Fundamental analysis and technical analysis in trading in the foreign exchange market and conditions applicable to Vietnam

Foreword

1. Urgency of the topic

Fundamental analysis and technical analysis are two popular analysis methods in business in many financial markets such as the stock market, the gold market and the foreign exchange market. With their advantages, these two methods complement each other, helping investors effectively invest and bring maximum profits. However, the application of these two methods in analyzing exchange rate fluctuations in the Vietnamese interbank foreign exchange market still has many limitations because the exchange rate regime of VND and USD - the currencies that account for the largest proportion in international trade transactions in Vietnam, has not been completely floated, the legal system and information have not been fully established... These problems have caused the Vietnamese foreign exchange market to lag far behind the foreign exchange market in developed countries and have not been able to properly perform its basic function, which is to regulate the supply and demand of foreign currency in the economy. Therefore, a problem arises that it is necessary to seriously study the fundamental analysis and technical analysis methods in trading in the foreign exchange market and the conditions for these two methods to promote their advantages in the Vietnamese foreign exchange market. Based on that practical requirement, the author has chosen the topic "fundamental analysis and technical analysis in trading in the foreign exchange market and conditions for application in Vietnam" as the topic of the thesis.

2. Research purpose and tasks

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Purpose:

- Study the system of theoretical issues on fundamental analysis and technical analysis

- Apply the theory to analyze the USD/JPY exchange rate in the US foreign exchange market during January 2010.

- Propose conditions for effectively applying the above two analysis methods to the Vietnamese foreign exchange market.

To achieve the above objectives, the thesis has the following specific tasks:

- Analysis of basic economic indicators applied to economic research in fundamental analysis, analysis of tools used in technical analysis commonly used for trading in the foreign exchange market.

- Analyze the application of basic economic indicators and technical tools to analyze fluctuations in the US foreign exchange market for the USD and JPY currency pairs.

- Analyze the characteristics of the Vietnamese foreign exchange market and propose conditions for effective application of the above two methods.

3. Research objects and scope:

- Study the meaning of indicators of fundamental analysis and the effects of tools used in fundamental analysis

- The scope of the thesis is limited to analyzing the fluctuations of USD/JPY exchange rate in January 2010 based on macroeconomic information and technical analysis models.

4. Research method:

Research domestic and foreign documents to analyze and synthesize general economic information of Japan and the United States.

In addition, the thesis also uses other research methods such as: Interpretation and induction methods, statistical and comparative methods to generalize, systematize and confirm research results.

5. Thesis layout

In addition to the introduction, table of contents, and list of references, the thesis content includes 3 chapters:

- Chapter 1: Theoretical basis of fundamental analysis and technical analysis in foreign exchange trading

- Chapter 2: Application of analysis of fluctuations of USD/JPY exchange rate pair in January 2010 in the US market

- Chapter 3: Conditions for effective application of fundamental analysis and technical analysis in foreign exchange trading in Vietnam.

Chapter I: Theoretical basis of fundamental analysis and technical analysis in foreign exchange trading

I. Overview of fundamental analysis

1. General concepts and characteristics of fundamental analysis:

1.1 Concept.

Fundamental analysis is a method of looking at the market through economic, social, and political factors that affect the supply and demand of a particular currency. In other words, we have to evaluate which country's economy is doing well and which economy is declining.

1.2 Characteristics of fundamental analysis.

a, Fundamental analysis focuses on factors affecting currency supply and demand in the market: interest rates, inflation, economic growth, import and export, investment...

When we talk about fundamental analysis, we mean the study of the core factors that influence a country’s economy. It is the prediction of price movements and market trends by analyzing economic indicators, government policies, and other social factors within the scope of a business cycle. Fundamental analysts must study various signals from price movements on charts, regularly released economic information, and daily political and social events that impact the currency market. For example, when we analyze an economist’s forecast of GDP growth or a report on unemployment, we will get a relative view of the health of that economy. These fundamental factors also have regular fluctuations in both the short and long term. When we delve into the complexity and subtleties of fundamental factors, our knowledge and understanding of the global economy will increase significantly.

b, Fundamental analysis is an effective way to predict economic conditions, but the exact value of the market is not a primary task.

