Tuesday, January 19, 2010

Governments stand in the way of market forces impacting their currencies

Sometimes governments stand in the way of market forces impacting their currencies, and hence, intervene to keep currencies from deviating markedly from undesired levels.

Currency interventions are conducted by central banks and usually have a notable, albeit a temporary, impact on FX markets.

A central bank could undertake unilateral purchases/sales of its currency against another currency; or engage in a concerted intervention in which it collaborates with other central banks for a much more pronounced effect.

Alternatively, some countries can manage to move their currencies, merely by hinting, or threatening to intervene.K7JJV5CQJHBB

Macroeconomic indicators

Fundamental analysis comprises the examination of macroeconomic indicators, asset markets, and political considerations when evaluating one nation's currency relative to another.

Macroeconomic indicators include figures such as growth rates; as measured by Gross Domestic Product, interest rates, inflation, unemployment, money supply, foreign exchange reserves and productivity.

Asset markets comprise stocks, bonds, and real estate. Political considerations impact the level of confidence in a nation's government, the climate of stability and level of certainty.

Understanding Fundamental Analysis

The two primary approaches of analyzing currency markets are fundamental analysis and technical analysis. Fundamentals focus on financial and economic theories, as well as political developments to determine forces of supply and demand.

One clear point of distinction between fundamentals and technicals is that fundamental analysis studies the causes of market movements, while technical analysis studies the effects of market movements.