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Forex Fundamental Analysis

AUD/CHF Global Macro Analysis

In this analysis, we will look into endogenous economic factors that influence Australia and Switzerland’s growth. We will analyze factors that affect the fluctuation of the exchange rate of the AUD/CHF forex pair.

Ranking Scale

Both the endogenous and exogenous factors are ranked on a sliding scale from -10 to +10. The ranking depends on correlation analysis of the endogenous factors with domestic GDP growth, and exogenous factors with the AUD/CHF exchange rate.

Domestic currency increases in value when the endogenous factor has a positive score and depreciates if it is negative. Similarly, the AUD/CHF exchange rate rises if the exogenous score is positive and drops if negative.

 

Summary – CHF Endogenous Analysis

Indicator Score Total State Comment
Switzerland Unemployed Persons -6 10 153,270 in November 2020 2020 mean is 142,100 above the historic average of 59,003
Switzerland Producer Prices Change -3 10 Decreased by 2.7% in November 2020 Represents the 23rd consecutive month of a price decrease
Switzerland Capacity Utilisation -6 10 78.11% in Q4 2020 Q4 is the lowest recorded in 2020. It’s also lower than the historical average of 80.03%
Switzerland Household Saving Ratio -5 10 Expected to reach 15.4% in 2020 This would be the highest level in Switzerland’s history
Switzerland House Price Index 1 10 172.82 points in Q3 2020 Throughout 2020, the Swiss Residential House Price Index has remained above the historic average of 106.48 points
Switzerland Fiscal Expenditure 3 10 Projected to hit 235 billion CHF in 2020 This would be the highest level in Switzerland’s history. It’s a direct result of the unprecedented expansionary fiscal policy
Switzerland Bankruptcies 1 10 14,800 companies in 2020 Precipitated by the adverse operating and economic conditions due to the coronavirus pandemic
TOTAL SCORE -15
  1. Switzerland Unemployed Persons

In Switzerland, the labour market is made up of Swiss citizens aged 16 to 65 years. The number of unemployed persons includes those who are available for work but could not get employed during the survey period. Note that the number of unemployed persons does not cover those working temporarily and must include those who have made efforts to seek gainful employment within four weeks. This number shows the prevailing economic situation in Switzerland since employment levels correspond to economic growth.

In November 2020, unemployed persons in Switzerland rose to 153,270 from 149,118 in October. In 2020, the mean of the unemployed persons in Switzerland is around 142,100 above the historic average of 59003. It has a score of -6

  1. Switzerland Producer and Import Prices

The Swiss PPI measures the change in the price of goods produced within the country and sold to wholesalers. It also includes the price changes of goods that are imported for resale in Switzerland. The PPI is a leading indicator of inflation in Switzerland since the change in the producer prices is passed to the final consumers of the products.

In November 2020, the YoY Swiss PPI  dropped by 2.7% compared to a 2.9% drop recorded in October. This is the 23rd consecutive drop in the PPI. However, it was the slowest drop since March indicating that domestic demand is picking up. It has a score of -3.

  1. Switzerland Capacity Utilisation

This tracks the percentage change in the ratio of actual industrial production in Switzerland and the maximum potential output. This ratio shows the rate at which the Swiss industries utilise the available resources. Typically, when the capacity utilisation rate increases, the output in the Swiss industrial sector also increases. This corresponds to economic expansion and improved living standards.

In Q4 2020, the Swiss capacity utilisation rose to 78.11% compared to 76.67% in Q3. However, the Q4 ratio is lower than the 81.34% in Q1, 80.03% in Q3, and the historical average of 83.45%. Consequently, it has a score of -6.

  1. Switzerland Household Saving Rate

This is the ratio between the amount that Swiss households save to their disposable income. In an economy, when the savings rate is high, domestic consumption takes a hit. Since a higher household savings rate corresponds to a drop in domestic demand, it leads to a decrease in GDP growth, and vice versa.

In 2020, Switzerland household saving rate is projected to hit 15.4%, which would mark the highest level in Switzerland’s history. It has a score of  -5.

