Fundamental economic and political indicators that influence the direction of currency flows are the basis of fundamental analysts in looking for long-term trends. While technical analysts often project shirt-term currency movements based on indications of changes in supply and demand.
Supply-Demand Macroeconomic Indicators
Macroeconomic indicators determine the long-term direction of currencies. They interpret the movements of money within economies that determine the perceived value of their currencies. Analysts can further correlate the indicators of different economies to identify whether their currencies are likely to strengthen or weaken against one another.
Balance of Payments
A country’s regular documentation of currency transactions across national borders is the balance of payments. It is usually published on a monthly or quarterly basis by a top governmental economic authority. The data is divided into two main components: the current account and the capital and financial account.
Current Account Balance – registers international commercial transactions of goods and services in addition to net foreign investment earnings and net international transfers of cash during a specified period. Analysts can find the national foreign trade balance showing total imports and exports, and the net exchange of cross-border services.
Capital Account Balance – registers the investments flowing in and out of a country. Direct investments and portfolio investments are the two types registered in the capital account balance.
Inflows/Outflows of Currency
Net foreign currency inflows and outflows of an economy during a given month are another important indicator that can be published within official balance of payments. The local currency generally shows weakening against its peers, when currency is flowing out of an economy. While when foreign currency enters, it strengthens.
Foreign Reserves
Because of goods and services transactions that have been made with individuals and entities abroad, a balance of foreign money that has accumulated within a country. Also, foreign reserves are acquired if there is a positive-sum of the current and capital account balances. These are invested in instruments that are considered safe, including debt securities of major economies such as the U.S and Europe.
Other Important Indicators
Inflation – an increase in the price of goods and services in an economy. A weakening of the currency is one factor of high domestic inflation. Adjustments in an exchange rate should be equal to the relative international power of a currency.
Interest rates – are key policy variables over which countries have control. Also, they’re indicators that most immediately influence currency trends.
Government Accounts – represents up to 30% or more of a country’s total gross domestic product. Thus, what the government does within its budget often gas a significant influence on other economics and on its currency.
Economic Activity and GDP Growth – traders monitor a series of data releases to track economic activity and what it may mean for currency strength. The broadest indicator of the level of economic activity in an economy is the growth of a country’s GDP. A growing economy attracts investment and is a sign of potential currency strength.
The fundamental health of economies and the implications for currency movements have a lot of factors that go into analysis. Traders can begin to monitor these factors for them to compile the relevant data and give conclusions about where currency may be moving next.
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