In our last lesson we began a new module on the fundamentals of the forex market with a look at how traders who have an understanding of both technical and fundamental analysis are in the best position to be successful in the foreign exchange and other markets. In today's lesson we are going to continue our free forex trading course with a review of what we have learned up to this point so we can make sure that everyone has an understanding of the basics which they will need throughout the rest of this course.
As we now have a basic understanding of how trade flows and capital flows move the forex market, the next step is to look at each of the individual currencies we will be focusing on so we can gain an understanding of their backgrounds, and the makeup of their economies. Once we have an understanding of this it will become clear what fundamental factors are the most important drivers of individual currencies, and therefore what we as traders should watch for.
Before we get into this however it is very important that everyone has a sound understanding of how trade flows and capital flows move the forex market (which is covered in module 3 of this course) as well as the following concepts, all of which are covered in module 8 of our free basics of trading course located in the free course section of InformedTrades.com:
- We all need to understand what the business cycle is.
- The difference between monetary and fiscal policy.
- What a central bank is and how they go about changing interest rates. In module 8 of the basics of trading course we cover the Federal Reserve which is the central bank in the United States. While the central banks that we are going to be covering going forward may differ in how aggressive they are with monetary policy in relation to the Federal Reserve, the methods they use to conduct monetary policy, and the reactions of the forex market that monetary policy generates, is basically the same no matter what central bank you are looking at.
- The first currency we will be covering will be the US Dollar, so you should have a good understanding of the basic components of the US Economy.
I am going to give everyone 10 questions here that you should now have the knowledge to answer if you have been through module 8 of my free basics of trading course, and module 3 of this course. Ok so here we go:
1. If inflation is low and a Central Bank is concerned about recession, what would the expected monetary policy response be?
2. If inflation and growth are both high what would the expected monetary policy response be?
3. If a central bank raises interest rates, what affect if any is this expected to have on the currency of that country, all else being equal?
4. If a central bank lowers interest rates, what affect if any is this expected to have on the currency of that country, all else being equal?
5. If a country's imports grow and all other trade and capital flows remain equal, what affect would this have on the current account and what would be the expected affect on the currency if any?
6. If a country's exports grow and all other trade and capital flows remain equal, what affect would this have on the current account and what would be the expected affect on the currency if any?
7. If a country is a major exporter of gold and the price of gold moves up by 50% over the course of a year, what would be the expected affect if any on that country's currency all else being equal?
8. Japan is a major importer of oil and Canada is a major exporter of oil. If the price of oil goes up by 50% over the course of a year, then what affect if any should this have on the CAD/JPY currency pair all else being equal?
9. Traders who follow US Dollar fundamentals pay particular attention to any numbers which reflect the overall health of the consumer. Why?
10. The US Economy in the past was referred to as an Industrial Economy, now it is referred to more as a ________________ Economy.
Once the first person posts the right answers to all 10 questions I will send a private message to them via the forum to request the mailing address where they would like their free copy of Day Trading the Currency Market sent.
That's our lesson for today. In tomorrow's lesson we will begin a discussion on the fundamentals that move each of the main currencies we will be focusing on, starting with the US Dollar, so I hope to see you in that lesson.
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20 Feb Mon
00:00 US- Holiday 21 Feb Tue
All Day flash PMIs 22 Feb Wed
09:00 DE- IFO Survey
09:30 GB- GDP
10:00 EZ- Final HICP
13:30 CA- Retail Sales
15:00 US- Existing Homes Sales
19:00 US- Fed Policy Minutes
20:30 US- API Crude 23 Feb Thu
13:30 US- Weekly Jobless
14:45 US- flash Service PMI 24 Feb Fri
13:30 CA- CPI
15:00 US- New Homes Sales
15:00 US- final Univ of Mich Survey
Odds are Monday will ba a subdued trading session with no major data slated and U.S. markets closed for the President' Day holiday. Key data are due over the week with the first round of PMI releases (flash) along with the German IFO Survey. These tend to be important items for analyst but not as much so for the markets in terms of price fluctuations.
As for where the forex markets are headed, my focus is on market sentiment vis-a-vis economic growth in the U.S. The Fed appears to be embarking on a policy "normalization" path starting with a rate hike on March 15. Market odds on a hike are only 38%. Traders simply don't believe the Fed has the courage to go through with a rate hike. For Yellen to have any future credibility she should hike rates. I'm not sure what this Fed is made of. A 25bp rate hike will not decimate the economy. We will see.
I feel that equity markets are currently of two minds about U.S. economic growth. They are hopeful that the new U.S. administration will be able to come through with its promises, primarily a significant tax cut. However, the establishment opposition (in both parties) are doing all they can to sabotage and obstruct major reform. They have a lot to lose. In addition to tax reform, Obamacare is a quagmire. It is a financial disaster that is going to be nearly impossible to fix in the short run. Whether it all can be fixed will depend on how well Trump delegates power and on how strong his Cabinet will be.
So the equity markets are of two minds. One is optimistic about growth and the second is pessimistic that major change will sabotaged by the establishment. The USD will be suported by positive prospects for growth and undermined by fears of no change.
As of late Friday Fed Funds futures odds for a March Fed rate hike were 38% (44%). Markets now place the odds for rate hikes by June at 112% (12%). That is 100% for one hike (March?) plus 12% for a second move.
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