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The Bigger Picture Fundamentals and Resources

  • #1
  • First Post: Edited 10:50am Mar 13, 2011 9:24am | Edited 10:50am
There are many threads that discuss trading techniques but there are not many threads, if any, that discuss the fundamentals of the bigger picture that ultimately drives this market and set the long-term trends on any currency. Most traders on here trade on the shorter timeframes and therefore fundamentals do not really come into play, but it is still very useful to have the bigger picture in the back of one's mind.

There are many traders on here that are very knowledgable from a fundamental aspect and they have some excellent information in their posts, although these posts seem to be littered across this forum. One of my aims is to bring all this information into a single thread so that traders can learn more about the fundamental aspects of Forex trading.

This thread is not intended to discuss trading setups, strategies or even charts. Personally I am happy with my technical aspects of trading, but I would like to get a better understanding of how the fundamentals affect the long-term trends of currencies. I don't profess to be a fundamental expert, however even though I have a good grounding in Economics, which I studied at High School, I still would like to understand more on this subject matter and how this is translated onto the higher timeframe charts.

I am not a news trader as I generally stay out of the market during scheduled news events, however the accumulation of these news events will determine whether a currency will strengthen or weaken over the long-term. Rather than discussing individual scheduled news events and how they would affect price on the day, I would prefer to discuss the accumulation of news events and how they will affect the currency in the long-term.

So my main aim of this thread is as follows -

1. A useful resource of links that will allow people to learn about the fundamentals and how they affect currencies.
2. To discuss monetary policies set by different countries and how they affect currencies.
3. To discuss inter-market relationships and how they affect currencies.
4. To discuss how scheduled and unscheduled news events will affect currencies in the long-term from a bigger picture perspective.
5. Anything else that involves the bigger picture fundamentals

I would like this thread to be useful to beginners, so that they can learn the fundamental basics, as well as seasoned traders who will hopefully discuss how these will affect the currencies in the long-term. If you can, please provide links to external resources, so that people can further investigate the topics discussed and allow them to further their research. I don't expect people to repeat the content verbatim that already exists on this or other sites, but rather provide links and preferably a summary of the links provided.

If you do find some information that was posted by another FF member, adapt it, add additional informational and resources to it, out of respect, please ensure that you acknowledge the original source or member in your post.

I hope that some of you will find this thread useful and informative, whilst others who intend to take an active role in this thread can further their own understanding on the ever changing market dynamics.

On a final note, we are all entitled to our own opinions, but if you want to be taken seriously, I suggest you back up your statements with well founded sources.
  • #2
  • Edited 12:13pm Mar 13, 2011 9:56am | Edited 12:13pm
Quoting bbakker
There are many threads that discuss trading techniques but there are not many threads, if any, that discuss the fundamentals of the bigger picture that ultimately drives this market and set the long-term trends on any currency. Most traders on here trade on the shorter timeframes and therefore fundamentals do not really come into play, but it is still very useful to have the bigger picture in the back of one's mind.

There are many traders on here that are very knowledgable from a fundamental aspect and they have some excellent information in their...
Beautiful Brain Brian !
I'm very grateful to you for you starting this thread. Many new traders, me a prime example , have difficulty in comprehending the interaction from the higher time frames to the lower and exactly where and when the fundermental issues are priced in. I absolutely believe that the higher influences the lower time frame and, as a scalper ( wannabe position trader) i look forward to this thread being my first port of call each time that i log in.
Thank you !
All systems of divination, like music itself,work through patterns.
  • #3
  • Mar 13, 2011 10:35am Mar 13, 2011 10:35am
Subscribed thanks B
  • #4
  • Mar 13, 2011 12:29pm Mar 13, 2011 12:29pm
In its simplest form, currencies determine the health and wealth of countries just like share prices determine the health and wealth of companies. In order to determine how well a country is doing there are economic indicators that measure this. The main indicator, the broadest measure of economic activity, to measure the health of a country is called Gross Domestic Product (GDP).

