields in Australia (AUD) are much higher and have been trending higher than those available in the United States (USD) for a few years. That creates a yield, or fundamental differential, that should push the AUD up against the USD.

Another way to look at this is as a see-saw. If the AUD is outweighing the USD from a fundamental perspective, then the AUD/USD see-saw will be pointing up and to the right. By no coincidence – so will the AUD/USD currency pair.

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