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Fundamentals in a Nutshell!
By Sean Hyman | May 15, 2009
Some people avoid fundamentals because they feel they are so complicated. However, the basics are very simple and easy to follow. You just follow the trail.
What’s the trail?Watch what the CPI (Consumer Price Index, which tracks inflation) does, especially on a Year over Year (YoY) basis. If it’s increasing, then central banks will have to address this by hiking interest rates. Increasing rates means that you can earn more money on your currency and money loves “yield”.
So the pattern is: higher CPI over time results in higher interest rates over time. Higher rates attract more money to that currency than a currency that has lower rates. Thus as money pours into that currency (they are buying up the currency), it pushes the currency higher. Therefore, over time…you end up with an appreciating currency that earns higher interest over time.
When do currencies not follow this simple pattern? When the pattern reverses. Slowing economy, can equal lower CPI and lower interest rates and money pouring out of a currency. So when a recession hits or an economic slowdown or a deflationary period hits….this cycle actually reverses. But even then, you know the drill and can profit from it.
Hope you’ve enjoyed this short lesson on fundamentals.
Sean Hyman
www.forextradingblog.com
Tags: bank, blog, central bank, currencies, currency, dow, easy, economic, economy, forex, forextrading, fundamental, index, interest, interest rate, interest rates, lower, money, recession, Sean Hyman, simple, ssi, time
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