Fundamental Analysis

The exchange rate affects factors reflecting the country’s economy.

• Indicators of economic growth ( gross national income, the size of industrial production )
• Trade balance’s condition, degree of dependence on external sources of natural resources.
• Domestic money market growth.
• Growth of inflation and inflationary expectations.
• Interest rate.
• The country’s solvency and confidence in the national currency on the world market.
• Speculative operations on the foreign exchange market.
• Degree of development of other sectors of the global financial market, for example securities market competing in the foreign exchange market

 

Money in foreign country

Interest rates differential

Types of securities:

T-bills (government securities)  USA – Bonds        UK – Gilts        Germany – Bunds       Japan – JGB

USA – negative budget deficit       Japan – positive budget deficit

Japan also has its principal assets in US bonds around 60% of the market size.

Stock indices

DJIA –USA   Nikkey – 225 – Japan     

FTSE – 100 – UK   CAC – 40 – France

DAX – 30 – Germany  Hang Seng – Hong Kong

Dow-Jones’ index (DJI)

There are four kinds indices from Dow-Jones

The Dow-Jones Industrial Average (DJIA) – a simplified average measure of stock price movements for the top 30 industrial corporations. The Dow-Jones’ industrial index is the oldest and most common between all stock market indicators. Its composition is not unchanged: its components can be changed depending on the positions of the largest industrial corporations in the US economy and the market, but in modern times the cases of change are too rare. The principle of its components is about 15% to 20% of the market value of the shares quoted on the New York Stock Exchange. This index is accrued by multiplying the price of the shares included in it and dividing the amount received into a denominator / which is adjusted to the stock-dividing and dividend shares in the form of shares accounting for more than 10% of the market value of the issues , as well as the substitution of the fusion and absorption components. The Dow Jones index is quoted in points. Recently, futures contracts have also emerged in Chicago.

Dow-Jones Composite Average- (The Dow Jones Composite Average – DJCA ) – a composite index based on the Dow Jones industrial, transport and utility indexes.

Dow-Jones’ transportation index (The Dow-Jones Transportation Average – DJTA)-an average measure of the stock price movements of 20 transport corporations (airlines, railways and car companies)

Dow-Jones’  utility index (The Dow Jones Utility Average – DJUA)- an average measure of the movement of the shares of 15 companies engaged in gas and electricity generation.

 Index Standart and Powers (S&P)

This index is published by independent company Standard and Powers. It is compiled in two stock options for 500 corporations and 100 corporations. The S & P 500 is calculated at the market value of the stock indices of 500 corporations represented in the following proportion: 400 industrial corporations, 20 transport companies, 40 financial companies and 40 utilities. It includes mainly shares of companies listed on the New York Stock Exchange, but there are also shares of some corporations quoted on the US Stock Exchange and NASDAQ. The index represent around 80% from market value of all feeds quoted on the New York Stock Exchange. This index is more complicated than the Dow Jones index, but it is also more accurate as more corporations are represented, and the shares of each corporation are matched by the value of all units that are in the shareholder’s hands Futures and options are sold at the Chicago Stock Exchange.

 

S&P-100 The index is calculated on the same basе as the stock index for 500 corporations, but consists of shares of corporations that are registered options on the Chicago Option Exchange. These are mainly industrial corporations.

 

New York Stock Exchange index (NYSE Index)

This index is calculated on the basis of the market value of the movement rates of all corporations that have registered their securities on the New York Stock Exchange, and this indicator represents the average share price for all New York Stock Exchange companies, averaged at the market value of the shares of each corporation (with appropriate corrections for factors such as fragmentation by shares, merger and takeover). Unlike the Dow Jones index, which is expressed in points, the NYSE indices are expressed in dollars. Operations with options under this index are performed at the New York Stock Exchange. Operations with futures contracts are conducted on the New York Stock Exchange which is a division of the New York Stock Exchange.

