Fundamental analysis or macro trading is a certain type of strategy, usually employed by Hedge Fund managers that look for patterns in the underlying fundamental economic data to try to predict future market trends.
In financial markets, macro analysis deals with understanding the big picture and shaping a world view as to why in certain market environments currencies rise/currencies fall and really what is the catalyst for major long-term trends.
It's Not Just About Currencies
- Interest rates;
- Global Indices;
The first thing fundamental analysis should deal with is: Why currencies rise and fall in the larger trend? Why do we look at things like economic data such as GDP growth, inflation forecast and labor market trends? And why we look at things that shape the economy and shape the central bank’s monetary policies? Answering this question it will shape your bias for a given currency and what that means for essentially deciding if you want to be a buyer or a seller.
The major forces that have been driving currencies over the past several years have been the outlook on interest rates, risk sentiment and the political landscape.
Central Banks & Interest Rates
Since interest rates are one of the most important factors in the fundamental analysis, macro traders put a lot of emphases not where rates are but where are rates going and where do market expect rates to go and how those expectations line up with the reality of where rates go. This is a critical part of the fundamental analysis because where interest rates are at any given moment in time is already reflected in the market.
What the markets care about is not what’s there at the moment, but what they care about is how reality lines up with where they expect things to go. If there is a misalignment there if reality turns out not to reflect what investors expect that’s what moves currencies because investors have to readjust their positions in the market.