 Hello, my name is Leon Roh, Currency Trader and Trading Coach at Trading180.com and welcome to the Fundamental Analysis course. Fundamental Analysis enables forex traders to gauge currency's strength or weakness without looking at a technical chart and is the main reason for currency movement and direction. Fundamental Analysis provides a trading edge that is greater than any technical trading pattern. As forex traders it is essential that we understand why a currency is highly likely to gain in value and another currency is likely to fall in value. Fundamentals can tell you if a currency is undervalued or overvalued. Fundamentals will show you the currency pairs that are most likely to trend and which currency pairs are most likely to range again all without looking at a technical chart. Once we understand the factors that determines currency's strength or weakness we use technical charts to time our buy or sell trades. This course provides a general overview of concepts within the scope of fundamental analysis. I'll be covering interest rates and inflation, inflation targets, interest rate cycle, quantitative easing, central bank intervention, gross domestic product, the business cycle, trade balance, intermarket analysis, risk on and risk off, trade idea examples, the commitment of traders report, trading the news, value, sentiment and market focus, buying the rumor and selling the fact, political stability, the US dollar index, the carry trade and finally putting it all together. There are several fundamental factors that determine the value of every currency. The relationship between interest rates and inflation play a huge part as to why the price and value of a currency rises or falls. If you are a saver or investor, interest rates are the returns you expect to receive on your savings or investment. The higher the interest rates, the higher the return on your savings or investment you'll receive. If you are a lender, interest rates will be the fee you will charge the borrower. We should view interest rates from the perspective of an investor. As forex is traded in pairs, it is natural to assume that all you would need to do is buy a currency that has a higher interest rate and sell another currency that has a lower interest rate. Unfortunately, it is not that simple, but as a foundation, keep this concept of currency strength as it relates to higher or lower interest rates in mind. Inflation is the purchasing power of a currency reflected as prices for goods and services. The two frequently quoted and most significant measures of inflation are the consumer prices index and the retail price index. A country's central bank is in charge of trying to control inflation via monetary policies. One of the primary tools central banks have to control economic growth and inflation is raising or lowering interest rates. Central banks of major economies have a consumer prices index inflation target of around 2-3% per year. Governments and central banks like there to be just enough inflation in an economy. Not too much that could lead to inflation getting out of control, but not so little that there is stagnation. If inflation is below the 2% target, central banks will attempt to stimulate inflation and get it to 2% by cutting interest rates. Lower interest rates encourage people or companies to spend money rather than save, boosting economic growth. As we know, inflation is the purchasing power of a currency reflected as prices for goods and services. If a currency is weak, more of that currency is needed to be exchanged for goods and services. This is reflected in higher prices for goods and services and otherwise known as high inflation. In an attempt to curb inflation, strengthen the currency to attract investors and meet their interest rate target, central banks will raise interest rates. We can determine a currency's potential strength or weakness by identifying where the currency is on the interest rate cycle. If central banks are keen on holding interest rates and their desired inflation target is met or not a concern, then they are in the hold section of the interest rate cycle. This would be considered neutral. If a central bank is keen to raise interest rates, this would indicate that inflation is increasing. Raising interest rates is usually applied when the central bank projects potential growth within the economy. If a central bank is focused on a cutting interest rates, this would indicate that inflation is in decline. Cutting interest rates is usually applied when the central bank projects potential contraction or recession within the economy. If two country's central bank policies are at different ends of the interest rate cycle, it is clear to see the forex pair you might want to be trading and the direction. In 2015, the Bank of Canada cut interest rates twice to try and prevent the economy from entering into a recession. The Bank of Canada were on the interest rate cutting end of the cycle. At the same time, the Federal Reserve Bank, which is the United States central bank, was anticipating that they may need to raise interest rates at some point. As the two central banks were on the opposite ends of the interest rate cycle, you can see that the chart of the US dollar Canadian dollar was clearly trending, the Canadian dollar being the weaker currency and the US dollar being the stronger. If lowering interest rates are no longer an option for a central bank, quantitative easing also known as QE may be employed. QE is aimed at stimulating economic activity, such as increasing consumer spending. The central bank buys assets, usually government bonds, with