 American Stock Exchange index (AMEX) The US Stock Exchange publishes two major indices, which are calculated on an entirely different basis. The AMEX Major Market Index is a simple average price index for 20 leading industrial corporations. It was conceived by the American Stock Exchange as a substitute for the Dow Jones industrial index. It relies on and publishes on the US Stock Exchange, with stocks of corporations listed on the New York Stock Exchange. It is noteworthy that 15 of these are also components of the Dow Jones industrial index. Operations with futures on this index are conducted on the Chicago Stock Exchange

The AMEX Market Value Index is calculated on a fundamentally different basis: it is an indicator of the average market value of all the issues of shares of these corporations that are included in it as components. Originally, it was published in September 1973. It includes components of more than 800 issues which represent securities for corporations of all industry groups registered on the US Stock Exchange, including even ordinary shares, US Depository Certificates and signed certificates. From a technical point of view, it is unique because its calculation assumes that dividends in the form of available funds paid out of the stock of shares entering it are reinvested and then reflected in the index. Options on this index are quoted on the US Stock Exchange.

OTC Turnover Index (NASDAQ)

The National Association of Stock Dealers calculates a number of indices representing both OTC turnover as a whole and corporate securities of individual industries. The NASDAQ index, which includes some 3500 corporations (other than quoted on stock exchanges), is the major index. This index is an average indicator of the market value of its constituents. It was first announced in February 1971.Operations with options and futures under this index are realized on the Chicago Stock Exchange.

The fall in stock indices has led to the fall of the national currency.

Central Banks

Central Banks watch the level of inflation in the country, the exchange rate of the national currency and try to regulate them using three basic percentages.

 

Core Percentages

Discount rate. Percentage rate below which the CB credits commercial banks in the country. 1%

American and English rates are high enough, so foreign investors are generally interested in them.

• Rate – Repo rate. Percentage rate applied by the CB in operations with commercial banks and other credit institutions when purchasing (reporting) government liabilities. The CB carries out capital market regulation. Fed Funds (Repo USA)

 

• Lombard rate. Percentage rate applied by the CB under a pledge of real estate, gold, foreign exchange rates on commercial banks’ lending.

When reducing rates, business activity and inflation increases. Decreasing rates will lead to a fall in the national currency. Increasing rates has led to a decline in business activity, a fall in inflation and an appreciation of the national currency. In today’s circumstances, the methods of influencing the exchange rate of the national currency remain the practice of buying / selling by the central banks of foreign currency, called currency intervention.

USA

• FED – Federal Reserve System;

The decision to modify the rates is taken at the Federal Open Market Committee (FOMC), at a six-weekly, two-day meeting: Monday and Tuesday.

Germany

• Bundesbank (BBK, Buba) – The Central Bank of Germany
• Buba cooncil meeting – Buba meeting – every 2 weeks on Thursday;

Great Britain

• Bank of England – BOE;
• Meeting once a month;

Switzerland

• Swiss National Bank (SNB);
• Session – every Thursday

EU

• European Central Bank (ECB);

Japan

• Bank of Japan (BOJ);  24 hours a day;

Together with the central banks in the forex market, brokerage firms operate with specific banks and act as intermediaries between the seller and the buyer of the currency. There are definite advantages in dealing with brokerage firms and this is the anonymity of the transactions, the continuity of the quote process and the possibility of offering at own cost.

 In the last decades, the foreign exchange market has changed the nature of commodity trading and focusing on the speed of execution of transactions, the implementation of which will be possible in the future. All this led, on the one hand, to increased susceptibility of the foreign exchange market to structural changes and to a significant increase in currency fluctuations and, on the other hand, increased opportunities for high-efficiency investment. On many exchanges, along with the widespread operations on the buy / sale of currencies, transactions with derivatives of the financial instruments – currency and financial futures and options were also obtained. An example of such exchanges is already in the long-recognized world currency exchange centers, namely the London International Financial Futures Exchange (LIFFE), the European Options Exchange  in Amsterdam (EOE), the German Time Exchange in Frankfurt (Deutsche Terminboerse – DTB), Singapore international Monetary Exchange (SIMEX) and Sydney Futures Exchange (SFE)  Time Exchange in Sydney, Australia.

