Methods of analyzing exchange rates

There are two main methods of analyzing exchange rates: fundamental analysis and technical analysis. Fundamental analysis is the analysis of the basic factors that affect foreign exchange rates. The basic factors mainly include the economic development level and status of various countries, the political situation of the world, regions and countries, and market expectations. Technical analysis uses the research methods and methods of psychology, statistics and other disciplines to predict the future trend of the exchange rate through the study of past exchange rates.

This article will focus on basic analysis

Fundamental analysis of exchange rates

The classic theory of studying exchange rate changes in the world today

There are three main ones: the theory of international lending by the British scholar Gerson, the theory of purchasing power parity by the Swedish economist Kassel, and the theory of interest rate parity by the famous British economist Keynes. Among them, the interest rate parity theory and the purchasing power parity theory have the greatest impact on the market. It is worthy of the attention of the majority of customers engaged in individual real foreign exchange trading that the above theories have many premises and assumptions, and the theoretical color is relatively heavy.

Interest rate parity

The theory of interest rate parity, put forward by British economist Keynes in 1923, explained the relationship between the level of interest rates and the exchange rate. In short, which currency has high interest rates, investors are willing to buy which currency, which will promote the currency exchange rate to rise. The theory of interest rate parity breaks through the traditional scope of international payments and price levels. It studies exchange rate changes from the perspective of capital flow, laying the foundation for modern exchange rate theory.

Purchasing power parity theory

Purchasing power parity theory is a Western exchange rate theory. The comparison of the two currencies depends on the comparison of the domestic purchasing power of the two currencies. If a hamburger is worth 1 pound in the UK, the same hamburger will sell for 1.70 US dollars in the US. We say that the exchange rate is 1 pound to 1.70 US dollars.

Although the purchasing power parity theory is not perfect, the central bank still plays an important role in calculating the basic ratio between currencies. Because the comparison between the basic exchange rate calculated based on purchasing power and the market price can determine the degree of deviation of the current market exchange rate from the basic exchange rate, which is an important means of predicting the long-term exchange rate.

The fundamental reason that determines the direction of foreign exchange rates

The fluctuation of foreign exchange rate, although ever-changing, is the same as other commodities. In the final analysis, it is determined by the relationship between supply and demand. In the international foreign exchange market, when there are more buyers than sellers of a certain currency, buyers rush to buy, and the buyer’s power is greater than the seller’s power; the seller’s rare goods can live, and the price will inevitably rise. Conversely, when sellers see poor sales and compete to sell a certain currency and market sellers have the upper hand, the exchange rate will inevitably fall.

Foreign exchange supply and demand are affected by cyclical fluctuations

The contradiction between the supply and demand of foreign exchange often has a periodic cycle, and different foreign exchanges have different cycles; that is, the same foreign exchange has different cyclical trends in different time processes. For example, the seasonal cycle, the exchange rate is often due to a country’s Seasonal changes in the demand or supply of money show cyclical fluctuations.

During the peak export season, foreign importers need to increase the country’s currency to purchase products. The currency of the producer country appears to be more demanding than supply in the foreign exchange market. Under the impetus of the buyer’s power, the currency will appreciate; similarly, during the peak import season At that time, the country’s money supply increased sharply, resulting in excess supply, and its foreign exchange price would fall. This factor can be analyzed from past data using statistical methods.

The impact of the balance of payments on the value of the national currency

The balance of payments refers to a systematic record of the total amount of revenue and expenditure caused by all economic transactions of a country in a certain period of time. It is an important factor affecting short-term changes in exchange rates.

When there is a surplus in the balance of payments, the supply of foreign exchange exceeds demand, and the ratio of foreign currency to domestic currency will decline. When there is a deficit in the balance of payments, the domestic currency debt is greater than the receivable currency claims, foreign exchange demand and supply, the ratio of foreign currency to domestic currency will rise, and the domestic currency will depreciate.

In the balance of payments, international trade data is more important. If the trade surplus continues to grow, the domestic currency’s confidence and demand in the international market will increase, leading to an increase in the exchange rate; on the contrary, the huge trade deficit will continue to increase, the market’s confidence and demand for the currency will decline, and eventually the currency will depreciate. The continuous or large increase in the number of foreign trade deficits has the strongest impact on market psychology.

The impact of the public’s psychological expectations on the foreign exchange market

Like other commodities, a country’s currency tends to affect the rise and fall of its foreign exchange prices for people’s expectations. The influence of such human factors on the exchange rate is sometimes even more pronounced than the effects caused by economic factors. Therefore, economists, financiers, analysts, traders, and investors often make their own comments and forecasts based on what is happening in the world every day, and express their views on exchange rate trends.

The influence of political factors on the foreign exchange market

Political factors and economic factors are inseparable. Whether a country’s political situation is stable will have a major impact on its economy, especially the currency exchange rate. Whether it is a military conflict or a political scandal, it will leave important traces on the foreign exchange market.

Central bank intervention in the foreign exchange market

Since the exchange rate level of a country’s currency often has an important impact on the country’s international trade, economic growth, currency supply and demand, and even political stability, when speculative forces in the foreign exchange market make the country’s exchange rate seriously deviate from the normal level, the The central bank of China often enters the market to intervene. The four magic weapons for the central bank to deal with speculators in the foreign exchange market are: 1) Directly buy and sell domestic currency or US dollars or other currencies in the foreign exchange market 2) Increase the interest rate of the domestic currency 3) Tighten domestic currency credit to prevent the outflow of domestic currency 4) Issue a relevant statement. Through the above measures, the central banks of various countries have greatly increased the financing costs of speculators in the foreign exchange market, forcing them to stop losses and liquidate their positions, and go back in order to return the exchange rate to a reasonable level. The above four methods, especially the short-term effectiveness of the central bank’s intervention in the foreign exchange market, are often the reason for the violent exchange rate fluctuations. Clients of individual real foreign exchange transactions must be very sensitive to this.

