Introduction to Fundamental Analysis

Fundamental analysis and technical analysis are two main types of analysis methods commonly used when investing in foreign exchange. Since fundamentals largely affect the long-term movement direction of the exchange rate, it has become an indispensable analytical tool for medium and long-term investors, such ashycmInvestors on foreign exchange platforms often use this as a basis for formulating strategies. However, the scope and complexity of fundamental analysis makes it difficult for many investors to start.

The main content of this series includes: interpretation of various economic indicators and economic data, overview of economic policies, summary of government statements and positions, and government intervention.

The most direct reflection of economic changes is the various economic data and indicators released by the government. The release of some important economic data will cause large fluctuations in the market, and may even change the short-term trend of the market. We start by interpreting economic data and indicators to help investors correctly understand, analyze and judge these data.

GDP interpretation

GDP is the gross domestic product (Gross Domestic Product), commonly abbreviated as GDP. It is the most concerned economic statistic in macroeconomics because it is considered the most important indicator to measure the development of the national economy.

GDP is the gross domestic product at market prices. It refers to the final result of the production activities of all the resident units in a country (or region) over a certain period of time. For example, the value created by the factories invested by Japanese companies in the United States is also included in the GDP of the United States. It involves real economic activity.

From an economic perspective, there are three forms of GDP, namely, the value form, the income form, and the product form. From the value form, it is the difference between the value of all goods and services produced by all resident units in a certain period and the value of all non-fixed assets goods and services invested in the same period, that is, the sum of the added value of all resident units; from the income form, it is the sum of the income directly generated by all resident units in a certain period; from the product form, it is the final use of goods and services minus the import of goods and services.

Of course, as ordinary investors, we don't have to delve too much into the economic significance of GDP. What we need to focus on is the impact of GDP on GDPforeign exchange marketThe impact of.

The faster the GDP growth rate, the faster the country's economic development; the slower the growth rate, the slower the economic development. If GDP falls into negative growth, it means that the country's economy has entered a recession.

Generally speaking, if GDP maintains a faster growth rate, it will support the country's currency, otherwise it will have a bearish effect. The growth rate here is a relative concept. Suppose that the GDP growth rate of A and B countries is 1.5% and 0.5% respectively. Although the growth rate is not fast, if this speed is maintained for a period of time, the trend of the currency of country A will be better than that of country B. Only GDP is considered here, and the actual foreign exchange trend should be considered in combination with other factors. However, GDP is one of the most important economic data and has a great impact on the foreign exchange market. This is also the focus of HYCM foreign exchange traders.

GDP announcements in Western countries are usually divided into monthly and quarterly announcements, with quarterly GDP data being the most important. Investors should consider the results of GDP in this quarter compared with the previous quarter and the same period last year. An increase or higher-than-expected growth rate can be regarded as positive.

leading index interpretation

The leading indicator, also known as the leading indicator or leading indicator, is one of the most important economic indicators for predicting future economic development, and is the weighted average of various economic variables that guide the economic cycle.

The leading index is composed of many elements and involves many aspects of the national economy. Take the leading index of the United States as an example, it mainly includes the following elements:

The average weekly workload of the manufacturing industry.

The average number of weekly jobless claims.

Manufacturers added new orders for consumer goods and raw materials.

4 Vendor delivery execution - the percentage of late deliveries at its factory.

5. Contracts and orders for plant and equipment.

6 New construction permits for private investment.

7 M2 money supply.

8 Standard & Poor 500 stock index and dividend income.

The Michigan Consumer Confidence Index.

The difference between the production cost and the selling price.

If most of these factors are positive, the leading index can be expected to rise in advance.

Leading indicators are usually published monthly, and the publication time varies from country to country. If the leading index falls for three consecutive months, it indicates that the economy is about to enter a recession; if it rises for three consecutive months, it indicates that the economy is about to boom or continue to expand. Usually leading indicators have a lead time of 6 to 9 months. In the United States, it is generally believed that leading indicators can predict the economic downturn 11 months before the recession and the economic recovery 3 months before the economic expansion. After World War II, leading indicators have been successfully used to predict the inflection point of economic prosperity and decline in the western developed countries.

Normally, the foreign exchange market reacts strongly to wild swings in leading indices. A surge in the leading index will strengthen the country's currency, and a plunge in the leading index will weaken the country's currency.

