Do you know that there is one thing that you could use in fundamental analysis beside of observing the conventional data releases? It was the value of Credit Default Swap.
There are so many economic indicators that you might have been confused on how to do fundamental analysis on all of them. But, do you know that there is one thing that you could use in fundamental analysis beside of observing the conventional data releases? It was the value of Credit Default Swap.
Credit Default Swap (CDS) is a modern day financial invention and the current most widely used credit derivative. After its appearance in financial world, the value of CDS became one of the most sought after fundamental indicators by big investors and fund managers. This situation turned sovereign CDS, that is CDS of a certain country, into the most accurate reference in predicting its currency movement, either in medium or long-term. How can it be? Let's see to the review below.
The definition of Credit Default Swap is the sale and purchase of agreement where the seller guarantees the buyers that the issued loan funds definitely will be paid. For your convenience, I am going to draw the scheme of Credit Default Swap as follows:
CDS generally could be issued by Banks, financial institutions, and even a country (sovereign CDS). The value of CDS we are going to use as tool for fundamental analysis is based on the sovereign CDS. The current value of sovereign CDS can be used to predict the direction of currency movement of a country in the future. The higher the CDS of a country, the higher the risks of those countries. European crisis that was happened in Eurozone worries investors and market analysts. It means, the crisis influenced the value of CDS. Therefore the risk of bankruptcy will become higher. It is due to the lack of investor's confidence in the value of those countries' currencies.
These are the condition of CDS I had from Eurozone countries and some other countries in another region in 2012:
In the picture above, we could see 5 years CDS from Portugal, Greece, Italy, and Spain experienced sharp increases in February 2012. It showed that in medium to long-term, the crisis in Europe was still going to be main news and could possibly crush Euro. We can see now that the crisis is still affecting Eurozone economic recovery, and consequently, the Euro.
25 years CDS found in Middle East Country like Bahrain, Saudi Arabia, Morocco, and Turkey also showed uptrend. It spelled that the tension between Iran and US about nuclear weapons in the Middle East zone and various other issues are still going to be a concern in the foreseeable future. It supported the price of crude oil in the middle of weakening demand at that time as the effect of global crisis.
By looking at the value of sovereign CDS of a country, I can conclude that CDS is the most accurate fundamental indicator in forex market. The two CDS charts above gave us the big picture from various fundamental analysis and made it possible to see the future of currencies in the market clearly. The market were described without getting contaminated by daily news and rumors that frequently blurs the real market condition.