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Institute of Securities, Management & Research Assignment Forex Market Fundamental Analysis Presented To: Mr. Hassam Ahmed Presented BY: Zafar Ali Channa Date: 03/03/2011

Foreign Exchange market
It is the largest financial market in the world, the market where trading of currencies is done world wide through computers and telecommunication networks. It is the market where different sectors and people of different backgrounds invest, speculate and exchange different currencies. Currency trading is done round the clock all over the world. Approximate $4 trillion dollars is the everyday trading in 5/24hours. Investors from every country participate in the market for exchanging one currency to another.

Who can participate?

Years ago, only corporate sectors and banks actively participated in the forex market. All these sectors used the market for foreign transactions and for the Speculation and Hedging. Hedging is Risk management strategy used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies, or securities.
Speculation The process of selecting investments with higher risk in order to profit from an anticipated price movement.

These days the financial and economic trends have changed. Now days the actively participants in the Forex market are, 1. Central Banks: They can enter the forex primarily for two reasons. First of all, they may start trading for the purpose of supervising the currencies market. Secondly, their goal may be to control the supply of currencies and the corresponding interest rates. 2. Banks: The greatest participants of the market. Transactions are conducted for their customers and for self. Banks are also used for speculation purpose around 70% transactions.

3. Commercial Companies: Companies who import goods or services from the abroad so they need some time home currency or foreign currency to meet their requirements. 4. Investments funds: These are the mutual fund companies and involved in the investments and these companies invest in the other countries securities. Investment funds companies also invest in forex market. 5. Brokers: An individual which acts as an intermediary between a buyer and seller, usually charging a commission. for securities or for currency 6. Individual traders: An individual is doing transactions for the speculation purpose or for any tourist who needs the foreign currency or home currency.

Factors Affecting Forex Market

Economic News Housing Information Interest Rates Investors Political Events

A fundamental analysis is a judgment for the state of currency. Fundamental analysis is an observation of an economy through its statistics. The analysis informs us about the growth or declination of any economy. Fundamental analyst considers all information to give a complete picture. Every possible situation is considered to give the future potential. To analyze any economy fundamentally, PESTEL are considered the best model.

PESTEL (Political, Economical, Social, Technological, Environmental and Legal)

: Political Factors Politics is directly related to economy because they are the policy makers. An unstable political sector can trigger negative reactions in the market. The time of election is considered to be the most troublesome for forex markets. Quick movements are observed during elections. Even local political events may lead to change in investor's attitude. Political factors surely have a deep impact on the currency market.. Economic Factors Economic situation of a country can heavily influence the trends in the currency market. Economic terms like budget, foreign policy, debt etc. Key Economic indicators affect the buying and selling behavior of an investor such as, 1. Interest rate/Bank rate: An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. 2. Inflation rate: The percentage increase in the price of goods and services, usually annually. 3. Unemployment rate: Percentage of the civilian labor force which is unemployed. a lagging indicator. 4. Major Export: Local products sold to the other countries. 4

5. Major Import: Products bought from the other countries. 6. Trade Balance (Trade surplus/Trade deficit) Export is greater than Import then It shows Trade Surplus and Import is greater than Export it shows the Trade Deficit. 7. Gross Domestic Product (GDP) Domestically Production and Services: Value of countrys overall output of goods and services at market prices during a fiscal year excluding foreign net income. 8. Gross National Product (GNP) Foreign as well as Domestically Production and Services: GDP of country to which income from abroad remittances of national living outside and income from foreign subsidiaries of local firms has been added 9. Consumer Price Index (CPI): CPI expresses the current prices of a 'basket' of goods and services in terms of the prices during the same period in a previous year, to show effect of inflation on purchasing power. it is one of the best known lagging indicators. 10. Social Factors Social Factors include the cultural aspects and include health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety. Trends in social factors affect the demand. Technological Factors Technological factors also affect market. Introducing of new technology in any countrys industry has a positive effect because, it gives benefit to the countrys economy and market has a positive trends. Maturity of technology Competing technology development Ecological Factors Ecological or Environmental factors effect the overall economy of country. Any country has a four seasons so they can produce all necessary things for survival and due to this the agriculture sector increases and positively benefit to the economy and also affect the market trends. Legal/Legislative Factors Legal factors are the most important for investors to invest in the country. 5

1. 2. 3. 4. 5.

Current home market legislation Future legislation Regulatory bodies and process Industry specific regulations Competitive regulations

Period of general economic decline, defined usually as a contraction in the GDP for six months (two consecutive quarters) or longer. Marked by high unemployment, stagnant wages, and fall in retail sales, a recession generally does not last longer than one year and is much milder than a depression. Although recessions are considered a normal part of a capitalist economy, there is no unanimity of economists on its causes. Oil Prices increase is a major force for recession because countrys industries, transportation and domestic use heavily dependent on oil. Oil prices increase so it negatively impacts the GDP. In 2007 the International market is influenced by Recession. This is Because of the 1. Easy Credit conditions: 2. Weak & fraudulent underwriting practice 3. Sub-Prime lending 4. Deregulation: 5. Increased debt burden or over leveraging 6. Financial innovation and complexity 7. Commodities boom 8. Systematic Crisis 9. Role of Economic forecasting 10. Indirect Pricing in risk