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Fundamental Analysis

Fundamental analysis of the forex market


The fundamental market data analyst identifies and measures factors that determine the intrinsic value of a financial instrument, such as the general economic and political environment, including any factors that may affect the supply and demand of the product or service underlying the instrument. If supply decreases but the level of demand does not change, there will be an increase in market prices. An increase in supply has the opposite effect.


For example, an analyst of a certain currency studies the supply and demand of that currency and of the products and services of the country in question (trade balance). He also observes the quality of the management and policies of the Government of that country, its historical and forecasted economic performance, its plans for the future and the most relevant ones in the short term; as well as all its economic indicators.


Based on these data, the analyst builds a model aimed at determining the current and expected value of that currency relative to another. The basic idea is that when the supply registers uncompensated increases, the value of the currency tends to fall, while when it is the demand that experiences such increases, the value of the currency tends to rise. Once the analyst has calculated the intrinsic value, he compares it to the current exchange rate and decides whether the currency is going to rise or fall.


One of the difficulties of fundamental analysis is in accurately measuring the relationships between the different variables. The analyst must, necessarily, make estimates based on experience. In addition, markets tend to anticipate events and discount them in advance, with the consequent reflection on the value of the currency. Finally, it usually takes markets some time to realize that an exchange rate is no longer in tune with its value; which can be a disadvantage, but also an advantage (depending on the "timing").


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