GDP refers to the market value of all goods and services produced within a country in a given period. For further information go to http://en.wikipedia.org/wiki/GDP

Countries generally release this information in percentage terms once a quarter and it is based on the previous quarter's performance in relation to the quarter before that (quarter on quarter or q/q). In some countries while this is q/q data, it's reported in an annualised format (quarterly change x4). If a country reports two consecutive quarters of negative growth (i.e. -0.5%) then the country is officially in a recession. Prolonged periods of recession with large negative growth is considered to be a depression. Positive growth means there is expansion of the economy. Positive growth is good for a currency and will strengthen it, whereas negative growth is bad for a currency and will weaken it.

Generally there are 3 versions of GDP released a month apart - Preliminary, Revised, and Final. The Preliminary release is the earliest and thus tends to have the biggest impact on the country's currency.

Currencies are always quoted in pairs and therefore in its simplest form, it is a measure of the two economies quoted in the pair. For example, EURUSD is a measure of the Eurozone against the US. If the US is showing negative GDP growth and the Eurozone is showing positive GDP growth, the Euro will strengthen and the US Dollar will weaken. Think of it like companies, which one would you rather invest in, a company that has positive growth or one that has negative growth?

I will continue with my Back to Basics series and cover other aspects of measurements that affect currencies such as RPI, CPI, PPI, Interest Rate changes, (un)employment and other lesser known indicators. I will try to do one at least once per week.
  • #5
  • Mar 13, 2011 2:06pm Mar 13, 2011 2:06pm
Great thread, I am also starting to research fundamentals and how they affect long-term currency moves.

So, maybe we can discuss the major event which is now in all newspapers:
japan earthquake/tsunami & nuclear meltdown.

I think these events will have a very long-lasting effect on the currency. Billions of dollars in damage across the country and depending on the direction of the wind and if they are able to cool down the other nuclear power plant, tokyo might be affected as well.

I think it is a very low risk bet to short the yen considering all the events.

What do you guys think?
  • #6
  • Mar 13, 2011 2:29pm Mar 13, 2011 2:29pm
Thanks Custos. You posted just as I was writing this, so here are my views on Japan -

The recent events in Japan are horrific and my thoughts are with the Japanese people. The situation with the nuclear facilities are compounding the problems for them as more news filters through showing incomprehensible damage caused by the earthquake and tsunami. Due to the damage to the nuclear facilities, there are already discussions of having rolling blackouts, 3 hours at a time. How will this tragic event affect the Japanese economy?

In the short-term, as we have seen during Friday's unfolding of events, JPY strengthened for a number of reasons including repatriation of money and foreign aid. Now the BoJ are having an emergency meeting on Monday to try and stabilise the financial markets - http://www.bloomberg.com/news/2011-0...ter-quake.html

What about the longer-term? What effect will this disaster have on the economy, especially if the rolling blackouts continue for a long period as business will be disrupted? This disaster could affect their growth as they are an export country, second or third to China and Germany. If they have limited manufacturing due to the rolling blackouts and they have to focus on rebuilding their country, how will this affect their economy and in turn their currency? You also have to remember that they are the most indebted country in the world, running at 200% of GDP. How will they be able to afford the rebuilding of their country?

The JPY is a complex currency as it is also a carry trade and a safe haven currency (I will discuss these in later posts) so it is not that easy, but long-term I do see the JPY weakening from a fundamental point of view.

From a technical aspect, you have to see where we are on the weekly curve on USDJPY and that is pretty much near all time lows. Is this event the straw that broke the camel's back?
  • #7
  • Mar 13, 2011 3:05pm Mar 13, 2011 3:05pm
subscribed,thanks
  • #8
  • Mar 13, 2011 6:29pm Mar 13, 2011 6:29pm
Here is the USDJPY weekly chart between 1992-1998 and I have marked the week when the Great Hanshin earthquake, better known as the Kobe earthquake occurred and how it affected this pair. It is also an event that caused Nick Leeson to lose Baring Bank's shirt.

Unfortunately the article does not cite any references in the Economic Impacts section and as stated "Discussions of Japan's 'Lost Decade' tend towards purely economic analysis and neglect the impact of the earthquake on the Japanese economy which at the time was already suffering from recession."