Inflation indicators

Consumer Price Index (CPI) – these are trading price retail.

Producer Price Index (PPI) – these are wholesale prices.

The higher these indices, the more expensive the national currency. It is assumed that the growth of these indices is allowed to 3% per year.

Cash Units:

M1, M2, M3, M4 – MONEY SUPPLY – monetary support.

M1 – cash in circulation, banknotes and coins;

M2 = M1 + funds on bank accounts and current accounts, traveler’s checks;

M3 = M2 + term deposits with banks;

M4 = M3 + Government Securities

The accelerated monetary growth, both in available and dematerialized form, has a downward impact on the exchange rate of the national currency.

American Economic Indicators

The Beige Book

Beige Book Contains reports on economic conditions in each of the 12 areas designated by the Federal Reserve. In essence, data are not quantitative but qualitative. Issued before the monetary policy meetings of the Federal Open Market Committee.

Gross Domestic Product

The larger the Gross Domestic Product, the better the state of a country’s economy. The optimal change to 3% per annum, if larger, gives feedback. It is necessary to introduce increased rates, which cause an increase in the national currency.

Gross Domestic Product (GDP) is the most widely used measure of aggregate economic activity and covers all sectors of the economy.

Federal reserve budget (Treasury Budget)

Monthly report on federal government surplus or deficit. Changes in the deficit on an annual basis are an indicator of fiscal trends, budget and confidence.

 

(Import & Export Prices)

Prices of goods purchased in a country and produced abroad and prices of goods sold abroad and produced in the country. The indicator is an indicator of inflationary trends in internationally traded goods.

 

Index of Leading Indicators

A complex index of the ten economic indicators that have the most significant impact on economic activity.

 

Consumer Confidence Index of Michigan University (Consumer Sentiment)

Exploring the attitude of consumers towards the current situation as well as their expectations regarding the economic conditions. The survey is conducted by the University of Michigan every month among 500 people. The indicator is in direct relation to the level of goods and services purchased in the economy.

 

Consumer Price Index

The Consumer Price Index measures the average price level of a fixed basket of products and services purchased by consumers. Monthly changes in the index are an indicator of the rate of inflation.

 

Producer Price Index

The Producer Price Index is a measure of the average price level of a fixed basket of capital and consumer products purchased by manufacturers.

 

MBA Index for House Purchase (Mortgage Bankers Association Purchase Applications Index)

Weekly index of house purchase requests for mortgage institutions. The indicator is a leading indicator for single-family home sales and homebuilding in the United States.

Help Wanted Index

 An index of the number of job vacancies posted in the 51 largest US newspapers within a month. The indicator is an indicator of the labor market situation.

 

Personal Income. Consumer spending (Personal Income & Outlays)

The Personal Income Index is the dollar value of the income earned by all sources of the individuals in the economy. The Pointer Cost Index includes purchases of durable and perishable products and consumer services.

 

International Trade

The international trade indicator measures the difference between imports and exports of products and services. The level of the indicator, as well as changes in the amount of imports and exports, are used to determine trends in trade abroad.

 

Jobless Claims

The total number of individuals applying for unemployment benefits for the first time within a given week. The indicator, and especially its four-week sliding average, is used to determine trends in the labor market

 

Housing Starts

Initial housing construction measures the number of residential buildings under construction each month.

 

Challenger Report

Monthly report on the number of announced redundancies by corporations for a given month. The indicator is not corrected for seasonal changes. Shows trends in the labor market.

 

Durable Goods Orders

The durable goods orders index reflects new orders made with local producers for both immediate and future deliveries of factory durable goods.

