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Forex Education | Forex Guide

 

 

 

FUNDAMENTAL ANALYSIS

 

Where do you start?

 

Start with fundamental analysis, where you look at the key points about a country and its economy to get an impression about what its currency is likely to do. Although it’s not the only way to analyze currency exchange rates, it’s an important one because it’s closely related to that key factor of what people think. However, while it’s important to know what other traders are thinking, make sure that you have the necessary information to form your own opinion so that you can compare. Otherwise you’ll simply be chasing the others and by the time you’ve caught up, the opportunities will have gone.

 

What causes fluctuations in currency rates?

 

The basic mechanism in the Forex market is “supply and demand.” The more there is a demand to buy a currency, the more expensive it becomes. On the other hand, the more people are trying to sell that currency, the cheaper it becomes. People (traders) want to buy a currency more when they see the country and the economy doing well, and because they think that the value of the currency will continue to rise (so buy now, rather than later). In particular, they may note that:

 

  • business in the country concerned is positive and growing

  • the central bank has raised interest rates (they often do this when the economy is good)

  • stocks and stock market indicators related to the currency concerned are doing well

  • the political environment is stable and encouraging for investment and development.

  • other economic data confirms a positive trend for the currency

 

Note: we’ve given examples for when a currency rate is rising, but remember that it’s quite possible to make a profit on a falling currency rate as well. In that case, you might look for signs going in the opposite direction.

 

What else, specifically, can influence currency rates?

 

Depending on the currency that interests you in particular, you’ll probably find examples of your own. Here are two possible cases involving what are called the “hard commodities” of gold and oil.

 

When gold prices go up, the currency of countries involved in gold production go up (the Australian Dollar for example), but the US Dollar goes down, because gold and the US Dollar both compete for being a low-risk commodity for storing wealth. Similarly, when oil prices go up, then the US Dollar and the Japanese Yen go down, because these two countries are heavily dependent on oil imports.