Fundamental analysis Part 2

Hi traders, welcome to the fundamental analysis introduction part 2. Now we’re going to consider in this video, the tools that the central banks have to make sure their control inflation and maintain price stability.

Now the first area they use is interest rates. Now interest rates are used by the bank to control inflation as we discussed in the last video and if inflation is increasing above the central bank’s target rate, they will raise interest rates to control it. That’s the general rule of thumb and this encourages people to start saving and stop spending their money and that reduces the rate, that inflation goes up. An example of a central bank raising its interest rates can be seen in the chart here.

Now this was the Bank of Canada and the Bank of Canada surprised the markets on the 12th of July, in 2017 by raising interest rates. That’s a CAD positive move and the pair booked, the pair on the screen is the US dollar Canadian dollar and it felt very heavily with CAD being bought with a surprise hike and you can see that over the next ten or so trading days, price moved over 300 points with very little retracement. That would have been an excellent scenario to use leverage to maximize your gains, as traders would have had the highest conviction that the trade would move in their direction.

Now returning a back to the next price tool. The next tool, a Central Bank has is that a price control and that’s like when a bank communicates, that it would like to see the currency at a certain price. So another good example of this, is the Euro Swiss Franc, when they had the flow at the 1.20 level and a price dropped towards that flow. Then the euro Swiss franc pair was bought in order to defend the area and that was a great opportunity to buy the Euro Swiss franc between 2012 and 2015.

The next area, the central banks have is that at language, the central bank’s makes statements would be they want, where they want price to be and they can issue threats if price is not where they want to be. They can threaten to interest rates or threatened to start a quantitative easing program. So sometimes a slight shift in emphasis on a central bank statement, a removal or addition of a key phrase is enough to signal. Some of these key shifts in the bank’s central focus the final tool that central bank has to control inflation is quantitative easing and maintain stability rather the QE process that the banks use, is essentially printing money and then putting that money into the nation’s financial system, stimulates growth and investment and it devalues a country’s currency and supports growth as the country’s exports become more competitive. It’s a very effective tool and it’s paid a lot of attention to by the markets.

So when a central bank uses any of these four tools here and we can tune it the opportunity is to make a profit. Banks tend to focus on one or maybe two specific indicators and by following, the central banks over time, you get to see what the bank is focusing on. So fundamental analysis works, it’s trusted and followed by, maybe every single professional trader. So why not make it work for you when the fundamental analysis is combined with technical analysis.

Traders are not only ready to read likely market direction but also identify key places to enter the market, take profit and place their stop-loss losses. That’s the end of this introduction to fundamental analysis part 2.

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