FUNDAMENTAL ANALYSIS

1.Macroeconomy :

The basis of fundamental analysis involves studying macroeconomics on a global scale. To do this, one must first understand the dynamics of the economic cycle, the monetary policies of major central banks, and a number of important economic indicators.

The past behavior of a financial institution, such as a central bank, has great relevance in making future decisions. Likewise, the history of economic data can influence how investors view the health of a country.

In the correct way of analyzing fundamentals, monitoring historical data is more important than momentary fluctuations. Sometimes, drastic fluctuations need to be ignored as noise with low relevance. If we pay too much attention to noise, we can actually become victims of news and media.

Based on economic data, we need to know two things so that we can then process the correct way to analyze fundamentals:

 2.What phase is the economic condition of the country

whose currency we are trading in? What economic data can provide an indication of the cycle phase of a country? Pay attention to Gross Domestic Product (GDP) data, unemployment rate, industrial production, and consumer inflation (Consumer Price Index/CPI). These data are usually released periodically by the relevant authorities in each country, and we can observe them directly on the official website or through the forex calendar.

For example, in the screenshot above, it appears that the Eurozone consumer inflation (CPI) data decreased in April compared to the previous period data. In fact, the data did not meet economists’ estimates (forecasts). However, do not rush to judge that this is negative data. Take a look at the history of Eurozone inflation first. Is the inflation trend really decreasing, or is this data just an anomaly.

Judging from the history of Eurozone consumer inflation data over the past year, there has clearly been a consecutive decline. This is negative news for the Euro currency. It could be that the region is experiencing an economic slowdown. On the other hand, the forex calendar shows that US unemployment data has decreased from 4.1% to 3.9%. If this improvement is confirmed by the history of US unemployment data in the longer term, it could indicate economic expansion. Moreover, if it is supported by better GDP and inflation performance, it will further strengthen the US economic outlook in fundamental analysis.

3.What phase is the current global economic condition?

By monitoring the dynamics of world interest rates, global economic growth, and industrial expansion; we can conclude what phase the international economy is in. Furthermore, by comparing global economic conditions with the countries whose currencies we trade, one of two scenarios can be taken:

  • In conditions of high global growth, investment risk appetite usually increases. Financial assets that increase in value in this situation include stocks; commodities (energy, agriculture, industrial metals); commodity currencies (Commodity Dollar/Comdoll); and currencies of countries with weak fundamentals.
  • Conversely, if a global crisis occurs, all high-risk speculative actions will shrink. As a result, these assets will suffer a sell-off, then experience a decrease in value. Wise investors will rearrange their portfolios, and allocate funds to financial assets that are considered safer and currencies of countries with stronger fundamentals. Globally, if productivity is high and economic growth is rapid, it can create an economic bubble. When this bubble bursts, it can trigger a crisis that pushes the world into recession. The economic phase will continue to change. Therefore, we need to review the fundamental analysis periodically, then make adjustments in the portfolio. .

Check Technological Innovation and Political Conditions In addition to economic conditions themselves, market sentiment is often influenced by technological innovation as well as political and defense-security (hankam) conditions. Although the influence is not direct, it is necessary to be aware of it in conducting fundamental analysis. For example, the advancement of information technology (IT) in the United States has given birth to many top companies that are included in the ranks of the best blue chip stocks, such as Alphabet (Google), Apple, Facebook, and so on. The competitive advantages of these companies invite foreign investment to continue to flow into the US and drive rapid growth. On the other hand, developing countries such as Indonesia have difficulty catching up with technological developments and maintaining fundamental economic stability

4. Global Economy Condition

Studying Global Monetary Conditions In addition to macroeconomics, monetary conditions and policies taken by central banks can also affect fundamental analysis in the forex market. Therefore, traders need to know the monetary situation of developed countries more specifically, especially about central bank monetary policy. In general, the bias of central bank monetary policy can be divided into three:

  • Hawkish, which tends towards tight monetary policy: restraining the growth of Money Supply (M3), raising the benchmark interest rate, selling securities (bonds), and cutting monetary stimulus (tapering). The consideration is, if interest rates are too low for a long time, it can cause a bubble that is dangerous to the economy.
  • Dovish, which tends towards loose monetary policy: encouraging the growth of Money Supply (M3), cutting interest rates or even setting negative interest rates, buying securities (bonds), and launching monetary stimulus (Quantitative Easing). The consideration is, if interest rates are raised when economic conditions are unhealthy, it will later curb business expansion due to the high interest rates that must be paid.
  • Neutral, which tends to leave the policies that have been taken, or in other words, not make any changes. By studying the current global monetary policy bias, we can compare it with previous conditions, then estimate its impact on the global economy.

In practice, in fundamental analysis, we can act based on the following formula:

  • Loose monetary policy after a recession is normal. For us, it means we can increase risk tolerance in the portfolio. In practice, we can choose financial assets and currencies that are higher risk.
  • Prolonged loose monetary policy presents the risk of an economic bubble. The currencies of countries with weak economic fundamentals will appreciate (the exchange rate will rise) beyond reasonable levels, thus opening up opportunities for short-selling them.
  • Tight monetary policy after the peak signals the start of the next cycle period. This means we need to reduce risk tolerance in the portfolio by choosing relatively safer financial assets and currencies.
  • Prolonged tight monetary policy will force speculators to cut their actions in the market, because interest rates continue to rise. As a result, the currencies of countries with strong economic fundamentals will appreciate (the exchange rate will rise) beyond reasonable levels, thus opening up opportunities for short-selling them. However, note that these four scenarios may not occur, if a crisis occurs due to the bursting of the bubble, commodity prices soar due to the crisis, or there is a certain geopolitical incident. Note that fundamental analysis is not a definite law of nature.

