Practical application of foreign exchange fundamental analysis

Forex fundamental analysis is a typical type of market analysis, so let's talk about the practical application of foreign exchange fundamental analysis:

On September 6, 2011, the Swiss National Bank pegged the euro to its own currency, the Swiss franc (CHF). This action was taken to reduce buying pressure on the Swiss franc, as traders wanted to exit the weakening euro in order to buy the Swiss franc, which is considered a stronger currency (safe haven currency). As an export-driven economy, the SNB's action was to make the Swiss franc relatively weaker so that the Swiss economy's exports would be cheaper. One such export is tourism. For example, if an Irish family wants to spend a holiday in a Swiss ski resort, it would be more economical to be able to exchange a certain amount of euros for more Swiss francs. This is the intention of the Swiss National Bank: to make Swiss exports cheaper and more popular.

Four years later, with the euro on a weaker footing and the European Central Bank considering a quantitative easing program, the Swiss National Bank has come to the realization that the costs of maintaining the Swiss franc's peg to the euro, including pouring Swiss francs into the market to buy euros, thereby boosting the value of the euro and lowering the value of the Swiss franc, are unsustainable in the long run. Some senior fundamental analysts saw this as early as October 2014. Most market participants didn't notice.

On January 15, 2015, the inevitable happened. Faced with the increasing cost of maintaining the exchange rate peg, the Swiss National Bank removed the EUR/CHF exchange rate limit. As a result, in just a few seconds, the euro fell by about 3,000 points to reflect its true value.

This classic case clearly shows that fundamental analysis could have saved many traders from the severe losses suffered by the Swiss National Bank on the day of the financial tsunami. Analysis of this exchange rate peg could have shown that the Swiss franc was significantly undervalued against the euro, relying solely on the Swiss National Bank to support it at a higher cost. When the Swiss National Bank decided to withdraw its support, the intrinsic value of the Swiss franc adjusted itself, returning to the market value of the Swiss franc against the euro.

Overall, traders who use fundamental analysis correctly can see some market changes earlier than others in the retail market, which holds great potential in the future.