Detailed economic indicators
Economic indicators Indicator explanation
Unemployment Unemployment, as a barometer reflecting a country’s macroeconomic development, indicates the current and prospective development of the country’s economy. It is bound to affect the formulation of monetary policy and have a significant impact on the exchange rate.
Nonfarm payroll employment Nonfarm payroll employment US employment report data are released together with the unemployment rate. Usually the announcement time is the first Friday of each month.
The Gross National Product GNP is currently announced every quarter by each country. It represents the sum of all production and services of all sectors in the country in a currency form. It is a comprehensive performance of different economic data and reflects the current economic development status.
Gross domestic product GDP is currently announced every quarter by each country, showing all of the country’s economic activities in a certain period of time, including the profits generated by foreign companies investing and establishing subsidiaries in their territory.
The production price (price) index PPI shows the cost of commodity production (changes in the price of production raw materials), and changes in future commodity prices, which affect the future changes in consumer prices and consumer psychology.
The Consumer Price Index CPI reflects the current price changes that consumers spend on goods and services, shows the changes in inflation, and is an important indicator for people to observe the country’s inflation.
Personal Income Personal Income includes all income derived from wages and social welfare, reflecting the actual purchasing power level of individuals in the country, and predicting changes in consumer demand for goods and services in the future.
Personal Consumption Expenditures Personal Consumption Expenditures includes personal expenditures on purchasing goods and labor services, and is an important indicator of household consumption expenditure.
The consumer confidence index reflects the optimism of the country’s nationals towards its economic development, and predicts future changes in consumer spending.
Industrial Production Index Industrial Production The industrial production index reflects the total production of the country’s production and manufacturing.
Housing Starts is a measure of the activity of the country’s construction industry. Since the construction industry is a leading industry in the economic development cycle, it indicates future economic changes.
The Purchasing Managers Index PMI is a barometer that reflects the comprehensive development status of the manufacturing industry in terms of production, orders, prices, employees, and delivery. It is usually 50% as the dividing line. A higher than 50% is considered to be an expansion of the manufacturing industry. Less than 50% means economic shrinkage.
The National Association of Purchasing Managers Index NAPM The Purchasing Managers Index of the United States, and the Chicago Purchasing Managers Index are released two days before and after.
Retail Sales Index The Retail Sales Index reflects the commodity transactions in the form of cash and credit cards in the retail industry excluding the service industry.
Wholesale Price Index The Wholesale Price Index reflects the wholesale price of bulk materials excluding labor services, such as raw materials, intermediate goods, final products, and import and export products.
Foreign trade (trade balance) reflects the country’s total foreign trade income in a period of time with the indicated comparison, that is, currency inflows and outflows. The importance of this data to the exchange rate of various countries is generally Japan, the United Kingdom, and the euro. District, United States.
Factory Order Factory Order reflects the demand of consumers, manufacturers or the government for future output of goods.
Durable Good Orders refers to the order of non-wearable goods, such as vehicles, electrical appliances, etc., reflecting the production and investment expenditures of manufacturers in the short term.
Equipment Utilization Capacity Utilization The ratio of equipment used in industrial production. Usually 80% of equipment utilization is considered to be normal idleness of factories and equipment.
Current Account Current Account refers to the inflow and outflow of funds arising from the import and export of goods, labor services, and investment between the country and foreign countries.
Business Inventory Business Inventory reflects the business sector’s demand for short-term credit. The increase in commercial inventories may lead to an increase in short-term interest rates and a slowdown in economic development, indicating that the economy may enter a state of stagnation.

U.S. economic data table
Economic data name Announcement time Approximate announcement date Announcement department Ranking
Gross Domestic Product (GDP) 21:30 Month end of the first quarter Ministry of Commerce 1
Unemployment rate 21:30 on the first Friday of each month Ministry of Labor 2
Retail sales 21:30 mid-month, 13th, 14th, 15th, etc. Ministry of Commerce 3
Consumer Confidence Index 23 points at the end of the month Consulting Chamber of Commerce 4
Commercial and wholesale and retail inventory 21.30/23 o’clock mid-month Ministry of Commerce 5
Purchasing and non-purchasing managers index 23:00 at the beginning of the month, 1st, 2nd, 3rd, etc. NAPM 6
Industrial production 21.15/22.15 minutes on the 15th of each month Federal Reserve 7
Industrial orders and durable goods orders at 23:00/21.30 at the end of the month or the beginning of the month Ministry of Commerce 8
Leading indicators 23:00 mid-month or near the end of the month Consultation Chamber of Commerce 9
Trade data 21:30 Mid-month or near the end of the month Ministry of Commerce 10
Consumer Price Index (CPI) 21:30, 20-25 of each month Ministry of Labor 11
Producer Price Index (PPI) 21:30 on the second Friday of each month Ministry of Labor 12
Budget report 21:30 End of month Ministry of Finance 13
New housing sales and operating rate, construction 21.30/23 o’clock mid-month or close to the end of the month Ministry of Commerce 14
Personal income and expenses 21:30 at the beginning of each month Ministry of Commerce 15