The fundamental analyst identifies and measures factors
that determine the intrinsic value of a financial
instrument, such as the general economic and political
environment, and including any that affect supply
and demand for the underlying product or service.
If there is a decrease in supply but the level of
demand remains the same, then there will be an increase
in market prices. An increase in supply produces the
opposite effect.
For example, an analyst for a given currency studies
the supply and demand for the countrys currency,
products or services (Merchandise Trade); its management
quality and government policies; its historic and
forecasted performance; its future plans and the most
important for the shorter term, all the economic
indicators.
From this data, the analyst constructs a model to
determine the current and forecasted value of a currency
against an other. The basic idea is that unmatched
increases in supply tend to depress the currency value,
while unmatched increases in demand tend to increase
the currency value. Once the analyst estimates intrinsic
value, he compares it to the current exchange rate
and decides whether the currency ought to rise or
fall.
One difficulty with fundamental analysis is accurately
measuring the relationships among the variables. Necessarily,
the analyst must make estimates based on experience.
In addition, the markets tend to anticipate events
and discount them in the currency value in advance.
Finally, serving as both a disadvantage and even as
an advantage (depending upon the timing), the markets
often take time to recognise that exchange rates are
out of line with value.
Summary
of US reports watched by the fundamental analysts
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