Forex Trading Fundamental Analysis 3

Question 1

What does Purchasing Power Parity (PPP) theory predict about long-term exchange rates?

Accepted Answer

Exchange rates adjust so that identical goods cost the same in different countries when priced in a common currency

Answer

Higher-yielding currencies always appreciate over time relative to lower-yielding ones

Answer

Central banks should maintain equal purchasing power for all citizens regardless of exchange rates

Answer

Trade balances are the sole determinant of long-term exchange rate movements

Question 2

What is the 'carry trade' strategy used by forex traders based on fundamental analysis?

Accepted Answer

Borrowing in a low-interest-rate currency to invest in a high-interest-rate currency

Answer

Buying a currency whenever its country reports stronger-than-expected GDP growth

Answer

Selling currencies of countries with above-average inflation rates

Answer

Trading based on the difference between a country's monthly import and export figures

Question 3

How does significant political instability in a country typically affect its currency in the forex market?

Accepted Answer

The currency weakens as uncertainty reduces foreign investor confidence and capital inflows

Answer

The currency strengthens as investors see opportunities in undervalued domestic assets

Answer

The currency is unaffected because forex markets focus exclusively on economic data

Answer

The currency strengthens because the government will increase spending to stabilize the situation

Question 4

Which group of currencies are traditionally classified as 'safe havens' that attract capital during global uncertainty?

Accepted Answer

USD, JPY, and CHF

Answer

EUR, GBP, and AUD

Answer

CAD, NZD, and NOK

Answer

MXN, ZAR, and TRY

Question 5

What does a consistently widening trade deficit typically signal for a country's currency over time?

Accepted Answer

Weakening currency as more of it must be sold to purchase excess imports from abroad

Answer

Strengthening currency because rising imports demonstrate strong consumer demand and economic growth

Answer

No meaningful impact because trade data is a lagging indicator ignored by currency markets

Answer

Strengthening currency because it indicates strong domestic purchasing power relative to foreigners

Question 6

What is the 'Big Mac Index' and how is it used in forex fundamental analysis?

Accepted Answer

A practical gauge of purchasing power parity that compares McDonald's burger prices across countries

Answer

A measure of inflation specifically within the fast food and consumer staples industry

Answer

A tool for tracking the impact of food commodity prices on consumer spending and CPI

Answer

An index tracking McDonald's stock price relative to currency pair movements globally

Question 7

How do sovereign credit rating downgrades by agencies like Moody's or S&P typically affect a country's currency?

Accepted Answer

The currency weakens as the downgrade signals increased investment risk and deters capital inflows

Answer

The currency strengthens as investors expect the government to implement economic reforms

Answer

The currency is unaffected because rating changes only influence the bond market

Answer

The currency strengthens because the government will be forced to raise interest rates to attract lenders