Attached Image (click to enlarge)
Click to Enlarge Name: USDJPY.png Size: 75 KB


The pictures on TV are truly shocking and again I wish to state that I am saddened by what I am seeing. My thoughts go out to the Japanese people.
  • #9
  • Mar 13, 2011 6:54pm Mar 13, 2011 6:54pm
Here is another interesting post and view from Rasi with regards to the current situation in Japan -

http://www.forexfactory.com/showthre...15#post4467515
  • #10
  • Mar 14, 2011 6:48pm Mar 14, 2011 6:48pm
Thank you bbakker for excellent initiative! I look forward to following this thread. Even though my trading isn't related to fundamentals, I do take a keen interest in these things.

To add my two cents to the JPY discussion, with reservations for the miserable state of the brain cell, I would say that currency movements are determined more by supply and demand flows than valuations, which nobody ever got right anyway.

And in terms of supply/demand the earthquake disasters are big black holes of JPY demand. Affected individuals, families, companies, and authorities will require liquid funds to deal with the disaster. Banks will require liquid funds to cover deposit withdrawals and short-term loans, insurance companies will require liquid funds to pay out against claims, foreign aid will be exchanged for yen in the spot market, and so on until the tide turns.

This would explain the JPY appreciation after the Kobe earthquake, and it would motivate going long yen if it continues to appreciate.
  • #11
  • Mar 15, 2011 1:25am Mar 15, 2011 1:25am
Quoting bbakker
There are many threads that discuss trading techniques but there are not many threads, if any, that discuss the fundamentals of the bigger picture that ultimately drives this market and set the long-term trends on any currency. Most traders on here trade on the shorter timeframes and therefore fundamentals do not really come into play, but it is still very useful to have the bigger picture in the back of one's mind.

There are many traders on here that are very knowledgable from a fundamental aspect and they have some excellent information in...
Finally someone make this thread, been waiting so long Sir...i think it will be complete if a trader know about Technical and fundamental analysis,..right?

btw i've search through internet but it's none (if some one here have, please share) kind of picture (something like my attachment) that show correlation from data realest to another, cos (imho) each data will impact to another that make action reaction that will continue and continue and so make a cycle...


So,
Maybe someone here with knowledge about fundist could make the complete version of that flowchart..so later if there is someone want to study about fundamental it would be much more easy if there is picture like that..,

i believe those picture will be famous and become reference in the trader world and economic study...

ps: honestly i don't know whether my picture is right or not, it's just an example how the fundist picture will looks like..,
Attached Image (click to enlarge)
Click to Enlarge Name: Example fundi.JPG Size: 117 KB
I will be the number one Manager.
  • #12
  • Mar 15, 2011 4:47am Mar 15, 2011 4:47am
Quoting javapips
Finally someone make this thread, been waiting so long Sir...i think it will be complete if a trader know about Technical and fundamental analysis,..right?

btw i've search through internet but it's none (if some one here have, please share) kind of picture (something like my attachment) that show correlation from data realest to another, cos (imho) each data will impact to another that make action reaction that will continue and continue and so make a cycle...


So,
Maybe someone here with knowledge about fundist could [b]make the complete...
Self portrait, JP?.....
Like the idea. i'm sure its all a priced in ,cyclical, knock on effect....but havn't the brain to explain.
All systems of divination, like music itself,work through patterns.
  • #13
  • Mar 15, 2011 7:56am Mar 15, 2011 7:56am
Quoting bbakker
current situation in Japan -
Correlations between markets that are driven by risk appetite can change over time and I'm curious to observe the assets this horrible situation reveals to us as the new safe havens.
  • #14
  • Mar 16, 2011 5:03am Mar 16, 2011 5:03am
hallo...anyone here know why US unemployment given REd label at news realest while England Yellow label?? i think both is same important..
and who give that label?

