Chapter 6 – Fundamental News 101 (Part I)

Scheduled economic news releases can generally be classified into 4 different categories.

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  1. Inflation
  2. Economy
  3. Infrastructure
  4. Others

As stated earlier in this course, you don’t need to be an economist or have a degree in economics in order to trade the news, all you need to know are what news releases are tradable and what to do during the release times. Is like a little story that I have heard: A business owner purchased a new commercial machine for his business. One day the machine broke down, and he had to call in a specialist. The specialist showed up and took out a hammer, hit the machine once in the back, and like a miracle, the machine started running again. Happiness soon faded as the specialist handed over his bill. The owner was shocked and protest at the $500 bill, he said “You only spent less than 1 minute and you only used a hammer”, the specialist answered: “Well sir, you are not getting charged for the 1 minute of my time, that’s on the house… nor that tap with the hammer, that’s also on the house… I am only billing you for knowing where to tap and how hard…”

That’s exactly what I am going to show you at the end of this section. You may find the following a little boring, but please bear with me and try to use it as references in the future. I strongly suggest that you memorize the reports and their relationships into memory, because if you do, you’ll start to see market setups beyond just news trading, you’ll become aware of market sentiment, and eventually be able to take advantage of it.

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It’s all about the Interest rate!

 

This is probably the most important tip in this section! All major currencies’ Interest rates are controlled by the government or an independent organization that answers to the government. The mandate of the government is to maintain and control inflation. If Inflation is high, interest rate will be raised to slow down the economy. Higher rates mean higher cost to borrow money, higher cost on the monthly credit card bills, higher cost to buy a home, etc… The economy will slow down, growth will be controlled, and thus inflation will be controlled. If inflation is low, the opposite is done, rates are lowered, borrowing will be encouraged, economy will be stimulated, therefore inflation will be higher.

Every government’s mandate on controlling inflation is to have what we called “Low Stable Inflation”, also known as “Price Stability” by some other central banks. A low stable inflation of 2~3 percent per year is the ideal inflation result that most major central banks want.

Another important concept to understand is that currencies are assets and their returns are earned in the form of interest rate. By increasing the interest rate, the values of the currencies also increase.

HIGHER INTEREST RATE = HIGHER INFLATION = HIGHER CURRENCY VALUE
         
    OR    
         
LOWER INTEREST RATE = LOWER INFLATION = LOWER CURRENCY VALUE

 

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About Kelvin Ching

I'm a professional Forex trader and I have been trading for over 7 years. I was a series 3 broker and a registered CTA with the NFA, the main regulatory agency in the United States, and I have been involved at the highest levels in commodity trading. I also have a background in Information Technology, graphics design, and programming... I'm the co-founder of CurrencyNewsTrading.com, a site dedicated to fundamental analysis and news trading.

Comments

  1. uwah prince ozioma says:

    will love to get more understanding on what mr wayne is saying, that’s exactly my question.thanks

  2. mr wayne says:

    if we have a better economy, we will have a higher inflation, a higher interest rate will follow, and higher currency value will be perceived.

    I dont understand this part , don’t we have bad economy is we got high inflation ??

    Also , if there is high inflation , meaning the value of the money in that country is depreciating , in order to bring the balance back , why would the interest rate be increase ? If interest rate increased means is more expensive to borrow money from the bank .

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