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Analyze A Currency’s Bias – Sentiment Or Macro-fundamental
So, we have just a quick question here from Byron asking us how can we calculate a currency strength or weakness? What data do we look at? So first of all, thanks for the question Byron.
In answering this question, we need to differentiate between two different types of strengths and weakness. We have short-term sentiment and then also we have macro fundamentals.
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Now for example, a currency might be deemed as strong or weak based on its macro fundamental picture or macro fundamental bias, which will include things like the current outlook for its central bank. So, whether the central bank is in a cutting cycle or hiking cycle or neutral. So, basically where interest rates are now and where they are expected to go in the next three to 12 months.
Then we also need to consider things like where the markets are expecting the next move from a central bank to be a hike, a cut or a hold, whether the economic data, the bigger hard data such as inflation, GDP and employment, what that is saying about the economy, the overall health of the economy, is the economy contracting or expanding? Is it in a recession? Is it going through a rough patch? Is it basically growing as to expectations, etc.
Then we also need to consider things like fiscal policy, can also be a big consideration. Now these are all elements that can affect the macro fundamental bias for a currency.
Now then we can turn to these short-term sentiment. Now it’s important to keep in mind that the short-term sentiment can often and do often go against the overall macro fundamental bias. For example, we might be very bearish from a macro fundamental point of view on a currency, but the short term catalyst might mean that it can have a short-term bullish bias.
Now, some of the elements that can affect the short-term sentiment include some of the things from the fundamental picture. Again, central banks, if the short-term bias for a central bank changes, basically let’s say they have comments that goes against their current overall bias or let’s say they are dovish but they say something hawkish that can have a short term impact economic data, and that prints with unexpected and significant deviations is another one.
Now, this is not only focused on the more hard backward-looking data like GDP and employment, et cetera, but it can also be more of these shorter forward-looking sentiment based indicators like the PMIs, consumer and business confidence, et cetera. They might also have short-term geopolitical factors that changes sentiments, so some issues between certain countries in terms of politics can also have an impact.
Then we might also have natural disasters that can or might affect the short-term sentiment but might not be enough to change the overall bigger picture. Then we also have sudden changes in other asset classes, right? Like big jumps in equities or commodities or maybe even the bond market can also affect that short-term sentiment.
Now, these are just a few of the things that can affect the short-term sentiment as well as the fundamental picture. But the good news is that we have basically done all of the heavy lifting for you already when it comes to these two different types of analysis both in our analysis and commentary that we have in the platform. For example, from a more macro fundamental point of view, some of the reports that you can use in the currency research section is the fundamental drivers report.
Then from the more shorter-term, the more sentiment based approach, you can look at the dominant currency sentiment reports that we also have in the market insight stab every day. You can also again look at the tradable sentiment shifts reports also in the market insight stab everyday day, basically gives you the potential next big shifts that can move the market to look out for.
Then you also have the video commentary that basically also gives you a rundown of the events as it happens through the day. A lot more shorter-term view in terms of the current sentiment drivers. So, that is just a few of the reports that our analysis and commentary cover with regards to the fundamentals and the short-term sentiment.
So, I hope that helps you out Byron? If there’s any other questions, please make sure to let us know.