At present, the leading index of the United States has the greatest impact on the foreign exchange market. It is released by the US Department of Commerce on the last working day of each month. Other countries such as Japan, Switzerland, Canada, and Germany will also release leading indices. Germany's ZEW Economic Sentiment Index and IFO Economic Sentiment Index also include certain leading indices.

Retail sales interpretation

Retail sales refers to a statistical summary of the amount of retail sales, including the total value of goods sold in cash or credit by all stores primarily engaged in retail business. Expenses incurred in the service industry are not included.

Retail sales data are an important guide for determining a country's economic status and prospects because they directly reflect changes in consumer spending. In developed Western countries, consumer spending typically accounts for more than half of the national economy, and in countries such as the United States and the United Kingdom, this proportion can account for two-thirds.

In the United States, the Bureau of Statistics of the Department of Commerce conducts a monthly national retail sample survey of retailers of all shapes and sizes (all companies registered with the Department of Commerce). Due to the wide range of retail industries, the survey is conducted by random sampling to obtain more representative data. Retailers of durable consumer goods include auto retailers, supermarkets, drug and alcohol dealers, etc. Due to the difficulty of collecting and calculating data, it is excluded. However, the service industry is also an important part of consumer spending, and its consumption increase or decrease can be determined from the data of personal consumption expenditure (including retail sales of goods and services).

In Western countries, car sales make up the largest share of retail sales, typically accounting for 25%, so retail sales are published with a retail figure that excludes car sales. In addition, because food and energy sales are more affected by the season, food and energy are sometimes excluded and a core retail sales is released.

An increase in a country's retail sales means that the country's consumer spending has increased, the economic situation has improved, and interest rates may be raised, which is beneficial to the country's currency. On the other hand, if retail sales have declined, it means that the economy has slowed down or is not good, and interest rates may be lowered, which is bearish for the country's currency. In the United States, retail sales data for the previous month are usually released on the 11th to 14th of each month.

Consumer Price Index

The Consumer Price Index (CPI), abbreviated as CPI, is an index of price changes that reflects the prices of products and services related to people's lives. It is usually used as an important indicator to observe the level of inflation.

Many economists exclude some indicators for analytical purposes, mainly volatile food and energy prices, which are known as the core consumer price index.

The consumer price index is one of the most commonly mentioned price indices when discussing inflation. If the consumer price index rises too much, there will be inflationary pressure. At this time, the central bank may raise interest rates to control it, which is favorable for a country's currency. Since most of the products related to life are final products, and their prices only rise and fall, the consumer price index may not fully reflect the actual situation of price changes. It is also necessary to combine other data to examine inflation comprehensively.

However, if the consumer price index rises too much, indicating that inflation has become a destabilizing factor in the economy, there is a risk that the central bank will tighten monetary and fiscal policies, resulting in an uncertain economic outlook. Therefore, the excessive increase in the index is not welcomed by the market.

In the United States, the current Consumer Price Index is based on the average price level from 1982 to 1984, covering seven categories such as housing expenses, food, transportation, medical care, clothing, entertainment, and others. Prices for 364 items determine the weight of various expenditures, usually published in the third week of each month.

Interpretation of new housing construction and construction permits

Construction indicators generally occupy a more important position in the data systems published by various countries, because the real estate industry plays a pivotal role in modern economies, and a country's economic prosperity is often reflected in construction indicators.

Housing construction is an investment and an important driving force for national economic growth. In Western countries, new housing starts and construction permits are two of the more important building indicators, which are basically residential or non-industrial buildings.

The increase in housing construction will lead to an increase in construction employment. Newly purchased households typically purchase other durable goods. Through the multiplier effect, output and employment in other industries will increase. Construction is important to the business cycle because changes in residential construction will point directly to a recession or recovery.

In the United States, there are generally two types of housing starts: single-family homes and group homes. When a single-family house is built, the base is 1, and when a 100-family apartment is built, the base is 100, and the housing start rate is calculated based on this. Experts generally place more emphasis on the construction of individual homes, because the units in a group house can be modified at any time, the volatility is high, and the data is usually not available.

In the United States, housing starts are usually announced between the 16th and 19th of each month.

In general, an increase in housing starts and construction permits is theoretically a positive factor for the country's currency, which will promote the strength of the country's currency; a decrease in housing starts and construction permits or lower than expected will put pressure on the country's currency.

Fiscal deficit interpretation

Finance, that is, a government's revenue and expenditure. At the beginning of each financial year, a government always formulates a fiscal budget plan for the year. If the actual implementation results in income exceeding expenditure, it is a fiscal surplus; expenditure exceeds revenue, it is a fiscal deficit.

