Fundamental Analysis in crypto
Fundamental analysis in forex refers to the method of analyzing currency trends by examining a country's or multiple countries' political and social situations, economic and financial data, unexpected events, government or central bank policies, and other factors. This approach views a country's currency as a financial asset, implying that the issuing country's fundamental conditions and changes will affect the intrinsic value of this financial asset. Fundamental analysis generally includes, but is not limited to, the following aspects:
I. Political Stability, War, Geopolitics, etc.
Modern currencies are primarily credit-based, issued and circulated under the compulsion of national regimes. The credibility of credit currencies directly depends on the stability of the issuing regime. The more mature and stable a country's political system and social conditions, the more welcomed its currency will be in the international market. We see that the US dollar and Swiss franc have long been regarded as "safe-haven currencies" and are widely sought after by the market during crises, largely due to the mature and stable political system of the United States and Switzerland's stable position as a neutral country.
Therefore, a country's degree of political stability and political events will have a direct impact on its currency exchange rate. Additionally, the level of political and social stability affects a country's economic health and stability, thus influencing currency trends. When a country faces general elections or government restructuring, exchange rate fluctuations may increase. If a country's political situation remains unstable for an extended period, its currency will inevitably be suppressed.
Wars or geopolitical conflicts directly affect a regime's existence or stability, thus directly impacting a country's currency value. The impact of war or conflict on a country's currency is generally negative.
II. Macroeconomic Conditions
A country's economic strength directly supports its currency value. If the national economy is developing well, it will support the exchange rate of the domestic currency, while a depressed economic condition will damage the value of the domestic currency. There are many indicators to measure a country's macroeconomic conditions, and the release of these economic indicators has a direct effect on the country's currency trends. Generally, a country's economic situation is examined from four aspects: economic growth, employment, inflation, and balance of payments.
The comprehensive indicator for measuring economic growth is GDP, or Gross Domestic Product. The growth of GDP is determined by consumption, investment, government spending, and net exports. For developed economies, consumption expenditure accounts for the largest share of GDP, so economic data such as retail sales are very important. For some emerging economies, investment accounts for a large proportion of GDP, so data such as fixed asset investment are relatively important. Stable economic growth in a country is usually favorable for its currency. Taking the United States as an example, economic data measuring economic growth include not only Gross Domestic Product but also retail sales, existing home sales, personal consumption expenditure, manufacturing and service sector purchasing managers' index, durable goods orders, etc.
The health of the job market is a barometer of the national economy. During economic recessions, the unemployment rate rises, and a high unemployment rate in turn affects personal income and consumption, thus hampering economic recovery. An improving job market is positive for a country's currency. Taking the United States as an example, economic data related to the job market include the unemployment rate, initial jobless claims, changes in non-farm payrolls, etc.
The impact of inflation on exchange rates is more subtle. Inflation reflects changes in the purchasing power of a country's currency. Persistent high inflation will reduce the purchasing power of a country's currency, which is unfavorable for the currency. However, in the short to medium term, inflation will force a country to tighten monetary policy, raise interest rates, and withdraw liquidity, which is favorable for investors holding this currency. Therefore, we often see inflation rates exceeding expectations pushing up a country's currency exchange rate. Economic data measuring inflation generally include the Producer Price Index, Consumer Price Index, etc.
Balance of payments is an important aspect of the overall balance of an economy. For export-oriented emerging economies, persistent imbalances in international payments are the main source of pressure for currency appreciation.
III. Monetary Policy and Fiscal Conditions
Monetary policy affects exchange rates by influencing a country's interest rates. Interest rates are the return on holding a currency. When a country's interest rate level rises, the interest income of investors holding that country's currency increases, thereby increasing the demand for that country's currency and pushing up its exchange rate. Conversely, it causes the country's currency to decline.
Interest rates are usually decided by a country's central bank. In addition to directly determining the country's benchmark interest rate, the central bank also influences market interest rates or monetary liquidity through other means, such as changing commercial banks' discount rates, adjusting reserve requirement ratios, and buying and selling government bonds in the open market. Central bank monetary policy can basically be divided into two directions: loose monetary policy and tight monetary policy. Generally speaking, a tight monetary policy is favorable for a country's currency.
A country's government fiscal condition also affects its currency. In many mature economies, government bonds have always been an important class of assets traded in financial markets. Good government finances generally bring both stable politics and stable financial markets. Once government finances encounter problems and the government's debt-paying ability declines, it will inevitably affect the stability of financial markets. At the same time, when the government's financing ability declines, political stability also becomes an issue. Therefore, a deterioration in a country's government fiscal condition is negative for its currency.
IV. Central Bank Intervention
For non-freely convertible currencies, the central bank's influence on exchange rates is undoubted. For freely convertible currencies, central bank intervention also occurs unexpectedly from time to time. Therefore, in actual forex trading operations, the possibility of central bank intervention must be considered.
Taking the Japanese yen as an example, in 2011, the yen continued its appreciation trend against the US dollar since the financial crisis. The Bank of Japan and the Ministry of Finance verbally intervened in the yen's trend multiple times, but with little effect. As a result, the Bank of Japan intervened in the yen exchange rate three times in March, August, and October, selling yen and buying US dollars and other currencies. Although the Bank of Japan's intervention did not change the overall trend of the yen against the US dollar for the year, the yen weakened significantly against the US dollar in the short term after the intervention.
V. Other Fundamental Factors
The currency exchange rate is a comprehensive reflection of a country's fundamentals. In addition to the aspects mentioned above, any events that have a significant impact on a country's politics, economy, and society will affect the exchange rate.
Market sentiment has an important influence on currency trends. For example, during times of crisis, investors tend to hold currencies with safe-haven characteristics, benefiting currencies like the US dollar and Swiss franc.
When analyzing exchange rates, it is also necessary to combine the analysis with other financial markets, such as stock markets, bond markets, and commodity markets. Taking the Australian dollar as an example, as a commodity currency, the Australian dollar has a certain degree of positive correlation with the trends of commodities and stock markets.
