What should be paid attention to in foreign exchange fundamental analysis?

Investors often write to me or call me to communicate about fundamental analysis of foreign exchange, and I have also realized that most domestic foreign exchange traders are mainly non-economics majors. After thinking about it, I will write an article on fundamental analysis, hoping to help everyone.

First of all, why does economic data affect the exchange rate? Economic data can reflect the current development of the country's economy and the objective performance of the expected future development. Changes in exchange rates follow a principle (except for political factors), that is, places with high interest rates attract capital, which leads to currency appreciation, and places with low interest rates release capital, which leads to currency depreciation. Several models of econometrics can help us analyze how exchange rates change.

The most crucial factor in determining interest rates is the balance of payments position. Balance of payments balances such as surpluses or deficits are immediately reflected in a country'sforeign exchange marketOn. This is essentially determined by the classic supply and demand curve. If the balance of payments surplus means that the supply of foreign exchange is temporarily greater than the demand for foreign exchange, that is, the supply of foreign exchange exceeds the demand, then the foreign exchange rate should fall (depreciate), and the relative local currency exchange rate should rise (appreciate); and when the balance of payments deficit occurs, there must be downward pressure on the local currency exchange rate, and there is a need for the foreign currency exchange rate to rise.

The second is the inflation rate. On the one hand, the inflation rate is reflected in changes in prices that affect the competitiveness of a country's goods and services in the world market. When a country experiences higher inflation than another country, the prices of its goods and services rise, which causes a relative decrease in exports and a relative increase in imports, resulting in pressure on the balance of payments deficit. The reflection of the deficit in the balance of payments in the foreign exchange market will put pressure on the appreciation of foreign exchange and the depreciation of the local currency. This is one aspect of the effect of inflation on exchange rate changes. On the other hand, the inflation rate also affects the supply and demand in the foreign exchange market and the exchange rate by affecting the real interest rate. When a country's inflation rate is higher than that of other countries, the real interest rate of that country decreases, and the decrease in interest rates will reduce the return on investment of investors, so funds will flow out of the country, and the flow of funds will change the supply and demand of foreign exchange in the foreign exchange market, resulting in changes in the exchange rate.

In terms of specific economic data, take the United States as an example. The economy of the United States mainly develops in a virtuous circle in the following three aspects. "Employment production consumption" The growth of the employment population can drive the development of productivity, and the growth of the number of goods will inevitably increase the boost of consumption. To achieve the growth of consumption, residents must have more income, which will also promote the development of employment. The three complement each other. Once one aspect is affected, it will affect the other two factors, causing a vicious circle of the economy. Production data mainly focuses on GDP, followed by manufacturing PMI, import and export data, real estate and crude oil data.

Employment data mainly focuses on non-agricultural workers, followed by the LMCI labor market index and weekly unemployment benefits data. Consumption needs to pay attention to CPI and PPI data and sales data. These simple data are mainly compared with expectations, not most investors think they are compared with the previous value. If the data is greater than expectations and the previous value, it is easy to produce a sharp rise in the market. If it is greater than expectations and less than the previous value, then it is also mainly a rising market. However, in this case, it is easiest to form a market between the two sides. If the data is both less than the previous value and less than expected, then the falling market is generally the main market.

The speeches of central bank leaders and national leaders will also have a relatively large impact on the foreign exchange market. The speeches of central bank leaders mainly focus on interest rates, revealing several topics such as interest rate hikes, interest rate cuts and interest rate maintenance. Investors need to think carefully about the dynamics of the central bank. The speeches of national leaders involve more political factors, which are prone to form a certain degree of risk aversion, and will also have a relatively large impact on the foreign exchange market.

There are many factors that affect the fundamentals of foreign exchange. Here, I will briefly discuss it. Fundamental research has a long way to go and cannot be completed overnight. I hope investors can carefully understand and find their own way to profit.