thanks you.
I will be the number one Manager.
  • #15
  • Mar 16, 2011 10:31am Mar 16, 2011 10:31am
Quoting javapips
i believe those picture will be famous and become reference in the trader world and economic study...
It wouldn't be that difficult to make an comprehensive chart that is accurate, but let me be honest with you - that chart wouldn't help you not one bit. You need to pick up a few books on economics, maybe even a proper macroeconomics 101 and familiarize yourself with the correlations so that when employment has been gathering pace for some time and new figures are
released that confirm the uptrend in employment you know instantly that this will lead to higher economic growth and higher inflation which in turn leads to higher interest rates which in turn will lead into more capital inflows etc. Reading the papers and following economic news in general helps too. A simple chart with a few arrows is good as a reminder, but it will not replace a book.
If you don't risk, you don't ever have to lose.
  • #16
  • Mar 16, 2011 10:37am Mar 16, 2011 10:37am
Quoting bug
It wouldn't be that difficult to make an comprehensive chart that is accurate, but let me be honest with you - that chart wouldn't help you not one bit. You need to pick up a few books on economics, maybe even a proper macroeconomics 101 and familiarize yourself with the correlations so that when employment has been gathering pace for some time and new figures are
released that confirm the uptrend in employment you know instantly that this will lead to higher economic growth and higher inflation which in turn leads to higher interest rates which...
and guys, do not forget academic articles. Most economic books are outdated or have theories which are mostly a couple of years old. Only academic articles show the newest kind of relationships and discoveries in the field of study.
If you can comprehend those, then you are on your best way to become a good economist.
  • #17
  • Mar 16, 2011 10:46am Mar 16, 2011 10:46am
Quoting Custos
and guys, do not forget academic articles. Most economic books are outdated or have theories which are mostly a couple of years old. Only academic articles show the newest kind of relationships and discoveries in the field of study.
If you can comprehend those, then you are on your best way to become a good economist.
Not only that, but working papers from BIS and national central banks too. I've been following BIS' working paper releases for over a year; the topics are usually very well chosen and; their finding are clear and readable.
If you don't risk, you don't ever have to lose.
  • #18
  • Mar 16, 2011 11:04am Mar 16, 2011 11:04am
Quoting bug
Not only that, but working papers from BIS and national central banks too. I've been following BIS' working paper releases for over a year; the topics are usually very well chosen and; their finding are clear and readable.
I agree, in my mind BIS working papers are academic articles as well, even though I know in reality there is a difference.

But anyways, building a foundation with economic books is good, but I urge everybody to take it up a notch and read up on current research and stuff like that.
  • #19
  • Mar 16, 2011 11:36am Mar 16, 2011 11:36am
Quoting bug
It wouldn't be that difficult to make an comprehensive chart that is accurate, but let me be honest with you - that chart wouldn't help you not one bit. You need to pick up a few books on economics, maybe even a proper macroeconomics 101 and familiarize yourself with the correlations so that when employment has been gathering pace for some time and new figures are
released that confirm the uptrend in employment you know instantly that this will lead to higher economic growth and higher inflation which in turn leads to higher interest rates which...
yes, i know that....i mean with that chart it could be a 'resume' of all that books, so it can be the basic knowledge to understand how the 'economic machine' work..
in advance, maybe that chart is not as simple as that.., if somebody creative enough s/he can make it in 'flash' motion or kind like that, example: when we double click at GDP it will show all information, what is GDP, what effect GDP number, GDP should be high or low, GDP reflected of what, etc etc...than move to double click at CPI, what is CPI, effect of cpi, related with other data news that before CPI realest we already know from other data like PPI, etc etc..etc...

so if people still blind about fundamental with all that picture s/he could 'catch' the basic mechanism...

if that picture become completed, it will show a complete 'machine', what for?example, there is a country still 'sick', government have to do something with that...an investor could make some 'prediction' what will government probably do, give low interest rate, or work hard in unemployment, or give money injection, etc...as long as we know what make that country sick, the prediction will not far..cos we already know the 'machine' looks like..

other function of that flowchart, at night before sleep, you could use it as a bed time stories to your children's...,
so son.. the story begin when a Big Big country is down..
at late night in white house, President O, Mr Ben, and all minister have meeting,..
"What's going on with this country??!! Our Dollar Free fall !! " said president
"now trader become smart Sir" said Mr Ben, "They know that we lie in our
GDP data" ......

yeah..,overall that flowchart will have many benefit, especially for us,..

.
I will be the number one Manager.
  • #20
  • Mar 16, 2011 12:07pm Mar 16, 2011 12:07pm
Well good luck with that, javapips. Based on your story in italics it looks like you have a lot of reading to do. A flow chart is not going to help you understand things in context and what they mean in the bigger scheme of things. Basic knowledge may be good enough for someone on the street but a trader that wants to trade off fundamental news needs expert knowledge. My advice is to skip the flow chart and start studying, because there really are not shortcuts.
If you don't risk, you don't ever have to lose.
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