There are many reasons why a country has a fiscal deficit. Some are to reduce tax rates or increase government spending in order to stimulate economic development, while others are due to improper government management, which leads to a lot of tax evasion or excessive waste. When a country's fiscal deficit accumulates too much, just like a company taking on too much debt, it is not a good thing for the country's long-term economic development, and it is also a long-term bad for the country's currency. In order to solve the fiscal deficit in the future, it can only rely on reducing government spending or increasing taxes. Both measures have adverse effects on economic or social stability. If a country's fiscal deficit increases, the country's currency will fall; conversely, if the fiscal deficit narrows, the country's economy is good, and the country's currency will rise.

In the United States, the Treasury Department usually releases the federal government's budget performance last month on the 17th government working day of each month. The US government has always been known for its fiscal deficits. During the Clinton era, the deficit turned into a surplus. However, after George W. Bush took office, the economic recession coincided with the continuous use of foreign troops, resulting in another high deficit.

Current account interpretation

The current account is the main item on a country's income and expenditure account, which records the capital outflows and inflows between a country and foreign countries due to the import and export of goods, labor services, investment income, income from other goods and labor services, and other factors.

If the balance is positive (surplus), it indicates an increase in the country's net foreign wealth or net foreign investment; if it is negative (deficit), it indicates a decrease in the country's net foreign wealth or investment.

The current account consists of five main items:

Goods refer to the import and export of goods from a country.

2. Labor services, including transportation and insurance fees related to the import and export of goods, passenger freight and port fees, as well as the income and expenditure of domestic residents traveling abroad, sightseeing, and foreigners traveling and sightseeing in their own countries.

3 Investment income refers to the dividends or interest earned by nationals purchasing foreign stocks, bonds and other assets, plus the interest expenses and dividend expenses incurred by foreign borrowings or foreigners investing in the country.

4 Other goods, services and income refer to the transactions of residents and non-residents in relation to services and income not listed above, the expenses of embassies and consulates, the remuneration obtained by residents for work in foreign countries, and the expenses of various institutions established by foreign governments or international organizations in their own countries. Generally, the so-called trade balance refers to the sum of the four items mentioned above.

5 Unilateral transfers refer to donations in cash or in kind, relief, foreign aid by a country, and contributions to the expenses of international institutions.

Generally speaking, if a country's current account deficit widens, the country's currency will depreciate; if the surplus widens, the country's currency will appreciate.

In Western countries, current account data is usually released monthly or quarterly, but a month's trade data is not a big reference for the market, and the quarterly adjusted current account is more important.

In the 1970s and 1980s, the current account deficit had a significant impact on the foreign exchange market. This influence has now faded, but for the United States, the current account deficit still has a significant impact on the dollar.

Interpretation of Producer Price Index

The Producer Price Index (PPI) is mainly used to measure the price changes of various commodities at different stages of production. Like the Consumer Price Index, it is usually used as an important indicator to observe the level of inflation.

For the foreign exchange market, the market pays more attention to the monthly changes in the PPI of final products. Since food prices fluctuate due to seasonal changes, and energy prices often change unexpectedly, in order to more clearly reflect the changes in overall commodity prices, changes in food and energy prices are generally excluded to form a "core producer price index" to further observe the trend of inflation.

In the United States, the data collection of the Producer Price Index is the responsibility of the U.S. Bureau of Labor, which collects data from major manufacturers by means of questionnaires. The base month collected is the quotations of 2,300 commodities for the week including the 13th of each month, and then weighted and converted into a hundredth form. For ease of comparison, the base period is set to 1967.

In general, when the producer price index increases significantly and continues to accelerate, the corresponding response of the country's central bank is to raise interest rates to prevent rapid inflation, then the country's currency appreciation is more likely; and vice versa.

Capacity utilization interpretation

Capacity Utilization (Capacity Utilization), also known as equipment utilization, is the ratio of total industrial output to production equipment. Simply understood, it is how much actual capacity is in operation to play a production role.

The data covers eight items including manufacturing, mining, utilities, durable commodities, non-durable commodities, basic metals, automobiles, and gasoline, representing the degree of capacity utilization in these industries.

