- Performing Position Trading and Swing Trading
- What is Fundamentals?
Performing Position Trading and Swing Trading
Position Trading and Swing Trading are 2 of the main long-term trading strategies.
Both trading strategies have been growing in popularity.
Are you looking to earn swap points for the long-term? Are you interested in earning a large amount of profit with one trade by holding positions for the long-term?
Then you may need to master the trading strategies “Position Trading” and “Swing Trading”.
When it comes to “Position Trading” and “Swing Trading”, reading the “Fundamentals” of the market becomes mandatory.
Just so you know, FBS is an NDD (Non-Dealing Desk) broker and allows any kinds of trading strategies on the trading platforms including the “Position Trading” and “Swing Trading”.
What is Fundamentals?
Fundamentals are the “basic conditions of the economy”.
For example, when we say, “Fundamentals of the American economy are good,” it means that the foundations of the economy, such as economic growth rate and corporate performance, are good.
Fundamentals is also a word that is often used in articles describing exchange rate market conditions.
However, in that case, the meaning is a little more limited, and it refers to the external environment of politics and economy among the factors that affect the exchange rate.
The term “fundamental analysis” is often used, but it is a method of predicting exchange rate trends from such an external environment.
So what are the fundamentals that are closely related to FX?
Here, we will explain the following in order.
- Interest rate trends
- Economic trends
- Balance of payments
- Fiscal balance
- Political factors
- Geopolitical risk
FBS’s analysis team provides the Fundamental Analysis every day, which you can refer to as a trader of FBS.
To follow the market events in real-time, you can also use FBS’s Economic Calendar which is available for free on FBS Official Website.
1. Interest rate trends
Interest rate trends are the most important item in analyzing exchange rates.
As a general rule, a situation with high-interest rates or expected interest rate hikes is a strong factor for that currency, and a situation with low-interest rates or interest rate cuts is a weak factor.
Investors in low-interest rate countries can earn more money by investing in high-interest rate country assets.
For example, if you want to invest in government bonds of a high-interest rate country, you must sell your currency and pay for that country’s currency.
Such movements affect the exchange rate largely.
However, since there is a risk of exchange rates, there is no willingness to invest unless the interest rate difference exceeds a certain level.
In the era of relatively high-interest rates before the subprime crisis and the Lehman shock, it was said that in the case of the USD/JPY, Japanese institutional investors need a 4% interest rate differential to activate investment in the US, and it was being appreciated.
However, this is a story when we were aware of the yen’s appreciation risk, so if the yen’s appreciation risk is mitigated over the medium to long term, the level of interest rate differentials will also drop.
Also, it is dangerous to think that it is a buying material simply because the interest rate is high.
The reason for this is that negative factors such as inflation and currency defense may be hidden behind the excessively high-interest rates.
Inflation is a factor that reduces the value of a currency as explained below.
Therefore, it is necessary to make a comprehensive judgment, including other conditions, instead of making a judgment based only on interest rates.
Inflation is the rise in prices, but from another perspective, it is also the depreciation of the currency.
For example, if the price index rises by 3% in one year, the value of goods and services will increase, and when the value of goods and services will not change, and the value of the currency (ie, purchasing power) will decrease by 3%.
So inflation is a weak source of currency.
In particular, when the supply of money is increasing and inflation is occurring, downward pressure is exerted on the exchange rate rather than when inflation is due to lack of goods and services.
As mentioned above, the interest rate level is one of the important fundamentals for the exchange rate, but the real interest rate considering the expected inflation rate is more important than the nominal interest rate.
For example, let’s say the US-Japan interest rate differential is zero.
However, if the US inflation rate is 2% and Japan’s deflation is -1%, the difference in real interest rates is 3%, which can be a factor of the strong yen.
So, you should refer to the purchasing power parity dealt on the next page for inflation.
3. Business trends
Since economic trends influence interest rate policies, they are an important factor in the exchange rate.
Also, since there are plenty of business opportunities in a country with a good economy, overseas companies will make investments such as building factories and acquiring companies in that country.
There is a demand for currencies, which puts upward pressure on the currencies of the country.
4. Balance of payments
Foreign exchange trading is liberalized and rates are determined by the market, and the exchange rate is greatly affected by supply and demand.
It is the same as the price of goods and services is determined by the supply and demand relationship.
So what influences the supply and demand relationship of currencies?
In the long run, it is considered to be the balance of payments.
The international balance of payments includes not only the trade of goods but also all the balance of payments resulting from capital transactions and overseas travel.
The balance of payments supply-demand relationship influences the long-term trend of foreign exchange.
For example, the Japanese yen, which is a country of significant surplus, has historically been under increasing pressure.
The foreign currency received by exporting goods to foreign countries must be converted into Japanese yen in the market, so the demand and supply of Japanese yen were always more than the demand.
On the other hand, the US has a huge trade deficit, so why should the US dollar not crash?
That’s because the capital balance has a surplus that makes up for this.
Governments and institutional investors around the world are investing in US Treasury bonds, which are both liquid and secure.
The US dollar will flow out due to the payment of the import price, but the US dollar will flow in due to foreign investment.
Therefore, the US dollar is not a surplus in terms of overall supply and demand.
5. Fiscal balance
The fiscal balance is the margin of government income and expenditure.
The main sources of income are tax revenue and expenditures, which are a public investment and social welfare.
When the economy goes bad, the government makes the public investment to stimulate the economy, but as a result, the fiscal balance deteriorates.
Conversely, when the economy improves, tax revenue increases and the fiscal balance improves.
However, major developed countries usually have budget deficits.
The government always tries to improve the economy to maintain the regime.
As a result, they tend to rely on fiscal spending.
They will issue government bonds to cover the budget deficit, but no one can say that they are in a healthy financial position.
So a budget deficit is a weak source of currency for a country.
However, Japan has a large budget deficit, which has never worked as a depreciating factor.
It is said that some hedge funds tried to sell Japanese yen several times using the budget deficit as a material, but it seems that each time it failed.
The reason is that more than 90% of JGBs are stably consumed by Japanese domestic funds (deposits and savings).
Even without relying on foreign capital, Japanese banks are buying back ample personal financial assets.
However, the landscape may change when domestic funds finally run out.
Also, for the US dollar, which is the key currency, the budget deficit can be said to be an important factor that influences market trends over the medium to long term.
6. Political factors
Monetary policy is the first political factor.
US policy is especially important.
When the trade delegation had power in the White House, exchanges were made into a tool of trade policy.
As political unrest rises, so does the currency of that country.
When political turmoil confounds, economic policy decisions may be delayed or delayed.
7. Geopolitical risk
Geopolitical risk also causes fluctuations in exchange rates.
Geopolitics is a discipline that studies how geographical conditions (for example, A and B countries, which are not close to each other) affect politics and economy.
Since it was used in 2002 by then-Fed Chairman Greenspan, it has also appeared in stock and currency commentaries.
At this time, it was used in the sense that the US attack on Iraq is becoming more realistic and there is a risk that it will adversely affect the economy if it happens.
After that, the term geopolitical risk was linked to terrorism, and there was a time when it became a market theme.
When terrorism by Islamic extremists became a topic, articles such as “The dollar fell due to geopolitical risk, while the Swiss franc rose as a safe currency” were often seen.
The fact that terrorism occurred did not lead to a large-scale war even if the US economy deteriorated, but in the market at that time “geopolitical risk” was a kind of fashion, it is not limited to America vs Islamic countries.
Geopolitical risks may re-emerge into market themes as the world becomes odorous.