5. INTEREST RATE

Examining the Difference in Interest Rates and Balance of Payments Finally, we can determine which currency we will sell and which we will buy in the forex market based on the difference in monetary data. This fundamental analysis method: compare the difference in interest rates and balance of payments of each country whose currency we are trading. Interest Rates in Fundamental Analysis Previously, it was important to know that in the forex world, there are major currencies from eight important regions that are the most traded and dominant in the forex market. Therefore, the central banks of these regions are in the spotlight of traders and investors. The following is a list of them along with the names of their respective central banks:

  • The US Dollar (USD) is used by the United States and several other countries, as well as the main payment instrument in international trade. Therefore, it is not surprising that the US central bank, the Federal Reserve (The Fed), is the center of attention in the forex market.
  • The Euro (EUR) is used by countries in the Eurozone. Monetary policy and the stability of the Euro currency are the responsibility of the European Central Bank (ECB).
  • Yen (JPY) is the name for the currency used by Japan. In fundamental analysis related to the Yen, it is necessary to pay attention to the Bank of Japan (BoJ) policy.
  • The Pound Sterling (GBP), nicknamed Cable, is used side by side with the Euro in the UK. Its movement is influenced by the Bank of England (BoE) interest rate policy.
  • The Australian Dollar (AUD) is one of the Comdolls. In addition to being greatly influenced by commodity price fluctuations and risk sentiment, its movement can also be directed by the Reserve Bank of Australia (RBA) policy.
  • The Canadian Dollar (CAD) is the second Comdoll that is very easily shaken by oil prices. However, the interest rate policies that influence it are determined by the Bank of Canada (BoC).
  • The Swiss Franc (CHF) is under the authority of the Swiss National Bank (SNB). In addition to being able to influence the Swiss Franc through interest rate policy, the SNB is also known to often intervene directly in the forex market by buying or selling CHF versus the Euro.
  • The New Zealand Dollar (NZD) is the third Comdoll. Its movement is influenced by many factors, including the benchmark interest rate determined by the Reserve Bank of New Zealand (RBNZ).

Each central bank will review its policy in meetings held periodically every 4-6 weeks. At that time, the central bank will announce whether the interest rate will remain unchanged, will be raised, or will be lowered. The results of these decisions can be seen on the relevant central bank website, in the forex calendar, or in the forex interest rate data table.

At first glance, many people think that an interest rate hike will have a positive effect on the currency of the country concerned; while a rate cut will have a negative effect. However, after the regular meeting, the central bank will also convey its views on the latest economic developments and other policies that will be taken according to future economic needs. Thus, market reactions are not solely determined by the interest rate decisions of one central bank.

“The market will scrutinize the central bank’s post-meeting statement as a whole, to then conclude whether the bias is hawkish, dovish, or neutral. Ultimately, the market’s reaction after the meeting is a combination of the current decision and the bias for future policy, compared to the bias of other countries. This comparison is known as “policy divergence”. We cannot conclude whether a currency will rise or fall, based on interest rate changes alone.”

4. BALANCE:

Balance of Payments in Fundamental Analysis .A country’s Balance of Payments can be likened to a company’s Financial Balance. The better the Balance of Payments, the stronger the resilience of a country’s currency in facing economic turmoil. In addition, it is also a good idea to check whether the Balance of Payments is supported by deposits of funds that can easily leave a country (hot money) or the accumulation of long-term direct investment that is more permanent. The Balance of Payments can usually be seen from the Current Account Balance (CAB) data and the Current Account to-GDP ratio of each country which are published periodically. Countries with a CAB surplus and a high ratio are usually seen as regions with resilient economies. By comparing interest rates and the Balance of Payments, we can decide on actions based on two fundamental analysis scenarios:

  • When the world economy is at the end of the Recovery phase and the beginning of the Peak phase, risk appetite increases, so market players will tend to sell currencies with strong fundamentals and low interest rates. Conversely, they will buy currencies with higher interest rates, even though the fundamentals may be weaker.
  • When the world economy experiences a Recession and Downturn phase, market players tend to play it safe by buying currencies with strong Balance of Payments. At the same time, they will sell currencies with higher interest rates whose countries have bad Balance of Payments.

Conclusion: The correct way to analyze fundamentals is not to use the good or bad of certain economic data as a trigger to buy or sell. Traders must pay attention to the data historically, other economic data from the country, and global economic conditions; then make a decision. In general, market players use fundamental analysis as a reference for opening long-term trading positions that are opposite to the majority trading positions (counter-trend). There is another type of market player who uses the release of economic data as a direct reference for opening short-term trading positions, known as News Trading. However, for users of the orthodox fundamental analysis method, News Trading is often not considered the correct way to analyze fundamentals.

ALSO PLEASE DONT USE AI IN FOREX, because forex involve human emotion on market player while AI not have emotion at all 🙂