When the capacity utilization rate exceeds 95%, it means that the equipment utilization rate is close to full, and the inflationary pressure will rise rapidly as the capacity cannot cope. In the case of market expectations that interest rates may rise, this is good for a country's currency. Conversely, if the capacity utilization rate is below 90% and continues to decline, it means that there is too much equipment idle, the economy is in recession, and the market expects that interest rates may be reduced, it is bad for the country's currency. The market generally attaches the most importance to the capacity utilization data of the United States. In the United States, the data of the previous month is generally released in the middle of each month.

Durable goods order interpretation

Durable goods orders represent the number of items that are not easily worn out in the coming month. This data reflects manufacturing activity. By definition, an order is a transaction of goods that are intentionally purchased and expected to be shipped immediately or in the future.

The statistics include statistics on the ordering of heavy industrial products such as automobiles and aircraft, as well as capital goods for manufacturing, and other items such as electrical appliances.

Since the statistics include supplies for the defense sector and supplies for the transportation sector, which are all high-priced products, changes in the data of these two departments have a great impact on the overall data, so the market also pays more attention to the changes in the data after deducting the supplies for the defense sector and the transportation sector. Overall, if the data increases, it means that the manufacturing situation has improved, which is good for the country's currency; if it decreases, it means that the manufacturing industry has contracted, which is bad for the country's currency. The market generally places the most emphasis on the US durable goods orders index. In the United States, data for the month before is generally released late in each month.

Interpretation of average hourly salary

Average Hourly Earnings is a measure of the wages and salaries of private non-agricultural workers based on average hourly and weekly earnings.

Hourly earnings data reflect changes in the hourly base wage rate and reflect increases in overtime bonuses. Average hourly earnings may be an early indicator of industry wage and salary cost trends, complementing the employment cost index to provide a measure of total labor costs.

The indicator has some variability and limitations, but it still makes headlines about inflation. The foreign exchange market mainly focuses on changes in seasonally adjusted average hourly and weekly wages from month to month and year to year. In general, if average hourly wages are expected to cause interest rates to rise, a rapid increase in hourly wages will provide a positive stimulus to the country's currency, and vice versa. In the United States, the indicator is monitored by the Federal Reserve.

Purchasing Managers Index (PMI) Interpretation

The Purchase Management Index (PMI) measures the state of the manufacturing industry in eight areas, including production, new orders, commodity prices, inventories, employees, order deliveries, new export orders, and imports.

The purchasing managers' index is expressed as a percentage, and 50% is often used as the dividing point between economic strength and weakness: when the index is above 50%, it is interpreted as a signal of economic expansion; when the index is below 50%, especially very close to 40%, there is a fear of economic depression. It is a very important sub-indicator of leading indicators. The market places more emphasis on the US purchasing managers' index, which is a physical examination of the US manufacturing industry. Before the release of the US purchasing managers' index, the Chicago purchasing managers' index is also released. This is part of the US purchasing managers' index. The market often makes expectations about the performance of Chicago purchasing managers.

In addition to focusing on the overall index, the paid price index and the received price index in the PMI are also considered as a type of price indicator, while the employment index is more often used to predict the unemployment rate and the performance of the non-agricultural employed population.

Employment report interpretation

The Employment Report includes employment-related information derived from two separate surveys, namely the Business Survey and the Household Survey.

Among them, the business survey provides information on employment in the non-agricultural sector, the average hourly work and the total hourly index; the household survey provides information on the labor force, household employment and the unemployment rate. Non-farm employment measures the number of people who have income in all non-agricultural industries, such as manufacturing and services.

The jobs report is often hailed as the "crown jewel" of all the economic indicators that the foreign exchange market can respond to. It is the most sensitive monthly economic indicator in the market, and investors can usually see a lot of market-sensitive information in it. Among them, the foreign exchange market pays special attention to changes in seasonally adjusted monthly employment. For example, strong non-farm payrolls indicate healthy economic conditions and may herald higher interest rates, and potentially higher interest rates will prompt the foreign exchange market to drive more of the value of the country's currency, and vice versa.

Interpretation of IFO sentiment index

The IFO Business Climate Index is an important leading indicator of the state of the German economy compiled by the German IFO research organization. IFO is the English abbreviation of the Registered Association of the German Institute of Economic Information. It was established in Munich in 1949. It is a public welfare, independent economic research institute and is known as one of the German government think tanks.

The IFO Economic Sentiment Index is a monthly survey of various industrial sectors, including manufacturing, construction, and retail. Each survey covers more than 7,000 entrepreneurs. It is based on companies' assessment of their current situation, as well as their plans in the short term and their views on the next six months.

