Fundamental analysis of a business involves analysing its financial statements and health, its management and competitive advantages, and its competitors and markets. When applied to futures and forex, it focuses on the overall state of the economy, interest rates, production, earnings, and management.
When analysing a stock, futures contract, or currency using fundamental analysis there are two basic approaches one can use; bottom up analysis and top down analysis. The term is used to distinguish such analysis from other types of investment analysis, such as quantitative analysis and technical analysis. Fundamental analysis is performed on historical and present data with the goal of making financial forecasts.
Eurozone, The Fundamental Lessons
We’ve experienced a significant unforeseen and unintended consequence as a result of the prolonged Eurozone issues and hopefully many FX traders will have immediately picked up on it. For many traders, who were not previously plugged into the news and aware of how macro economic news affects the markets, then the past year has provided a constant stream of superb unmissable examples as to who, how and why the markets move..
Over the past twenty four hours we’ve witnessed a superb illustration of the euro moving in perfect synergy with the prevarication and apparent indecision of the Euro group and troika. The shadowing of price, as the news ebbed and flowed, was almost balletic. As opinions varied in the media as to the eventual result of the troika/Euro group (and the clock ticked down) there was a visible reaction to all currency pairs containing the Euro as the counter party. That reaction reached a fascinating ‘crescendo’ yesterday evening and early this morning.
The euro fell versus the dollar in the NY Monday afternoon session as optimism evaporated that a deal would be reached. That fall was magnified at 11 pm GMT as the planned meeting failed to take place. The euro then experienced a sharp spike up from 2:40 to 3:15 am GMT as news broke that a deal had been finally reached. As the morning session began (and analysts got to work) sobriety overtook optimism, the euro fell as many investors deduced that this agreement is only the first step to recovery. Since which time the currency has recovered to be printing at a price of 13270 up circa 60 pips or 0.47% on the day. The pair is near on parity with yesterday’s high and only 23 pips short of the daily high.
However, if we move away from shorter term charting, to look at perhaps the two hour chart over the past week, we can gather a far superior viewpoint of the fundamentals that have been in play. On the 13th of Feb. the euro began to experience a significant fall of over 200 pips to dip below 13000, from which it recovered as of midday on the 16th of Feb. to reach 13276 midday yesterday. Both of these ‘swings’ over the past week can be directly related back to the overall events concerning the Eurozone issues as they unfolded last week.
13th Feb – 15th Feb
Athens had been left scarred by the social unrest around the Greek parliament on Sunday 12th. Cutting minimum wages, slashing public spending and sweeping lay offs in the public sector fuelled the anger. Eurozone finance ministers closely monitored the situation in Greece before making further decisions on the bailout package due to be presented at Wednesday’s meeting. They’d rejected a previous set of measures proposed by Athens, and were demanding an extra 325m euros in savings. The Eurozone ministers subsequently cancelled the meeting scheduled for Wednesday 15th the Greek finance minister stating that the troika was shifting terms of €130bn bailout deal as part of move to force country out of eurozone.
16th Feb – 20th Feb
On the 16th it was announced that the extra budget cuts had been found. Hopes rose that the European Union would agree a fresh €130bn bailout on Monday (yesterday) to save Greece from defaulting on its debts after politicians in Athens said they were close to a deal with their single currency partners.
Amid attempts by Brussels to defuse the tension that has been building between Greece and Germany it appeared that the austerity stricken southern European country had found the additional budget cuts being demanded by the rest of the eurozone. “We are almost there,” one source said. The news came after European markets were closed but the Dow Jones index rallied by 123 points to close at a four year high encouraging risk on were the euro was concerned. This optimism, for the eventual rescue rubber stamped in the early hours of this morning and as previously highlighted frayed nerves were evident on our charts as the news leaked out of Brussels and the deal was eventually agreed.
Whilst not the purest of fundamental analysis examples this brief snap shot of a single currency pairs behaviour, in relation to the most critical of fundamental decisions in recent times, perfectly illustrates the overwhelming power and superiority of FA above TA. Price did not ‘bounce off’ moving averages, the market didn’t concentrate on stop hunting around resistance and or support, it didn’t revert to the mean due to touching the upper or lower Bollinger band..price was dictated and shaped by the critical fundamentals in play at the most crucial economic time the seventeen nation Eurozone has witnessed since it’s creation. That ‘information’ in the form of intelligence was then translated onto our charts.
This article isn’t intended to decry the use of TA, (technical analysis) after all as the author of this and many articles for FXCC many readers will know that I’m as hard core a technical analyst and trader as you’ll find, ALL of my decisions are taken off the charts based on the alerts/set ups I’ve embedded in my charts, however, the crucial issue is that I understand why price moves, who is making it move and hopefully when that move and trend will end.
This article is in two parts. Part two will cover A Reference Guide To Forex Fundamentals.