CHAPTER 4 Fundamental Analysis. Two types of analysis are used for the market movements forecasting: fundamental, and technical (the chart study of past behavior of commodity prices). The fundamental one focuses on the theoretical models of exchange rate determination and on the major economic factors and their likelihood of affecting the foreign exchange rates. . Economic Fundamentals Theories of Exchange Rate Determination Fundamentals may be classified into economic factors, financial factors, political factors, and crises. Economic factors differ from the other three factors in terms of the certainty of their release. The dates and times of economic data release are known well. | CHAPTER 4 Fundamental Analysis Two types of analysis are used for the market movements forecasting fundamental and technical the chart study of past behavior of commodity prices . The fundamental one focuses on the theoretical models of exchange rate determination and on the major economic factors and their likelihood of affecting the foreign exchange rates. . Economic Fundamentals Theories of Exchange Rate Determination Fundamentals may be classified into economic factors financial factors political factors and crises. Economic factors differ from the other three factors in terms of the certainty of their release. The dates and times of economic data release are known well in advance at least among the industrialized nations. Below are given briefly several known theories of exchange rate determination. Purchasing Power Parity Purchasing power parity states that the price of a good in one country should equal the price of the same good in another country exchanged at the current rate the law of one price. There are two versions of the purchasing power parity theory the absolute version and the relative version. Under the absolute version the exchange rate simply equals the ratio of the two countries general price levels which is the weighted average of all goods produced in a country. However this version works only if it is possible to find two countries which produce or consume the same goods. Moreover the absolute version assumes that transportation costs and trade barriers are insignificant. In reality transportation costs are significant and dissimilar around the world. Trade barriers are still alive and well sometimes obvious and sometimes hidden and they influence costs and goods distribution. Finally this version disregards the importance of brand names. For example cars are chosen not only based on the best price for the same type of car but also on the basis of the name You are what you drive . FOREX. On-line Manual For Successful Trading 32 The PPP .