money it has printed or more accurately created electronically. It then uses this money to buy bonds from investors such as banks or pension funds. This increases the overall amount of usable funds in the financial system. Making more money available is supposed to encourage financial institutions to lend more to businesses and individuals. It can also push interest rates lower across the economy, even when the central bank's own rates are just as low as they can go. This in turn should allow businesses to invest and consumers to spend more, giving a knock-on boost to the economy. A central bank will buy or sell a currency in the foreign exchange market in order to increase or decrease the value of its nation's currency. This is known as currency intervention, central bank intervention or forex market intervention. When a country's currency is enduring extreme and unnecessary upward or downward financial pressure, a government or central bank will use intervention to stabilize the situation. Gross domestic product measures the value of economic activity within a country. GDP is the sum of the market values or prices of all final goods and services produced in an economy during a period of time. Currency strength or weakness usually follows its country's GDP growth. If a country is doing well, investors will usually flock to that country and invest because they see it as an opportunity to grow their capital. The business cycle captures GDP data over time. There are phases in the business cycle you would be very familiar with. By understanding where a country is on the business cycle, you can gain an edge on whether you should be buying or selling the country's currency. The stages of a country's business cycle are boom, contraction, recession, bust or slump, recovery, expansion and back to boom again. A country's business cycle is considered in a recession if they have two consecutive quarters of negative growth. In the contraction phase of the business cycle, central banks will look to prevent a recession by employing tools we have touched on like lowering interest rates and engaging in quantitative easing to boost spending and economic growth. Recovery and expansion phases are usually led by rising inflation therefore central banks will contemplate raising interest rates. The components of gross domestic product are personal consumption, business investment, government spending and net exports. If a country is receiving more in revenue from exporting than importing this would be viewed as good for the economy and the government as the country's balance sheet would show a surplus. If the value of a country's imports are more than its exports this is viewed as negative for the economy and the government as the country's balance sheet would show a deficit. Intermarket analysis is the study of business relationships and correlations between countries and markets. Countries will have a range of services and or commodities that they export to other countries. Australia's biggest export is iron ore and copper, New Zealand is dairy, Canada is oil and Japan's main exports are electronic goods. Countries whose main export is a commodity are known as commodity currencies. The Australian dollar, the New Zealand dollar and the Canadian dollar are all considered commodity currencies. China is the world's biggest importer of oil and metals like iron ore. This is because they are investing heavily in their country's infrastructure. Currently China or Australia's biggest trade partner Australia export their main product to help China build its infrastructure. If China's economy contracts or goes into recession they may be less likely to invest as much on infrastructure projects than when they were in the expansion or boom phase of their business cycle. So if China decide to cut back on new projects Australia will be affected because Australia will be forced to export less to China thus affecting their GDP and the possible value of their currency. Risk on and risk off investing describes a process where investors move to riskier and potentially higher yielding investments and then back again to supposedly lower yielding investments which are perceived to have a lower risk. In a risk on market environment investors feel that the financial and political climate is conducive to investing in riskier assets for a higher return. Covenancies like the Australian dollar and the New Zealand dollar as well as the stock market tend to benefit from risk on environments. Risk off indicates times of market uncertainty, instability or turbulence. Traders are less concerned with generating a return and more concerned with protecting their investments. Assets like gold, government bonds and currencies like the Japanese yen are considered safe haven assets because they are expected to retain their value or even increase in value in a risk off market environment. The sectors highlighted in green will benefit from a risk on environment meaning that investors are willing to invest in riskier assets for a higher return on their investment. The sectors highlighted in red are safe haven plays for investors in a risk off market environment. Money is shifted into these assets when there is huge uncertainty and turmoil within the financial markets. Understanding the interest rate cycle, business cycle, into market analysis and risk on risk off financial market environments will give you a clear review of where the big money is investing. We always want to position ourselves to follow the money. In 2014 the European Central Bank announced various measures like quantitative easing to stimulate economic growth due to