Fundamental Analysis
Fundamental Analysis is an analytical method that takes into account various aspects, such as industry performance, business competition analysis, industry analysis, economic analysis and macro-micro markets. From here, it can be known whether the industry is still healthy or not. From these checks, investors can identify which industries are in good condition and can be selected for investment.
In forex, fundamental analysis is the analysis of currency movements based on economic data and the political situation of a country. When there is a release of a forex news, the price will tend to fluctuate. Why? There are two reasons: Launching news means it can be a driver of market risk sentiment, thereby urging people to buy or sell currencies, stocks, or other financial instruments in a country. In turn, these buying and selling actions can cause an increase or decrease in the value of a currency, stock, or other financial instrument, and affect the flow of investment into a country.
In the long run, the value of a currency tends to reflect the state of the economy of the country of issue. If a country displays great economic development, the value of its currency in the forex market will strengthen. On the other hand, if a country is facing an economic crisis, the exchange rate may disappear and the currency will no longer sell, as happened in Zimbabwe and Venezuela. These two things are the reasons why fundamental analysis is meaningful.
The question is, how can traders use economic information and news for fundamental analysis?
Step 1: Get into Macroeconomics
The basis of the fundamental analysis method relates macroeconomic research on a global scale. To do this, it is necessary to first know the dynamics of the economic cycle, the monetary policies of the major central banks, and some significant economic indicators.
The past attitude of a financial institution, such as a central bank, has enormous relevance in making decisions in the future. Likewise, historical economic information can influence how investors view a country as healthy or not.
In analyzing fundamentals, monitoring historical information is more meaningful than momentary fluctuations. Sometimes, even extreme fluctuations need to be ignored as noise of low relevance. If we pay too much attention to noise, we can even become victims of the media.
Determine the Phases in the Economic Cycle The economic cycle is 4 phases Recession (contraction / recession); Sluggishness, Bottom, or Valley (through/slump); Recovery (recovery/expansion); and Peak (peak / boom) which is intertwined from time to time. This cycle will always be felt by the world, the country’s economy, or any industrial business that creates output based on a certain productivity.
Based on economic data, we need to know 2 things so that we can then analyze fundamentals:
1. In what phase is the state of the economy of the country whose currency we trade? What economic information can share the symptoms of overcoming the phases of a country’s cycle? Pay attention to information on Gross Domestic Product (GDP), unemployment rate (unemployment rate), industrial creation (industrial production), and consumer inflation (Consumer Price Index/CPI).
These data are generally released periodically by the relevant authorities in each country, and we can observe it directly on the official website or through the forex calendar.
2. What is the current state of the global economy? By monitoring the dynamics of world interest rates, global economic developments, and industrial expansion; we can formulate what phase the international economy is in. Next, by equating the state of the global economy with that of the country whose currency we trade, one of two scenarios can be drawn: In a state of major global developments, investment risk attention generally rises. Financial assets whose value increases in this situation include stocks; energy, agri, and industrial metal commodities; commodity currency (Commodity Dollar/ Comdoll); and currencies of countries with weak fundamentals.
On the other hand, if there is a world crisis, then all speculative actions are at great risk of going down. As a result, these assets will suffer a sell-off, after which they will face depreciation in value. Wise investors will rearrange their portfolios, and allocate funds to financial assets that are considered more comfortable and national currencies with stronger fundamentals.
Globally, if productivity is high and economic development is rapid, it can result in a state of a bubble economy. When this bubble is broken, it can stimulate the formation of a crisis that pushes the world into a recession. The economic phase will continue to change. Therefore, we need to review fundamental analysis carefully.