Fundamental analysis

How does it work? Why does e.g. an increase of unemployment of lets say USA, leads to the depreciation of its currency?

The main fundamental driver regarding exchange rates is interest rates; therefore an increase in unemployment generally means the economy is not doing too well therefore interest rates are likely to fall to kickstart the economy and create jobs. A lower interest rate makes a currency less attractive therefore the currency will fall. This was seen yesterday as non-farm payrolls did not increase as much as expected therefore the dollar fell.

andycs said:

This was seen yesterday as non-farm payrolls did not increase as much as expected therefore the dollar fell.

Click to expand...

NFP is a key monthly indicator which measures production across all sectors in an attempt to assess the overall strength of the economy.

When it exceeds its 'estimate':-

Stocks Fall
Bonds Fall
Yields Rise
US Dollar Stronger

When it falls short of its 'estimate':-

Stocks Rise
Bonds Rise
Yields Fall
US Dollar Weakens

Strong employment growth (or stronger than expected) suggests a growing economy which is conducive to stronger demand and higher prices - causing inflation. The Fed may be inclined to raise interest rates in this event. Which would result in a more attractive (stronger) dollar.

Weak employment growth (or weaker than expected) suggests a slowing economy which potentially could lead to lower demand and lower prices. The Fed may be inclined to lower interest rates in this event. Which would result in a less attractive (weaker) dollar.

Hi GJ

A couple of NFPs ago there was a 100 pip swing one way then a very sudden swing in the opposite direction, which some say was due to a time delay between digestion of the headline number and the detail of the release.

However, I read a piece which stated that traders were calling this particular NFP price action a "drive-by", co-ordinated by a hedge fund. This article explained that a severe momentary liquidity shortage was created by this organisation. The method was simply to simultaneously hit all the market makers with huge orders thus creating a large spike and the resultant confusion.

Is this really feasible or just the commentator's imagination in overdrive?

Thanks,
Steve

TheBramble said:

NFP is a key monthly indicator which measures production across all sectors in an attempt to assess the overall strength of the economy.

Click to expand...

Since NFP is an employment report, to say it measures "production" would seem more than a little off-base. There are specific production data releases.

When it exceeds its 'estimate':-

Stocks Fall
Bonds Fall

When it falls short of its 'estimate':-

Stocks Rise
Bonds Rise

Click to expand...

If only it were that simple. Stocks and Bonds have often been known to trade in the exact opposite directions.

Well explained on the rest of it, though.

If you read the books by and about George Soros you will learn a lot about fundamental trading in forex. He made a billion shorting GBP - without looking at a chart.