  1. Switzerland Residential House Price Index

This index tracks the change in the quarterly change of the price of single-family homes. Price change in the real estate sector is a leading indicator of overall economic growth. Residential property increases in price due to rising demand, which means there is access to affordable financing or increased disposable income.

In Q3 of 2020, Swiss housing price index increased to 172.82 points from 169.22 points in Q2. Throughout 2020, the Swiss HPI has remained above the historic average of 106.48 points. This shows that domestic residential property did not take a hit as a result of the coronavirus pandemic. It has a score of 1.

  1. Switzerland Fiscal Expenditure

This measures the totality of expenses by the Swiss government. They include expenditure on goods and services, public investment, and transfer payments. Note that fiscal expenditure is a primary method for the government to influence the economic growth rate.

In 2019, the Swiss government’s fiscal expenditure increased to 224.309 billion CHF from 221.715 billion CHF. It is projected to hit an all-time high of 235 billion CHF in 2020 due to unprecedented fiscal expansionary measures to combat the pandemic. It has a score of 3.

  1. Switzerland Bankruptcies

This measures the number of companies operating in Switzerland that are forced to close down due to the inability to service their debt obligations. Typically, the number of bankruptcies increases when the economy is performing poorly.

In 2020, the number of Swiss bankruptcies is projected to reach historic highs of about 14,800. It has a score of 1.

AUD/CHF Exogenous Analysis

  1. Australia and Switzerland Terms of Trade Differential

A country’s terms of trade are derived from dividing the value of its exports with its imports. Thus, a country with a surplus net current account balance has terms of trade above 100%. Conversely, when its balance of payments has a deficit, the terms of trade will be below 100%.

In international trade, the domestic currency appreciates when a country has favourable terms of trade, and depreciate when unfavourable. Thus, when the differential of the terms of trade between Australia and Switzerland is negative, the AUD/CHF pair is expected to be on a downtrend. If the differential is positive, we can expect an uptrend for the AUD/CHF pair.

From January to October 2020, Australia’s average TOT was 97.9% while Switzerland had 121.15%. The differential is -23.25% and has a score of -4.

  1. Annual GDP Growth Rate Differential between Australia and Switzerland

The differential in the annual GDP growth rate is the difference between Australia’s and Swiss annualised GDP growth rate. Naturally, a country with a higher GDP growth rate tends to have a stronger currency than those with a slower GDP growth rate.

When this differential is positive, Australia has a higher annualised GDP rate than Switzerland. Since the AUD will subsequently appreciate more than the CHF, we can expect a bullish trend for the AUD/CHF pair. Conversely, if the Swiss economy has a higher annual GDP growth rate, then the differential will be negative. Consequently, the AUD/CHF pair has a bearish trend.

Australia had an annual GDP growth rate of -8.8% during the first three quarters of 2020, while the Swiss economy has an annual growth rate of -10%. The differential is 1.2%, and it has a score of 2.

  1. The AUD/CHF interest rate differential

In the forex market, the interest rate differential determines the flow of capital between two currencies. For the AUD/CHF pair, the interest rate differential determines if traders and investors will go long or short the pair.

A positive interest rate differential means that Australia has higher interest rates than Switzerland; hence a bullish AUD/CHF pair. Negative differential means Switzerland has a higher interest rate than Australia; hence a bearish AUD/CHF.

In 2020, the Reserve Bank of Australia cut interest rates from 0.75% to 0.1% while the Swiss National Bank maintained interest rate at -0.75%. Therefore, the interest rate differential for the AUD/CHF pair is 0.85%, and it has a score of 5.

Conclusion

Indicator Score Total State Comment
Australia and Switzerland Terms of Trade Differential -4 10 A differential of -23.25% Switzerland has a current account surplus hence better terms of trade than Australia
Annual GDP Growth Rate Differential between Australia and Switzerland 2 10 1.20% Australian economy marginally contracted at a slower pace than the Swiss economy
The AUD/CHF interest rate differential 5 10 0.85% The SNB has maintained interest rate at -0.75% and has no short-term prospects of changing the policy. A policy change from the RBA might trigger any changes in the differential
TOTAL SCORE 3

 

The cumulative exogenous score for the AUD/CHF pair is 3, which implies that we can expect the pair to continue trading on a bullish trend. The pair’s weekly chart’s technical analysis shows it is attempting to break through the upper Bollinger band. Furthermore, it has formed a series of bullish ‘hammer’ candles meaning that sellers have failed to drive down the exchange rate.

