Forex Trading Basic

Fundamental Analysis on Government Factors

Emotional Weakness of Forex traders

Fundamental Analysis on Government Factors: Most people are not known of how the rising levels of government debt result in currency debasement. If the country has been a long time in a bad balance of trade, and its government continues to stack on the debt, the currency falls as a result. Both the sides of the currencies we trade have governments buried in debts that are more than 70% of Gross Domestic Product:

Fundamental Analysis on Government Factors:

Most people are not known of how the rising levels of government debt result in currency debasement. If the country has been a long time in a bad balance of trade, and its government continues to stack on the debt, the currency falls as a result. Both the sides of the currencies we trade have governments buried in debts that are more than 70% of Gross Domestic Product:

Fundamental Analysis on Government Factors

Government debt as a percentage of GDP which is also known as debt-to-GDP ratio, is the amount of national debt a country has in percentage of its GDP. The higher the debt-to- Gross Domestic Product ratio, the less likely the country will pay its debt back and more likely the country is to default on its debt commitment. The highest gross Government debt as a percentage of Gross Domestic Products among countries which were tracked was recorded in Japan but the currency weaked the effect of their enormous debt has not been felt as much because they enjoy to have large trade surplus. This is also for most other countries with large trade deficits and huge debt to GDP ratios. We find about the sovereign debt issues of the EU, and it describes the fact of their problems that their countries have enormous debt to GDP ratios: Greece (143%), Italy (119%), Ireland (96%), Portugal (93%). Their Gross Domestic Products cannot keep pace with their mounting debts. Most other big economy based countries are not far behind. The United Kingdom, France, Germany, and Canada, all have debt levels between 80 to 90% of Gross Domestic Products. United States has a whopping of 93% Gross Domestic Products , similar in percentage to that with Portugal and Ireland. But amounts in dollar is absolutely staggering, coming in at $15.5 trillion and growing by a pace of $1.5 trillion per year. Only two countries of the Forex Majors not plagued by a high debt they are Switzerland (55%) and Australia (22%)

In a article of Nick Barisheff we can observes how US government debt and the price of gold are now moving in lockstep

Fundamental Analysis on Government Factors

I agree with him that as  America’s debt is projected to reach $23 trillion in 2015 the price would be $2,600 per ounce if correlation remains the same. I also agrees that most of the Western economies have reached unsustainable levels of debt, and their own poor debt records have been debasing their own currencies relative to gold.
Fundamental Analysis on Government Factors

Nick describes the four possibilities of reducing the government debt: 1) grow out of it through increased productivity and exports 2) introduce strict austerity measures to reduce spending, which has the unwanted short-term side effect of increasing unemployment and reducing GDP, resulting in even higher deficits; 3) default on the debt, which will make it difficult to raise future bond issues; and 4) issue even more debt and have the central bank create whatever amount of currency is needed. In his article he thinks that most politicians will opt for four, since few have the will to choose austerity, cutbacks and full economic accountability over simply creating more currency.

Economic Events: Fundamental Analysis on Government Factors

Government Budget Balance:

  • Impact: Low-Medium
  • Countries: US, Canada, Spain, France
  • Frequency: Monthly

Budget Balance measures the difference between the federal government’s income and the expenditure during the reported month. A positive number describes budget surplus, a negative number describes the deficit. This figure shouldn’t  be get confused with the year end fiscal deficit, which can be huge, or with the National debt. This results to an accumulated deficit across a number of years and can be mind-blowing enormous. For example, the monthly deficit for the US is around 100 billion and yearly deficit is now 1.5 trillion, while the US National Debt is 15.5 trillion and its growing by millions every minute that I write this. Few economies today gave a budget surplus, either monthly or yearly while most move into consistent and deeper budget deficits.

For traders, the rule of thumb is given below:

Difference in Forecast and Actual: Budget BalanceCurrency EffectReason
Positive number Strengthens CurrencyRepresents a budget surplus. If country has a high debt to GDP ratio, a positive number can encourage to investors in the currency.
Negative number  Weakens CurrencyRepresents a budget deficit. If country has a high debt to GDP ratio, a negative number can be discouraging to investors in the currency.

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Please note that: gaining profit from fundamental analysis largely depends on your brokers MT4 platform functions. If your broker is vulnerable to high slippage problem during the time of news release, you are not going to get expected result from trading. So, while Choosing Forex broker, we would like to recommend you to start trading with a broker that has slippage guard. We recommend you to trade with HYCM Broker to get the best possible outcome of forex trading fundamental analysis. Read review of HYCM Broker to learn more on this

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Chapter 6

Forex Trading Fundamental Analysis

Lesson 1.Forex Trading Fundamental analysis
Lesson 2Forex Trading Fundamental analysis
Lesson 3Fundamental Analysis of Interest Rates
Lesson 4Fundamental Analysis of Inflation Rates
Lesson 5Fundamental Analysis on Balance of Trade
Lesson 6Fundamental Analysis on Government Factors
Lesson 7Fundamental Analysis: Employment / Unemployment
Lesson 8Fundamental Analysis on GDP
Lesson 9Fundamental Analysis on Geopolitical Risks

Go back to Main Page: Forex Trading for Beginners

About the author

Syed Nazim

Syed Nazim is the Marketing Manager of RedMaroon, a Digital Marketing Agency for Financial Institutions. He is also involved with Forexing24.com as a writer and financial Analyst. He is a brilliant marketing geek with vast experience in every sector of Digital Marketing. He likes sharing strategies, tactics and proven methods to help you build a business and live the life of your dreams.

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