Since the IFO Economic Sentiment Index is published monthly and surveys companies' views on the future, it covers a wide range of sectors, making it highly referential in economic trend forecasts.

ISM index interpretation

The ISM index is an important data released by the Institute for Supply Management in the United States, which has an important impact on reflecting the prosperity of the US economy and the trend of the US dollar.

The Institute for Supply Management (ISM) is the world's largest and most authoritative professional organization in the fields of procurement management, supply management, and logistics management. Founded in 1915, the organization was formerly known as the American Purchasing Management Association. It currently has more than 45,000 members and 179 chapters. It is one of the most respected professional organizations in the United States.

The ISM index is divided into manufacturing and non-manufacturing indices.

The ISM Manufacturing Index consists of a series of sub-indices, of which the Purchasing Managers Index is the most representative. The index is a barometer that reflects the comprehensive development of the manufacturing industry in production, orders, prices, employees, deliveries and other aspects. Usually, the critical point is 50. Above 50 is considered to be the manufacturing industry in expansion, and below 50 means that the manufacturing industry is shrinking, affecting the pace of economic growth.

The ISM non-manufacturing index reflects the prosperity of non-manufacturing business activity in the United States. When its value is above 50 levels in a row, it indicates that non-manufacturing activity is expanding and prices are rising, which often indicates that the overall economy is expanding. Conversely, when its value is below 50 levels in a row, it often indicates that the overall economy is contracting.

Car sales interpretation

Auto sales are an important part of consumer spending and a good indicator of consumer confidence in the economic outlook.

Auto sales, which account for 25 per cent of retail sales and 8 per cent of total consumption, are often the first thing we know about the strength of a country's economic cycle before other personal consumption data are released. As a result, car sales provide a good predictor of subsequent retail sales and personal consumption expenditures. They also serve as an early indicator of recession and recovery.

If car sales rise, it generally indicates that the country's economy is improving and consumers are more willing to spend, which is good for the country's currency. At the same time, it may be accompanied by an increase in the country's interest rate, which may stimulate the country's currency exchange rate to rise.

Interpretation of Consumer Credit Balance

Consumer credit balances include household loans used to purchase goods and services that will be repaid in two months or more.

Borrowing for consumption is a common phenomenon in western countries, where a large number of people apply for bank loans to buy commodities, such as houses and cars, or services, such as university education, creating a consumer credit balance.

The foreign exchange market focuses on seasonally adjusted outdated net credit balances. In general, an increase in consumer credit balances indicates an increase in consumer spending and optimism about the economy, which usually occurs during economic expansions; a decrease in credit balances indicates a decrease in consumer spending and may be accompanied by pessimism about future economic activity.

Generally speaking, the foreign exchange market does not respond strongly to the data if consumer credit balances do not fluctuate significantly. At the same time, we cannot interpret consumer credit balances in isolation, but in combination with other data.

Federal Reserve System Annotation

The Federal Reserve was established by an act of Congress in 1913. Before the establishment of the Federal Reserve, the funds and credit activities required by the US economy were carried out by a decentralized banking system.

The Federal Reserve is composed of 12 regional Federal Reserve banks, each of which has its own board of directors and each selects a representative to serve on the Federal Advisory Committee of the Federal Reserve, which meets four times a year in Washington; while the FOMC is controlled by regional banks; the Monetary Policy Committee makes monetary policy decisions under the leadership of the Federal Reserve Chairperson.

Each month, the Federal Reserve's Monetary Policy Committee holds a monetary policy meeting to analyze the information collected by each Federal Reserve Bank and other relevant economic information, and to evaluate the current and future economic situation, and then decide what measures to use to support economic growth or delay economic decline, including the level of interest rates.

Due to the dominance of the US economy in the world, the Federal Reserve's views and policies on both the domestic and international economy are of great significance, often having a significant impact on the foreign exchange market.

Interpretation of the Japanese Short View Report

According to the Japan Tankan Report, the Japanese government conducts a quarterly survey on the future industrial trends of nearly 10,000 companies, which surveys companies' confidence in the short-term economic outlook, as well as their views on current and future economic conditions and company profit prospects. Negative results indicate that more companies are pessimistic about the economic outlook than optimistic companies, while positive numbers indicate that more companies are optimistic about the economic outlook than pessimistic companies.

According to history, the quarterly corporate short-term report data released by the Japanese government is highly representative and can accurately predict the future economic trend of Japan. Therefore, it is highly correlated with the fluctuations in the stock market and the yen exchange rate.