Forex Fundamental Analysis

Forex fundamental analysis is one of two widely recognized approaches to foreign exchange market analysis.

An alternative to technical analysis, which makes use of market trends (i.e. chart analysis) to determine the future value of a particular currency in the FX market, fundamental analysis describes methods of present and future valuation determined by social, economic, and political variables. While technical analysis is praised for its effectiveness at predicting short-term trends (under 3 months), the fundamental analysis approach is better suited at forecasting long-term movement in the FX market.Employing fundamental analysis strategies requires a basic understanding of supply and demand, the underlying force behind all financial markets. In the case of the FX market, the commodity being exchanged is a particular currency. Because the value of a currency is derived from the economic health of its respective country, global (or local) macroeconomic changes can invariably have an impact on currency rates. Fundamental analysis itself is broken down into two broad subcategories: capital flows and trade flows.

Capital Flows in Fundamental Analysis
A country's capital flows are the net quantity of currency being traded through capital investments, including equity market investments, fixed income market investments, third party licensing agreements, joint ventures, and foreign direct investment—all of which must be considered in fundamental analysis. The first two are the flow of portfolio investments and international government bonds, while the latter three represent the physical flows of capital that serve as financial indicators of stability and growth. Together, they are known as the capital flows.

Trade Flows in Fundamental Analysis
Also known as current accounts, these flows measure the net of imports and exports of a particular country, and the subsequent impact that these flows can have on the value of a currency. The reason that international trade plays an important role in fundamental analysis, and ultimately in FX market, is that importers are required to sell currency used to purchase goods and services being exported. Following this logic, countries that have positive trade flows (exports are higher than imports) run surpluses that serve to increase their currency, while the opposite is true of net importers. This aspect of fundamental analysis is one of the most influential, frequently providing insights into movements in a currency's price.

For more information regarding Fundamental Analysis, see the links in the left section: you can:

• Review information on six major economic indicators,
• Browse links for applicable foreign exchange news sites,
• See a listing of major governmental web pages and other sources of direct fundamental information feeds
• Look at a selection of recommended foreign exchange brokers to begin your own excursion in foreign exchange trading.