Consumer Confidence

Exploring the attitude of consumers towards the current situation as well as their expectations regarding the economic conditions. The survey is conducted by the Conference Board each month among 5000 people. The indicator is in direct relation to the level of goods and services purchased in the economy.

 

Consumer Installment Credit

The dollar value of the given consumer credits on payment. Changes in the metric are indicators of consumer income status and forthcoming changes in consumer spending.

Retail Sales

Retail sales measure total revenue from stores selling durable and perishable goods

 

New Home Sales

The number of sales of newly built homes in a given month. The level of the indicator is an indicator of trends in the home market.

 

Existing Home Sales

The number of completed sales of already built homes for a given month. Sales of existing homes (the index is also known as house resale) occupy a larger share of the market than newly built homes and are an indicator of home market trends.

 

NAPM Survey

The NAPM survey (a study by the National Association of Purchasing Managers) is a complex index, a measure of the state of the US manufacturing sector. Values ​​above 50% indicate expansion of the manufacturing sector.

 

PMAC Survey

The PAMC (Purchase Association M) study is a complex index for the state of the manufacturing sector in the Chicago area, where the distribution of manufacturing firms reflects national distribution. Values ​​above 50% indicate expansion of the manufacturing sector. The PMAC study is considered to be a leading indicator in the NAPM survey.

 

Productivity and Costs

Productivity measures the growth in average labor productivity in the production of goods and services in an economy. The unit labor cost, as its name indicates, shows the labor costs incurred for the production of a unit of output. Both indicators are indicators of future inflationary trends.

 

Unemployment rate

 Unemployment rate measures the number of unemployed as a percentage of the working population in one country.

 

Construction Spending

Monetary value of newly constructed construction of residential and non-residential buildings assigned government procurement. The values ​​of the indicator are given in nominal and real (inflation-adjusted) terms.

Current Account

A measure of the international trade balance of goods, services and unilateral payments of a country. The current account level, as well as trends in export and import changes, are indicators of international trade trends.

 

Wholesale Trade

The dollar value of the sales made and the stock held by the wholesalers. Wholesale is one of the components of the business inventory.

 

Factory Orders

The dollar value of new orders for the production of durable and perishable goods. The indicator provides better information than orders for durable goods, the value of which is announced one to two weeks before.

 

Employment Cost Index

A measure of total overheads, including salaries, wages, and premiums.

 

LJR Redbook

Meter of sales made by big stores, published weekly

 

 Non-Manufacturing NAPM

Reports provided by the National Association of Purchasing Managers for Business Activity in the Non-Production Sector. Values ​​above 50% indicate an expansion of the economy. The indicator is not corrected for seasonal changes.

 

Durable Goods

According to the above information, the data usually go to 13:30 and 15:30 UTC time. (Reuters, CQG)

JAPAN

The financial year in Japan ends on March 31st. Towards the end of the year, as a rule for calculating the balance, a huge amount of foreign currency is transfered into Japanese yen, which in turn leads to its appreciation. Numerous Japanese insurance companies are the largest players in the forex market: USD / JPY, EUR / USD, EUR / JPY, GBP / JPY. A major problem in Japan is causing the aging population of the country. Maintaining a low interest rate for many years often causes a banking imbalance, but Japan’s banks remain the largest banks in the world. Strengthening the Southeast economy in perspective gives the yen a chance to become the main currency for the Asian region.

SWITZERLAND

 Switzerland has no intention of joining the EU, and this is all the more emphasizing its independence. The attractiveness of CHF remains high. There are problems with Nazi gold, which question the reputation of the largest Swiss banks. But as we see in events of September 11, 2001, huge amounts of currency are invested in Swiss banks.

UK

The presence of high percentages in England highlights the great interest of world currency speculators who predict economic performance. England – a world-renowned global financial center, headquarters of the largest investment giants are located here, very robust legislation regulating the financial activity of companies, banks and exchanges operates in the territory of a country.