If you are not following the fundamentals and trading solely on the technicals than you should read this post in which I explain in detail how the fundamentals override the technicals in the market all the time. Over the years this is what I learned. Fundamentals are more important when it comes to trading. Even if you have a perfect trade setup and all the technicals are looking perfect you might get a surprise when the market disregards the technical setup and does the exact opposite. Take a look at the following GBP/USD H4 chart.

GBP/USD H4

A bearish divergence has formed, this the day before the Scottish Independence Vote. The market is expecting a Yes vote so GBP/USD is showing a bearish mood. GBP/USD falls around 100 pips in 24 hours. Now look at the chart just above the red arrow pointing up. This is day of the Scottish Independence Vote. GBP/USD has stopped moving down. Why? The recent surveys show that the vote will be NO. So GBP/USD is showing a bullish mood now. It just disregards the bearish divergence and starts moving up almost 300 pips.

Now take a look at the red arrow pointing down. This is the day when the Scottish Independence Vote results get announced. GBP/USD once again becomes bearish. Why?  There is uncertainty in the market now. Scottish Independence Vote is over but there is uncertainity in the market over the coming constitutional changes. This is bad news for GBP/USD and could limit foreign investment in the country until these massive devolution plans for the UK are hammered out. So you can see clearly how the fundamentals have been over riding the technicals over the course of 3 days and moving the market up and down.

When you trade always make sure you keep an eye on the fundamentals and only take the technical signal when it correlates with the under lying fundamentals. When the under lying fundamentals say that the market is going to go down but the technical setup is giving you a bullish signal, take a pause and think hard before you take the signal.

Now this should be something very interesting for you. Milk prices in the global market fell down. New Zealand is the major supplier of dairy products in the global dairy market. Market analysts started predicting a downtrend for NZD/USD. Now this analysis was published on the Wall Street Journal In April:

The fall in milk prices is a potential catalyst for a fall in the New Zealand dollar over the next few quarters, Mr. Poore said. Two weeks ago his fund sold kiwis, declaring the currency “very stretched,” and weaker dairy prices as a factor that could drive it lower.

But for four months dairy prices fell and the kiwi didn’t. The currency had been up 5.5% for the year before Thursday’s auction. It is down 1.3% since.

“It takes a bit of time for everyone to get on to a story,” said Geoff Kendrick, head of Asia currencies and rates at Morgan Stanley in Hong Kong. The relationship between dairy prices and the currency, he said, is “direct when it matters, when you get a few bad things in a row, then [everyone realizes] it matters.”

Andrew Robb, Australia’s trade minister, said in an interview with The Wall Street Journal last week that with the New Zealand dollar at near-parity with the Australian dollar, its economy is starting to fell “some of the exchange-rate pressures” that have squeezed Australia….

Now take a look at the following NZD/USD daily chart. It took sometime for the pressure to built on NZD as predicted by the Wall Street Journal. The downtrend started in July and it continues till now.

NZD/USD

NZD/USD has fallen by more than 700 pips in 2 months. So you can see it can take sometime for the fundamentals to change the market.In GBP/USD case the fundamentals acted suddenly. However you should keep this in mind Scottish Independence Vote is not something that happens every month. It happens in many many decades. In the case of NZD/USD, we faced a lag. This lag is normal in all economies. Whenever the central bank changes the interest rate or makes changes to the monetary policy, it can take 6-12 months for the change to trickle down the economy. This time lag has been reported by the FED. In case of other economies it can be different. In the case of New Zealand, the global daily prices took sometime to put pressure on NZD. Why? Dairy orders had been made months back at old prices. When the dairy prices fell down, new orders were placed at those prices and those orders were to be delivered a few weeks to a few months later. What this means is that a few months of lag was there before new dairy orders were placed with lower prices. So it took a few months for the pressure to build up on the New Zealand Trade Balance and when enough pressure was build up, NZD fell down.

Now let’s take the case of USD/JPY. Starting from January till July 2014, USD/JPY just kept on ranging between 101 and 104 level. In July 2014,  the Japanese economic figures were poor indicating a poor economy. Japanese government applied a Keynesian stimulus that didn’t work to resolve the issue of stagflation in the economy. On the other hand, US economic figures started reported a strong economic recovery. So we have a strong currency/weaker currency. This started a strong uptrend in USD/JPY which continues and can continue till the end of this year as long as the fundamentals support it. USD/JPY has risen more than 700 pips in 2 months.

USD/JPY

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