certain economic problems that had arisen. In the same year the US Federal Reserve Bank were hinting at increasing interest rates for the first time since 2006. Both European and US Central Bank financial policies were diametrically opposed to each other hence the downtrend in the euro-dollar currency pair that lasted around 18 months. The risk of China, the world's second biggest economy slowing down and possibly going into the contraction phase of the business cycle after years of boom created a risk off environment in August 2015. Also in late 2015 early 2016 the United Kingdom vote to stay or leave the European Union otherwise known as Brexit was coming into focus. This created uncertainty both financially and politically for the value of the British pound. The Japanese currency gained in strength on both the risk off environment created by China as well as Brexit voting uncertainty while the British pound suffered. The commitments of traders report is issued by the Commodities Futures Trading Commission. It aggregates the holdings of participants in the US futures market where commodities metals and currencies are bought and sold. The commitments of traders report is released every Friday at 3.30 US Eastern time and reflects commitments of traders for the prior Tuesday. The COT provides a breakdown of aggregate positions held by three different types of traders commercial traders in forex known as hedges non-commercial traders typically large speculators and non-reportable which is typically small speculators. The COT report should be used to gauge large financial institution sentiment on a currency. We are interested in net non-commercial positions which are contracts held by large speculators mainly hedge funds and banks trading currency futures for speculation purposes. Here we have the Japanese yen the report date shows trade positions taken from the 6th of December 2016. The long and short position numbers show that there were more short positions taken than long positions. In the next section that says changes from and the previous weeks date we can see that short positions increased by quite a large amount when compared to the increase in long positions. Change in open interest indicates the amount of new positions that were open from the previous week to the current date. We should always keep an eye on the COT report so we can get an idea of the positions and sentiment of large speculators. We can use the COT report as confluence with our fundamental analysis trade ideas. If you've tried news trading you will understand that buying good news and selling bad news can actually be detrimental to your trading account news should be traded when the unexpected occurs. When news data is forecasted to be better than the previous data release but the actual release data comes out as extremely negative this can be a great opportunity to trade because the market has been wrong-footed about the forecasted data. If the data forecasted is due to be negative but the actual data release is surprisingly positive this is another good opportunity for us to capitalize. An unexpected news release can also take the form of a much better than expected or a lot worse than expected data release. Sideways or ranging moving markets occur when buyers and sellers are in agreement on the value of one currency against another. As an example let's look at property market prices let's say the average or mean price of a home in your area is £500,000. Some homes may sell for slightly more and some homes may sell for slightly less but there will be a certain price range that prices in your street will stay until something changes fundamentally within the property market. Recession, supply and demand as change in interest rates among other things will have an effect on the price of homes. The price of property will either break out to the upside or seek a new value area or price as buyers and sellers decide on the prices they are willing to accept for a home. Once buyers and sellers agree on a price range again it will be reflected in a sideways or ranging market. Looking at the price chart we can see that buyers and sellers are in agreement of the value of this currency pair. Ranging or sideways markets can also be described as a value area. The average or mean price is also known as fair value. Anything below fair value could be considered cheap and anything above fair value could be considered expensive as long as traders agree that fundamentally the two currencies should be at this value area then price will continue to move sideways. Price will only break out of the value area when one currency is seen as either cheap or expensive at the current value area. A potential shift in central bank policies, risk on or risk off sentiment as well as various other fundamental factors will cause price to break out of the value area. Price will then trend as the stronger or weaker currency is bought or sold and seek another value area where buyers and sellers will agree on price and fair value. As forex traders we need to understand when a price of a currency is undervalued or cheap compared to another. Using fundamental analysis indicators like interest rate cycles, business cycles and intermarket analysis you will be able to determine whether you are buying a currency at bargain prices or if a currency is overvalued. Sentiment can be described as the overall attitude of traders towards a particular financial market or currency and is a powerful short-term driver of market direction. Sentiment isn't always based on solid fundamentals as it can be emotionally driven by crowd psychology. To get an