The main objective of fundamental analysis is to predict the potential return value of a market to determine whether the market is overvalued or undervalued based on fundamental theories: Interest Rate Parity (IRP) and Purchasing Power Parity (PPP).

1.3 Advantages and disadvantages of fundamental analysis

With the above characteristics, fundamental analysis has shown the biggest advantage of this analysis method is:

- Ability to predict long-term trends

- Grasp the real value of foreign currency.

However, it also has many limitations such as:

- Only effective if the analyst has access to complete information, has good analytical and predictive abilities to act immediately

- Depends on the economic information system of countries

- Only good value is determined but not the right time to buy and sell.

2. Key indicators in fundamental analysis

Any news or event that directly or indirectly affects the economy is considered a fundamental factor. From changes in the economy, interest rate changes, political elections to information about natural disasters, all can have an impact on the economy in the future. Not only does this news vary from country to country, it also varies in importance and timing. Economic information is often scheduled and easily available, especially in industrialized countries.

Unlike economic news, political news can be released at any time and can certainly have a big impact on the forex market, but only in the short term. In the US, elections take place every four years and candidates are announced to the public, which is why the forex market is considered the most stable. In other countries, such as Italy, the government is unstable and parliamentary elections can happen at any time, making it unpredictable.

Financial factors are determined and predicted based on facts. Interest rate cuts by central banks in the US, the European Central Bank and the Bank of Japan are predictable, although the information is kept secret. While interest rate changes are almost impossible to predict, we can know the timing of central bank meetings through the media.

To systematize the indicators commonly used in fundamental analysis, we will study the following main groups of indicators:

2.1 Economic indicators

Economic indicators have so far provided the bulk of information on all the fundamental factors used for analysis in trading in the forex market. Unlike financial, political and crisis factors, economic factors occur regularly and at specific and regular times. It is important for us to understand this economic information and make accurate trading decisions. However, understanding the information is not enough, in order to make a profit we need to make accurate forecasts of the trend.

Normal economic information is published monthly except for some information on gross domestic product, labor price index, etc.

are only announced quarterly and annually. Meanwhile, there is economic information released weekly and usually has a negligible impact on the forex market. All information is announced both last year and this year so that traders can compare and determine the actual state of the economy through that comparison.

Information about what is going to happen or the economic figures of the US are always announced in leading newspapers such as Wall Street, Financial Times and NewYork Times. And some reliable websites such as www.money.cnn.com, www.moneycentral.msn.com/investor/home.asp , www.bloomberg.com or another source of information from the New York Reserve Bank www.ny.frb.org .

2.1.1 Gross national income.

Gross National Income (GNP) is considered the most important economic indicator and many analysts agree that it is the most comprehensive measure of the state of the economy. GNP is the total amount of goods and services produced by the people of a country regardless of whether they live and work in their own country. When a report shows that the real GDP has been adjusted upward, it is a good sign for the economy and creates optimism for the trading market of that country's currency.

2.1.2 Gross domestic income

Gross domestic income - GDP reflects the total amount of goods and services produced in a country including those of people from other countries living and working in that country. It also has the same meaning as GDP, when the total actual output of goods and services produced in a country increases, it is a positive sign for the economy of that country and vice versa.

2.1.3 Consumer spending

Consumption expenditure is often assessed from a psychological perspective, indicating consumer confidence rather than actual consumption. Consumption expenditure is determined by each individual based on their actual income and disposable income to make reasonable spending decisions.

2.1.4 Government public expenditure

Public spending is a very important indicator in which it accounts for a significant proportion and has a great influence on the economy, but it also has an influence on other aspects such as politics and society. Because it is a special form of spending such as military spending, national infrastructure investment spending, etc., it helps reduce unemployment and increase gross domestic product and encourage investment spending.

2.2 Inflation indicators

Inflation is the increase in the general price level and estimating its rate of increase is an important task in macroeconomics. Traders pay attention to inflation because one of the ways to deal with this situation is for the government to increase nominal interest rates, which will lead to changes in the domestic currency price, the value of real interest rates and real gross domestic product, real gross domestic product. These are the most important numbers for money managers and currency traders, allowing them to accurately compare the world price market. Traders often use the following 9 economic indicators:

- Producer Price Index PPI

- Purchasing managers' index (PMI)

- Consumer price index CPI

- Durable goods

- GNP deflator

- GDP deflator