The Use of Fundamental Indicators
Once the basics of a country's economy are determined from looking at the central bank website, you can delve deeper and look at some of the current and future economic indicators. The following is a list of indicators on the U.S. Economics and Statistics Administration's website (www.esa.doc.gov/about-economic-indicators).
▼ TABLE 6-1: FUNDAMENTAL INDICATORS
Current and future economic indicators are a bit more complex to digest and assimilate into good trading information. Don't allow yourself to get caught up in the numbers. Remember, what you are looking for is any indication that a country's economy is steady, slowing, or growing too quickly. After looking at this information and its equivalent on the non-U.S. central bank websites, you can build upon your knowledge base of what is expected in the direction of interest rates of that currency through its current and future growth rates.
Additionally, you can cross reference any of the information you may have noticed with the currency-news websites and any broker's reports you may be receiving as part of your trading platform's information news feeds. It would also be good to make note of your observations in your trading journal, keeping note of where and when you observed the hint or suggestion that a trade might be developing.
Economic indicators are used by economists as well as stock, bond, and currency traders to predict where a country is financially heading. Some of the economic indicators tell a story of what has already happened, called lagging indicators. Others tell where the economy will be soon; these are called leading indicators.
Gathering Fundamental Information
Fundamental information develops slowly: It is considered the longer-term information and therefore a medium- to long-term analysis of where a currency and a currency pair are moving. Often, your broker might report a current price and a medium- and long-term range for a particular currency pair. What these investment banks are doing is having their currency analyst departments look at the fundamentals of a currency and compare it to the fundamentals of a counter currency.
For example, the currency analyst might look at the NZD/USD for a possible trading opportunity. The FX analyst at the investment bank that is providing the report would study all of the written reports on the Reserve Bank of New Zealand (www.rbnz.govt.nz) for any indication of growing, slowing, or steady economic development. This would indicate a change in the interest rates of currency as set by the Reserve Bank of New Zealand to control the growth (or lack of growth). The FX analyst would then look for any information on money flows into and out of the country and other statistics (www.rbnz.govt.nz/statistics/econind/index.html). She would then make note and compare these to the same type of information on the related U.S. central bank website. This information would be matched with the information and observances of the NZD/USD technical indicators, and if she has an idea that there will be a widening or convergence of the interest rates of the two currencies, she would take a long, short, or neutral stance.
Interpreting the Information
If the analyst thinks the NZD will raise interest rates and the USD will be steady or lower interest rates, then she would issue a long NZD/USD buy signal in the report. A long NZD/USD would mean you are selling USD and using the proceeds to buy NZD. The trade would make money when the NZD crept up in value against the USD over time due to other traders pushing its price up. This pushing of the price of the NZD would most likely be due to the world's FX traders engaging in the time-tested practice of carry trades, or making money selling short a low-interest currency (in this case, the USD) and using the money to invest in a high-interest currency (in this case, the NZD). Additional information as to actual entry and exit points of the NZD/USD trade would be given, and the report would be checked out by a senior banker. That NZD/USD broker's report would then be sent out over the Internet to the bank's customers and clients.