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What is fundamental analysis and how to work it out

Fundamental analysis is based on usage of theoretical model of currency price forming and learning the basic economical and other factors influencing on the exchange rates of foreign currency.

Theories of currency price forming

In fundamental analysis all methods are classified as learning of the economical, financial and political factors and crisis. Economical factors differ by the other 3 with the regulation of showing of their characteristics. The day and the time of publishing of the economical database are well known earlier in the economical developed countries.

Parity of the purchasing power

The parity of the purchasing power (PPP) is concluded in this the price of goods in one country must be equal to the price of similar goods in another country counted according to the rate of the currency or law for unified price. Two versions for the theory of PPP are known – absolute and relative. According to the absolute version the ex-change rate is just a proportion of the general level of the prices in two countries which is the average weighted value from the prices of all goods made in the country. This version is only used in case of opportunity 2 countries producing and using same goods. Apart from that in absolute version transport expenses and expenses for getting over the trade barriers are not reported. The transport expenses are really big and different in different countries.
Trade barriers still exist and sometimes are obvious, sometimes hidden and influence on the self value and spreading the goods. In the end in this version the importance of the trade marks is not reported.

Relative version of PPP

fundamental analysisAccording to the relative version of PPP changing of the exchange rate in percents during a base period must be equal to the difference between changing in percents of the level of prices in the country and abroad. But relative version of PPP has some problems like the complex or the difference in choosing the base period such as in absolute version. Real and hard for solving is the problem with the trade restricts – averaging the prices when deciphering their indexes and having different goods in the indexes makes hard their comparing and in long-termed perspective the proportion of the inner prices of some country can change making diversion of the exchange rate from the one that is chosen by the inner PPP. At the end the exchange rate of MAC changes independently from the proportion of the inner and outer prices, being confirmation of the influence of the financial conditions and other factors that cannot be said for the stock market.

Theory of the elasticity

The theory of the elasticity says that the exchange rate is such price of currency which holds equilibrium of the payable balance. For example if the import of country A is big the trade balance is low. Rising of the exchange rate makes stature of the export of the country and the connected earnings. If the stature of the inner earnings in country A makes stature of the inner consumption like local produced goods and imported goods and high demand of currency lowing down the foreign earnings in country B follows drop of the consumption in country B of goods that are local and import and lows the demand of national currency.
The theory of the elasticity is not perfect as long as for a small period of time the exchange rate is less elastic than longer period of time also extra factors that influence on the justice of this theory show up all the time.

Modern monetary theories of the volatility of the exchange rate

Modern financial theories of the volatility of the short-termed exchange rate report the role of the short-termed market of the capital and the long-termed influence on the exchange rate. According to these theories the difference between the exchange rate and PPP is determined of the demand and supply of capitals on the level of the international financial consistency.
One of the modern financial theories says that the volatility of the exchange rate is made by the concurrent rising of the supply of national currency as long as this points expectation of future stature of the money.
The theory PPP spreads by this way on the capital market. If in 2 countries the value of the currency which rate changes from the demand of money is set by the level of the inner earnings and the size of the interest percent when rising the earning rises the making of deals in the same time while the high interest percent rises the alternative expense of heaping of money lowing down their demand.
According to the second version the exchange rate instantly adapt for keeping of permanent parity of the currency prices although only in long-termed perspective it is mastered by PPP. The volatility spring up because the stock market adapt slower to this than the financial market. This version is known as the dynamic monetary approach. Other modern theory that matters is – Theory for the balance of the wallets this theory says that the demand of currency determine by the demand of financial resources than the currency as currency.

Synthesis of the traditional and modern monetary theories

To adapt the theories to the real market there are more serious conditions for synthesis of traditional and modern theories.
Short-termed reflux of capital made by financial problems makes break of the payment balance making need of correction of the exchange rate for restoring of the pay balance. Speculation striving, instability of the stock market and the presence of short-timed movements of the capital make volatility of the rate. Steppe of changing of the exchange rate is function of the elasticity of the user demand. As long as the financial markets are more adaptable than the stock ones, the rate value of the currency is subject of the influence of the short-timed changes of the stock markets.