Fundamental
analysis is a way of looking at the market by analyzing economic, social, and
political forces that affects the supply and demand of an asset. If you think
about it, this makes a whole lot of sense! Just like in your Economics 101
class, it is supply and demand that determines price.
Using
supply and demand as an indicator of where price could be headed is easy. The
hard part is analyzing all the factors that affect supply and demand.
In other
words, you have to look at different factors to determine whose economy is
rockin' like a Taylor Swift song, and whose economy sucks. You have to
understand the reasons of why and how certain events like an increase in
unemployment affect a country's economy, and ultimately, the level of demand
for its currency.
The idea
behind this type of analysis is that if a country's current or future economic
outlook is good, their currency should strengthen. The better shape a country's
economy is, the more foreign businesses and investors will invest in that
country. This results in the need to purchase that country's currency to obtain
those assets.
For
example, let's say that the U.S. dollar has been gaining strength because the
U.S. economy is improving. As the economy gets better, raising interest rates
may be needed to control growth and inflation.
Higher
interest rates make dollar-denominated financial assets more attractive. In
order to get their hands on these lovely assets, traders and investors have to
buy some greenbacks first. As a result, the value of the dollar will increase.
Later on in the course, you will learn which economic data drives currency prices, and why they do so. You will know who the Fed Chairman is and how retail sales data reflects the economy. You'll be spitting out interest rates like baseball statistics.
But
that's for another lesson for another time. For now, just know that the
fundamental analysis is a way of analyzing a currency through the strength or
weakness of that country's economy. It's going to be awesome, we promise!
