Hi Everyone,
One of our long term members has been focusing on improving his fundamental analysis. This week he shared with us a new approach he will be using to improve it. Below is the article from James in his own words.

I feel that I need a more structured approach to how I plan for the week. Currently it doesn’t have enough consistency – and I’m potentially missing important bits of information. So, in order to bring this structure and help my own thinking, I’m going to trial a new structure which focuses on the fundamentals of macro.

The main drivers of price can be split up into Global and Domestic. It is important to look at the wider picture and then narrow down – just like how technicals start at a higher timeframe and work down; my fundamental analysis will start with global drivers and then drop down to more granular domestic drivers. I’ll explain a little about what they are but how I’m going to track and report on them to help shape my views for the week ahead and give clues/confluence on potential price moves for the week ahead. There are a lot of overlaps and interdependencies between the factors so it’s not as straightforward but I think this will be a good skeleton.

Before I get into it, a lot of the structure and underlying approach has been shaped by The Art of Currency Trading by Brent Donnelly – which I am re-reading AGAIN. I have found it really useful for the foundational knowledge and I think it is both a great starter book and a great reference book to help during sticking points (as well as AlphaTrader – The second book). It wouldn’t feel right if I didn’t give the props and credit where it was due.

It is important to understand that it’s not just the absolute level, but the change from the previous release which is important. A value close to it’s all time highs may not signal ongoing strength if the rate of change has significantly decreased over the past 4 releases. It could be a turning point.

Global Drivers:

  1. Global Growth

Certain currencies do well in high growth environments – certain countries whose economy is driven by exports will particularly do well in times of high global growth and vice versa. This will look at generic global growth and generic global contraction.

How I’m going to monitor this:

Global PMI indicators and reports – This is survey data from around the world about manufacturing and services outlook.
I’ll be taking the data from: https://www.pmi.spglobal.com/

This is a good site and gives a weekly look ahead for all things PMI.

Unemployment Data

In order to fuel expansion and growth, companies will need to hire more staff – using the US, Eurozone and Chinese unemployment data will give good clues about growth. The thesis is Unemployment level will be negatively correlated with growth. This change and trend is important here.

Chile Copper Production

Chile is the biggest exporter of Copper. Usage of copper increases during high growth times as it is used extensively in the modern world. It is used in everything from the wiring in new infrastructure through to high value tech items that are more purchased during the good times.

China PMI’s

The Manufacturing Purchasing Managers Index is based on five individual indexes with the following weights: New Orders (30 percent), Output (25 percent), Employment (20 percent), Suppliers’ Delivery Times (15 percent) and Stock of Items Purchased (10 percent)

China Services PMI: The index tracks variables such as sales, employment, inventories and prices.

With China being a major global exporter, if the surveys show expansion then global growth may be high.

South Korean Exports

South Korea publishes data earliest and has a high correlation to the export growth of other Asian countries which is an indicator of global demand/growth.

  1. Commodity Prices

Commodity prices play a big impact in the movement of some currencies. Mainly for me, the CAD, AUD and NZD.

I’ll be tracking the prices of oil, nat gas, coal, copper, gold, silver and dairy. Movement in these commodities may hint at the relevant exporters currency gaining in strength (and vice versa).

  1. Risk Aversion

Are we moving into a risk on or risk off period? This can influence the money flows into currencies from equities but also into certain currencies. The tradition safe haven currencies such as CHF, JPY and USD.

I’ll look at reporting on VIX, S&P, Hang Seng 500, DXY, STOXX 600

  1. Geopolitics

There is no real indicator for this – this is just a quick focus on the news.

  • War
  • Elections
  • Sanctions
  • New laws/policies

Domestic Drivers

In this section I’ll focus more on the individual currencies and the things which drive them. I’ll likely have a section for the main currencies – not everything will be relevant each week but I’ll base the domestic section around:

  1. Monetary Policy + Data Releases

The main thing here is interest rates, but the things which influence interest rates can vary. What a central bank is interested in may change quite frequently so i’ll look at

  • CPI/Inflation measures
  • Growth
  • Central bank intervention
  • Balance sheet (QE/QT)

The items here could come in hard data releases or soft data such as central bank member comments.

  1. Balance of Trade

The Balance of Trade is the difference between the total value of exports and the total value of imports of a country. Boiled down, has a country been able to sell more than it’s bought. If so, this has creased a surplus that can be utilised by the country.
The Balance of Trade is a major part of GDP.

  1. Fiscal Policy

Although monetary policy is the main thing we usually look at, Fiscal policy can also play a major impact but there may not always be something to discuss about this as changes in fiscal policy aren’t too frequent.

  1. Central bank and General News/Sentiment

This section could be a bit of a miscellaneous dumping ground of news, rumour and sentiment.

Summary and Opinion

I’ll likely bring together a rough summary of what everything COULD mean for the week ahead and my opinion.
As you all know, I’m not the most experienced in macro and fundamentals and this is a part of my journey and development so please take any of my views or opinions with a pinch of salt or a large brandy.

I’m always open to people’s suggestions, arguments and views so please feel free to share if you wish.

Kind regards,