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An Explanation Of Forex And Fundamental Analysis

In forex, fundamental analysis usually refers to the study of pure economics as it pertains to changes in forex currency pair pricing. First and foremost is the issue of central bank monetary policy because a change in monetary policy affects interest rates and forex currencies are priced in accordance to their perceived “higher than the others” interest rates. So, if a central bank decides to lower interest rates, there’s almost no doubt that the country’s currency is about to take a pricing hit. Conversely, if a central bank decides to raise interest rates (or effect some other kind of monetary change that has the same result), then the price of the country’s currency should levitate immediately.
The Australian dollar has a relatively high interest rate in forex, attached to it, compared to the currencies of most other highly developed nations. This is why the AUD/JPY is so highly admired in Japan (where interest rates continue to hover near zero). However, any further interest rate reductions may cut into the Aussie’s foreign fan club.

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In finance, the term fundamental analysis usually concerns itself with pure economics. This includes anything about interest rates, employment rates, industrial production rates or international trade balances. The 2 hot buttons are interest rates and unemployment rates; a “surprise” in either can send the forex world into a pricing tizzy. Of the 2, surprises in interest rates can inflict the most damage, particularly if the surprise is downward. A forex currency with a declining forex interest rate is not half as attractive as a forex currency with upwardly mobile interest rates. For an example, look no further than the 2013 pricing action in the AUD/USD, partially caused by the US Federal Reserve contemplating “tapering” while the Reserve Bank mulls over the opposite.

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If you go to “rba.gov.au”, you can see the schedule for the monthly monetary policy meetings which decide whether to raise, lower or hold steady the “cash rate”. Usually, all forex trading dies away right before these meetings as the forex community (particularly all AUD-related brethren) collectively holds its breath, waiting for word from on high. Good news is deemed as no change or an upward revision. Horrible news is a reduction in rates. In the US, the scene is similar, except you’re spared a monthly agony; “FOMC” meets every 6 weeks and does not hold press conferences after every meeting (but does pass out a “statement” that is immediately dissected with the finest of Wall Street financial combs).

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In forex, when it comes to making interest rate decisions, a central bank can resemble a walrus that is happily enjoy the surf and turf and really doesn’t want to roll over. An outstanding example of this phenomenon is the European Central Bank, which hasn’t changed its interest rates on deposits since its July 2012 decision to go down to 0%. So, the US Federal Reserve’s 2013 “taper” decision represents a major inflection point that spells big trouble for the EUR/USD (and the AUD/USD) – no matter what – since US interest rates are already beginning to rise. The “smart money” is leaning toward the long side of the USD/JPY (and the USD/MXN) or shorting the EUR/USD down to approximately EUR/USD 1.2800.




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