Fundamental Factors

1. Economic Indicators

Economic indicators are economic and financial data sets published by private and government agencies. These statistics help us monitor market drivers and react to the slightest change in them. To respond to economic announcements in a correct way, you need to understand the relationship between statistical reports and the exchange rates of the currencies in question. Now, we would like to present the most influential economic indicators and define their impacts on the prices of the currencies.

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Output indicators: GDP, industrial production, retail sales. Any increase in the published data tells us that the economy is growing. If the publications are strong, seek appreciation of the currency.

Sentiment indicators: business and consumer sentiment. This group of indicators serves as a barometer of the mood of consumers or investors. The more they spend / invest, the stronger the national economy and currency.

Indicators of the labor market: unemployment rate, wages, jobs created / lost, unemployment insurance. The more jobs, the better it is for the national currency (the opposite holds for unemployment).   

Housing market indicators: permits / permits / construction approvals, construction starts, sales of new / existing / pending dwellings. If there is a sign of growing economic activity in the housing market, it means that the national economy is healthy. This causes an increase in the exchange rate of the nation’s currency.

Inflation: IPC, IPP, IPCA, IPCV. Higher inflation is negative for the national currency, while lower inflation is positive. In the short term, however, the CPI and other inflation indices may have an opposite effect on the currency. Significant increases in inflation gauges may lead the central bank to raise its interest rate. This may cause an increase in the currency exchange rate.

Trade balance : the total value of the nation’s exports minus the total value of its imports; > 0 means a surplus, <0 means a deficit. When a country has a trade surplus, the demand for its currency by foreign buyers rises. So the price of this coin rises. In contrast, a trade deficit causes the depreciation of the national currency.

Balance of payments : balance between a country and its trading partners, reflecting all payments for goods, services, interest and dividends; > 0 means a surplus, <0 means a deficit. A deficit means that the country is spending more than gaining, and is borrowing overseas to reduce the deficit. The impact on the national currency is negative. A surplus, on the contrary, has a positive impact on the currency.

2. Monetary policy of central banks

Interest rates. All major central banks define their refinancing rates. There are two types of monetary policy: expansive (lowering the interest rate if the national economy needs a boost, the impact on the currency is negative) and contractionary (raising the interest rate to decrease the rising inflation rate, the impact on the currency is positive).

Purchase of securities. Sometimes central banks resort to massive purchases of government bonds to increase the amount of money in circulation. By doing this, they try to cheapen credit and boost economic growth. These unconventional monetary measures lead to currency depreciation. Purchases of central bank securities that lead to a larger money supply are known as quantitative easing (QE).

3. Government fiscal health. Budget balance and debt. If a country is sunk in debt, it is less attractive to foreign investors because large public debts lead to inflation. In addition, large debt can prove to be of concern to foreigners if they believe there is a country’s risk of defaulting on their obligations. In this case, the demand for the country’s currency will fall and its exchange rate will also fall.

4. News stream:

  • Political, social and other news.
  • Economic forecasts of the IMF, OECD, World Bank and other organizations.
  • Changes in sovereign credit ratings by Moody’s, Fitch, S & P and other agencies.

Foreign investors tend to look for politically and economically stable countries. That is why recurring news of political turmoil or disorder drives away the investments of the affected country. Therefore, its national currency depreciates due to the exit of foreign investments. Sometimes even politically stable countries experience social unrest, government restructurings, and significant legislative changes. All these events can also influence the currency. Unexpected results from elections or referendums can cause great volatility in a currency (do you remember the effect of Trump’s victory or the consequences of UK exit voting?). Political statements by national leaders and public appearances by central bankers can make the price of money fluctuate.

Considerable changes in the currency exchange rate may also be caused by the flow of news of a different kind. We are talking about economic forecasts from financial institutions such as the IMF, OECD, World Bank, or changes in credit ratings by Moody’s, Fitch, S & P and other agencies.

Finally, some really unexpected events like earthquakes and other natural disasters. These events are destructive to economies and, consequently, to exchange rates. However, the relationship is not always simple. For example, in 2011, the Japanese yen strengthened after an earthquake in Japan: the reason was that investors perceived the yen as a safe, safe currency, and the currency rose in times when the market risk appetite plummeted. 


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