The political and economic situation of nations influences market players’ purchase or sale of a currency, thus affecting its demand and supply. The ideal situation is to buy the currency which country’s fundamentals are strong. Applying this knowledge to currency pairs (ex. GBPJPY), one would buy a pair which base currency (GBP) has stronger fundamentals than the quote currency (JPY). Studying fundamental data on a weekly basis allows for reassessment of a currency pair in which there is desire to trade.
Economic calendars provide the fundamental data required to assess the fundamental data required to assess the fundamental strength of currencies in a currency pair. This data is used to determine the Currency Strength or Weakness ratio (CSOWR, pronounce ‘sour”). In short, the CSOWR is used to determine a currency’s strength or weakness.
Key reports used to input data into the CSOWR are:
- Central bank interest rate
- Gross Domestic Product (GDP)
- Consumer Price Index (CPI) (and inflation indicator)
- Retail sails
- Trade balance
These six fundamental reports reflect positive and negative measures of a nation’s economy. Any rise in the CSOWR factors indicate strength in the country’s currency. For example, a drop in unemployment could be favourable for a country’s currency; however, it could also reflect weakness in the CSOWR. Trade balance increases could be good news because it reflects a lower deficit; however, this does not necessarily reflect strength in a consumer driven economy if lowered retail sales present, especially with reduced imports.
The CSOWR data could be entered into a spreadsheet and averaged. Although the CSOWR calculationis not an exact science. it is, however, a cheap way of determining the fundamental strength or weakness of a currency pair.
A predictive CSOWR is calculated using forecast (expected) values for each fundamental data factor. The CSOWR should be used to position a trader on the side of fundamental strength or weakness, depending on the trader’s intention to enter a long or short position on a particular currency pair. Keep in mind that the CSOWR in and of itself is not a reason to trade, as price action (dictated by supply and demand) around key support and resistance levels are used to determine specific entry prices of a trade.
(Refer to Making Money In Forex by Ryan O’Keefe for more detailed explanation of CSOWR)