THE FUNDAMENTAL ANALYSIS

The fundamental analysis is a price of financial asset depending on political and economic processes and events.

There is an interconnection between financial-economic, political and economic events that take place in certain countries as well as in the whole world, and currency rates and actions. This interconnection is studied in the framework of the fundamental analysis.

The fundamental analysis is the most difficult part of economic analysis of the financial market. It carries out significantly more difficult than any other analysis, as one and the same factors in different conditions influence differently on the market; the important ones can turn into insignificant. Apart from definite general formal rules the practical experience is needed to carry out an analysis like this.

The methods of the fundamental analysis are used in practical activity of a trader with other types of market analysis and allow to estimate the main situation of history and perspectives of the rates of exchange instruments, on the assumption of interconnection of fundamental economic and other factors and standard reactions on them of the exchange markets.

There are following factors take place in the fundamental analysis:

• Government crisis;
• Big dismissions and change of the Cabinet of ministers;
• Negligent claims in press;
• Publication of economic indicators of countries and block of countries;
• International conflicts;
• Waiting of the elections;
• Natural disaster (force-majeure).

All the events that are regarded in the framework of the fundamental analysis divide into planned and unplanned ones. All the planned events (issuing of economic indicators, planned speeches of the heads of the Cabinet of Ministers or other influential officials, publications of election results etc.) are published in economic calendar. Unplanned events include any force-majeure (fires. natural disasters, terroristic attacks etc.). Besides the course of the fundamental analysis means that politics is a process of redistribution of public goods and public resources, that are connected with economics.

The market reaction on any unplanned event, that is regarded from the point of view of the fundamental analysis, is unpredictable and depends on concrete situation. There were some historical events that changed for a while the currency rate of dollar against other currencies on two technical patterns during 1 hour. (For example, crash at oil-production enterprise in the Caribbean Sea, Saddam Hussein catching by the American army, Hurricane "Katrina" and others).

Nevertheless it is possible to forecast further direction of the movement of rate of an exchange instrument with planned appearance of economic indicator. The changes in statistics on unemployment rate, for example, will have obvious consequences for the national currency rate. There is a certain mechanism of market reaction on appearance of economic indicator exists.

In your work we recommend to use economic calendar of events. You can find it on www.forexpeoples.com.

Publication of economic data of leading countries influences with different extent on the currency rate. In accordance to its importance this data is divided into following groups:

1. Very important ones:

• gross national product;
• trade deficit
• payment deficit
• inflation indexes (CPI and PPI);;
• unemployment and employment data;
• money supply data (M4-M0);
• official discount rates;
• elections in Parliament, Congress, Senate. Presidential elections (pre-election promises of the candidates and historic preferences of the parties influence on the currency)

2. Less important ones. Sometimes rate reacts on this group. Everything depends on concrete situation at the market:

the size of retails and sales:

• the size of retails and sales;
• housing starts;
• the size of manufacture orders and orders of durable goods;
• industrial production index;
• producer price index;
• consumer price index;
• economic productivity.

3. Unimportant ones:

• futures;
• deposit rates;
• actions indexes (Nikkey, DowJones, DAX etc.) - the growth of these indexes is a sign of good situation in the national economy. It increases the demand of national currency of this country.
• price dynamics of government obligations (T-bills, T-bonds)

The influence of the indicators on the currency rate is shown in the table below:

Indicators	Change of indicators	Change of the national currency rate
Balance of trade deficit	growth	fall
Balance of payment deficit	growth	fall
Inflation indexes: CPI and PPI	growth	fall
Official discount rate (repo, lombard etc.)	growth	growth
GDP	growth	growth
Unemployment	growth	fall
Money supply data (М4, М3, М2, М1, М0)	growth	fall
Presidential or parliamentarian elections	growth	-
Retail sales sizes	growth	growth
Housing starts	growth	growth
The size of orders	growth	growth
Producer price index	growth	fall
Industrial production index	growth	growth
Economic productivity	growth	growth
Forward currency rates	-	-
Futures currency rate	-	-
Effective exchange rate	-	-
Deposit repos	-	-
Stock index (DJI, NIKKEY, DAX, FTSE)	growth	growth
Government bonds prices (T-bills, T-bonds)	growth	growth

The publication of fundamental data, as it was said before, is a planned event. Leading economic countries are obliged, in accordance to existent international agreement, to issue forecasted and actual data of their economic indicators. It is important to remember that the market immediately takes into consideration the forecasted data about indicators, and sharp market reaction is possible because of the significant change of issued economic indicator from forecasted data or because of reconsideration of previous periods. The forecasting of market reaction is a difficult process that demands some practical experience.

The fundamental analysis data should be taken into consideration in trade strategies, but only together with technical analysis data. It is impossible to make trade decisions taking into consideration only fundamental data because the market reaction is unpredictable. Apart from this the practice exists where after the planned publication of economic indicator, the previous data about this indicator is revalued, and this can change total financial market reaction on the opposite one. For example:

The quantity of claims of primary distribution of unemployment benefits in the USA (the data is published each two weeks) at the moment of publication was equal to 418 thousands. Previous value was equal to 515 thousands, and the forecasted one - 452. The smaller quantity of primary distribution of benefits in comparison to forecasted one is obvious, and it means the improvement of economical situation. The market will react with high growth of USD rate against all other currencies on certain value (in practice - to the half of price pattern). In two minutes after the start of  the USD rate movement the review of previous indicator of two-weeks may be published, and 515 000 value may be reconsidered to 468 000. Then it seems that the forecasted value does not differ much in its absolute value from the value of the previous one, after which the opposite market reaction will follow that in short term (about 10 minutes) will return the currency rates levels to their initial state or provoke opposite movement. There are cases when after publication of the group of important macroeconomic indicators the volatility of currency rates increases sharply in a very short time interval, after that the price levels return practically to the same state where they had been before the indicators publication.

It is important to take into consideration that different macroeconomic indicators influence on price rates of financial instruments, orienting on different time intervals. For example, the correlation of levels of discount rates of the State Central Banks - is an indicator that influence on total global direction of movement of correlations of currency rates. The higher CB discount rate the more profitable the investments in this currency (it is important to remember about inflation expectations). With the change of level of discount rate of Central Bank the investors start to reestimate the level of profit of investments in this currency and their attention is changes in the direction of another financial instrument. The same situation takes place with the estimate of level of market-value of temporary contracts on the difference of stocks prices of the largest world holdings. The fundamental indicator is the level of stock profitability (in percent) for the previous accounting period. In more short-term perspective the profitability reports are used for the estimation of investment profitability for shorter time periods (up to one month).

Methods of the fundamental analysis are described in comprehensible form in the list of recommended literature.