Fundamental news or what is often called news is a report on economic data or policy announcements by certain authorities from a country. These data are generally indicators used by experts in assessing the condition of an economy. So that it is often the concern of investors and parties affected by economic conditions or policies issued by the government of a country.
In forex trading, news is known for its immediate impact on the forex market. Usually the market becomes very volatile right after the news is released. As a result, price movements have a wide range of movements, many times wider than the average movement of a currency pair in one day.
Therefore, many traders are deliberately waiting for news to be released in search of instant big profits. Even though the potential for profit is included in a high-risk market situation. Even before the news release, it is not uncommon for the market to experience a decrease in liquidity due to the departure of the majority of institutional market players from the market. So prices tend not to move because the level of supply and demand in the market is very low.
The Impact of Fundamental News on the Forex Market
Price movements in the forex market are caused by demand and supply in the forex market. When the price goes up, it means that the quantity demanded for a currency is higher than for another currency. Meanwhile, when the price falls, it means that the supply level of a currency is higher than other currencies.
Demand and supply in the forex market come from buying or selling transactions made by foreign exchange market participants. These market participants consist of several entities, such as:
* Bank
* Hedge funds
* Importer and exporter
* Retail market players
Transactions conducted by the four entities consist of three types of transactions, namely:
1.Exchanges
Exchange transactions are exchange transactions between foreign currencies and domestic currency for the purpose of using that currency. For example, foreign tourists going to Indonesia, to be able to shop, they need domestic currency. Therefore exchange transactions are carried out.
Exchange transactions generally occur in international trade, such as exports and imports. And it can also happen to local people who work abroad, so that they regularly send part of their income to their families here. For that reason in Indonesia, TKI or people who work abroad are referred to as foreign exchange heroes.
In addition, exchanges are also usually carried out by foreign investors. Both stock market investors and other investments.
Foreign investors who are interested in investing in a country will practically exchange their money into domestic currency, so that it can be used to invest in assets or projects that are considered profitable. This exchange process, from foreign currency to domestic currency, will increase demand for domestic currency, so that the exchange rate of domestic currency against foreign currency strengthens.
2. Hedging
Hedging transactions are carried out as risk management to minimize losses due to currency market fluctuations. The mechanism is not much different from an exchange, it’s just that the purpose of hedging is to keep business profits from being eroded by adverse currency fluctuations.
For example, a businessman exports rambutan abroad worth IDR 150 million. The exchange rate for the rupiah to the US dollar at that time was IDR 15,000 per US dollar. So the exporter will receive $10,000 in cash.
So, to avoid a situation where the rupiah strengthens against the dollar, businesses hedge by making hedging contracts of the same value. So that even if there is a change in the rupiah exchange rate to the dollar, the profits received by businesses will not decrease.
3. Trading
Trading is a foreign currency exchange transaction with the aim of gaining profit from the difference between the buying price and the selling price. For example, a trader buys 1USD when the exchange rate is still IDR 14,000 per USD. When the price of 1 USD rises to IDR 15,000 per USD, the trader sells it, so the trader receives a profit of IDR 1000.
Trading transactions are usually carried out by institutions such as hedge funds or other parties who seek profit by speculating on foreign currency movements. The most famous example of a trader is George Soros who once brought down the Bank of England by selling massive shorts on GBP.
Fundamental News As Economic Indicators
The role of fundamental news in moving the market is as an indicator that shows the state of the economy of a country. If fundamental news shows negative indications, market participants will rush to sell short in one currency and switch to buying another currency.
The sell short action can be in the form of trading transactions or exchange transactions. Trading transactions are carried out by traders, including large institutions such as hedge funds and banks. While exchange transactions are usually carried out by investors, both retail and institutional.
And conversely, when fundamental news shows a positive signal, market participants will flock to buy a country’s currency, either for trading or investment purposes.
An example that has recently occurred is the Fed raising interest rates causing money to flow from other countries to the United States. The movement of money flows shows that there are many traders and investors who choose to buy US dollars because they are considered to be profitable. Traders are buying the US dollar because the US dollar is expected to strengthen. Meanwhile, investors buy US dollars because investment in the US provides greater profits following the increase in the benchmark interest rate by the Fed.
Conclusion
So, the relationship between fundamental news and the forex market is that fundamental news is an indicator to assess the state of a country’s economy. Indicators that show positive signals will usually trigger market participants to buy a currency, causing the price to rise significantly. And conversely, indicators that show negative signals will trigger market participants to sell a currency, so that its value drops significantly.
