What are Fundamental Factors?

In the currency market, there exist two basic types of analysis: fundamental analysis and technical analysis. Technical analysis will be discussed in the next lesson. Fundamental analysis gauges the intrinsic value of a country's economy, and judging on its expected future performance, positions are opened to take advantage of the anticipated trends in the currency market.

Fundamental Factors

News that has an impact on the economy both directly and indirectly is considered a fundamental factor. These fundamentals are separated into three major categories: economic factors, financial factors, and political factors which include crises.

Economic and financial factors have the biggest impact on currencies movements. The reason that economic and financial data releases are watched is the uncertainty concerning the release's outcome or results. The fundamental reports are kept under strict secrecy up to the time of the actual occurrence. Central banks, for example, change the discount rate confidentially and even though the markets closely watch these events, sometimes the outcomes do not coincide with the predictions. The deciding factor in whether a fundamental release will have an effect on the currency market is how closely the actual results come to economists' predictions. If the fundamental release matches predictions then it should have already been "priced in" to the market beforehand. However, if the release strays from the anticipated numbers, then it will have a bigger impact on the market.

The dates and times of economic data release are well known and are anticipated by the market. There are many resources available on the Internet concerning financial, and economic indicators. CMS provides an Economic Calendar for the dates of critical fundamental announcements and events.

Political factors can include elections, high level talks, and crises. Some political factors, such as a presidential election or a G-7 meeting are scheduled beforehand and can be anticipated. A political crisis such as a nuclear test by a rouge nation such as N. Korea, or a terrorist attack such as 9/11 can have dramatic effects on the currency markets and are almost impossible to predict. However, only big political events that can affect the patterns of trade or working of an economy or group of economies will have an effect on the financial markets.

Next we will look at an example of a fundamental release and a political crisis.