idea of market sentiment and what the market may be focused on visit major financial news sites like Bloomberg, Reuters and Market Watch as well as sites like FX Street and Forex Factory every day. If most sites are focused on the theme of a possible US dollar interest rate hike, China possibly entering into a recession or the political stability or instability of the European Union you can plan to trade the affected currencies and the direction. If market sentiment and fundamentals don't align opportunities can arise to buy a currency for a bargain price if the overall fundamentals for that currency are still positive. An example of short-term negative sentiment but long-term positive fundamentals would be when a single news event like employment data is released and the figure is below projected expectations. Short-term sentiment would be present and cause the market to fall until it is realized that it may be the only negative data when compared to the other data that make up the overall health of the economy. When financial or economic rumors start to generate interest via the news publications major market participants have already started to position themselves to buy or sell. If rumors circulate about a possible rate cut or hike of a currency, a potential recession or political instability event traders will look at the current price of the currency and consider if it is overvalued or undervalued based on the rumor becoming a fact. By the time the event is close to being announced the market would have already priced in the value of the currency pair long in advance based on the probability of the rumor becoming a fact. Significant political events like government general elections and presidential elections can have huge effects within the currency markets. Markets generally like the status quo a newly elected party or leader brings with it uncertainties because of potential policy changes promised by the newly elected leadership. If the changes are perceived to benefit or hinder the country the currency will rise or fall in value. Uncertainty means an increase in risk money will generally flow into safe haven assets and currencies like the Japanese yen and the Swiss franc. The US dollar index is a measure of the value of the United States dollar relative to a basket of foreign currencies like the euro Japanese yen and the British pound. Most major markets are connected to the price of the US dollar a falling dollar will increase the value of other countries currencies especially the euro currency. If the price of the dollar goes down commodities like gold will also increase in value as it is inversely correlated to the dollar. If the value of the dollar drops it costs more dollars to buy commodities investors will also look for an alternative investment source to store value and gold is an alternative. Keeping an eye on the US dollar is essential when planning to take trades involving a US dollar pair. The carry trade occurs when traders decide to borrow a currency with a cheap interest rate and invest in a currency with a higher rate of interest. Traders make money on the difference between the difference in interest rates. The carry trade theme usually occurs during a risk on financial environment. Major investors constantly adjust their portfolio exposure within the different markets you'll be able to see the correlations and where the big money are moving their capital depending on the financial environment for example risk on and risk off interest rate differentials business cycle analysis and into market analysis. Setting up your chart to keep an eye on other financial and commodity markets is vital when currency trading. The top left screen displays the forex market which is currently showing the euro dollar currency pair. The top center shows the dollar index. The top right shows gold. The bottom left is the S&P 500 stock market industry. The bottom middle we have crude oil and finally US government treasury bonds. All charts show the daily time frame. The euro dollar forex currency pair is currently trending down which means the US dollar is the stronger currency. This is backed up by the US dollar index which is clearly in an uptrend. We can also see another correlated market to the US dollar index which is gold and that is trending downwards giving us confluence of a strong US dollar. The stock market oil US treasury bonds and gold should be used as a measure of risk sentiment within the financial markets. As you can see we are currently in a risk on market environment as the stock market is making new highs and an OPEC deal to cut production in an attempt to reduce oversupply in oil has been agreed. Stocks and oil will usually do well in a risk on environment. US treasury bonds and gold don't do well in a risk on environment so you can see the current downtrend since November and overall correlations with the different markets. As we are in a risk on environment we should look to buy commodity currencies like the Australian dollar, the Canadian dollar and the New Zealand dollar and sell safe haven currencies like the Japanese yen and the Swiss franc. If we go to the Australian dollar Japanese yen currency pair you will be able to see the uptrend as a result of money flowing into a higher yielding commodity currency and out of the safe haven currency. It should also be no surprise to see the same trending market for a currency pair like the Canadian dollar Swiss franc and the currency pair like the New Zealand dollar Japanese yen. Thank you for watching the fundamental analysis course. If you have any questions please email support at trading180.com