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Key Takeaways
- Beyond NFP: Basic fundamentals watch the calendar. Advanced fundamentals watch the Bond Market and Trade Flows.
- Bond Yields: The "Smart Money" lives in bonds. If 10-Year Yields rise, the currency usually strengthens.
- Terms of Trade: The ratio of Export Prices to Import Prices. A rising ratio boosts the currency.
- PPP: Purchasing Power Parity explains long-term valuation. Is the Big Mac cheaper in Tokyo or New York?
- COT Report: The "Commitment of Traders" report shows exactly how heavily the Hedge Funds are positioned Long or Short.
Table of Contents
The True Drivers of Price
Retail traders look at Head-and-Shoulders patterns. Hedge Funds look at macroeconomic models. If you want to trade like a bank, you must understand what drives capital flows: Yield and Growth.
Bond Yields & Spreads
The bond market is 100x larger than the stock market. It tells the truth.
The Rule:
Currency follows Yield. If US 10-Year Yields are 4% and German 10-Year Yields are 2%, capital flows into the US Dollar.
The Spread: Don't just watch the US yield. Watch the Spread (Difference) between US and German yields. If the spread WIDENS (US yield goes up faster than German), EUR/USD falls.
Macro Models (PPP & ToT)
1. Purchasing Power Parity (PPP)
The "Big Mac Index". Over the long term (5-10 years), exchange rates should adjust so that a basket of goods costs the same in both countries.
If a Big Mac is $5.00 in the US and £3.00 in the UK, and the rate is 1.50, the real cost is $4.50 in UK. The Pound is "Undervalued".
2. Terms of Trade (ToT)
Export Price Index / Import Price Index.
If Australia sells Iron Ore (Export) and prices double, Australia gets richer. The AUD strengthens. This is why AUD is correlated with Commodity prices.
The COT Report
Released every Friday by the CFTC. It reveals the positions of:
- Commercials: Big companies hedging (e.g., Samsung selling USD). They are often "counter-trend".
- Non-Commercials: Hedge Funds and Speculators. They are "trend followers".
- Strategy: If Non-Commercials are at an extreme net long historical high, a reversal is imminent (Crowded Trade).
Intermarket Correlations
| If This Rises... | Then This Usually... | Why? |
|---|---|---|
| Gold | AUD & NZD Rise | These countries export gold/minerals. |
| Oil | CAD Rises, JPY Falls | Canada exports oil. Japan imports 99% of its oil. |
| S&P 500 (Risk On) | USD & JPY Fall | Safe haven currencies are sold to buy stocks. |
Frequently Asked Questions
Do I need to be an economist?
No, but you need to think like one. Understanding why price is moving gives you confidence to hold trades longer than technical traders.
Where can I see Bond Yields?
TradingView or CNBC. Search for "US10Y" (US 10 Year) or "DE10Y" (German 10 Year).
Is the COT report real-time?
No, it is delayed by 3 days (released Friday, data from Tuesday). However, institutional positions take weeks to build, so the trend is still valid.
Does this work for scalping?
No. Fundamentals drive the long term trend. They are useless for a 1-minute chart trade.