 

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Forex Fundamental Analysis

AUD/JPY Global Macro Analysis: Ranking Impact Factors

The global macro analysis of the AUD/JPY pair focuses on endogenous factors that impact GDP growth in Australia and Japan. We’ll also analyze exogenous factors that determine the exchange rate fluctuation of the AUD/JPY pair.

Ranking Scale

We will rank these factors on a scale from -10 to +10 depending on the severity of their impact.

To determine the rank for endogenous factors, we will conduct a correlation analysis with the GDP growth rate. If the ranking is positive, the endogenous factors have led to an increase in either the AUD or JPY. If the ranking is negative, they have resulted in domestic currencies shedding some of their value.

For exogenous factors, ranking is derived from correlation analysis with the exchange rate of AUD/JPY. If the ranking is negative, the exogenous factor has resulted in a bearish trend for the pair. Conversely, a positive ranking implies the factor resulted in a bullish trend.

AUD Endogenous Analysis

  • Australia Unemployed Persons

As an economic indicator, unemployed persons show the number of the working-age population actively looking for employment. This number is used to show the health of the labor market. It also estimates how well the economy is performing; an expanding economy creates more job opportunities, hence decreasing the number of unemployed persons. Conversely, a deteriorating economy results in job losses, increasing the number of unemployed persons.

In November 2020, the number of unemployed persons in Australia dropped to 942,100 from 959,400 in October. This number is still higher than the historic average of 639,530 and higher than 722,060 recorded in January. It has a score of -6.

  • Australia Producer Prices Change

This indicator measures the changes in the price of goods that manufacturers sell directly to wholesalers over a particular period. It is a leading indicator of overall inflation since the prices of goods and services from the manufacturers will be passed to the final consumer. Typically, an increase in demand in the market leads to higher prices while a drop in aggregate demand results in lower prices. Thus, changes in producer prices correspond to changes in GDP.

In the third quarter of 2020, the YoY Australia producer price changes dropped by 0.4% same as Q2. In Q1, the index was higher by 1.3%. Thus, we assign a score of -4.

  • Australia Capacity Utilisation

Capacity utilization measures the degree to which a country’s manufacturing and production capabilities are being put to use. It shows the total output being produced vs the maximum potential output produced using the same resources. In Australia, capacity utilization includes companies operating in the industrial sector; which include manufacturing, mining, and utility firms. It is a leading indicator of overall economic growth.

In November 2020, Australian capacity utilization rose to 79.32% from 77.93% in October. This shows that the industrial sector is expanding from the lows of the pandemic. However, the current utilization is still below 81.34% recorded in January. It has a score of -5.

  • Australia Household Saving Ratio

This represents the portion of the disposable income that households do not use to purchase goods and services and transfer payments. Typically, what is not consumed is considered savings. Therefore, when the household saving ratio increases, Australian households are spending less on domestic consumption. Since GDP heavily relies on domestic expenditure, an increase in household savings ratio is a leading indicator of economic contraction.

In the third quarter of 2020, Australia’s household saving ratio dropped to 18.9% from historic highs of 22.1% in Q2. Q3 reading is the fourth-highest since 1960. It has a score of -7.

  • Australia House Price Index

In Australia,  the HPI measures the quarterly change in the price of residential property in eight cities. Canberra, Sydney, Brisbane, Hobart, Melbourne, Perth, Adelaide, and Darwin. When the HPI increases, it shows that demand in the real estate market is growing, which corresponds to economic expansion.

In the third quarter of 2020, HPI in Australia increased by 0.8% from a drop of 1.8% in Q2. The Q3 increase is attributed to the easing of COVID-19 restrictions that stifled the economy in Q2. It has a score of 2.

  • Australia Fiscal Expenditure

This includes the totality of government expenditure on the purchase of goods and services, transfer payments in social security, and investments. It is used in the computation of the total government budget value. Fiscal policy is used to stimulate economic growth. Usually, in times of economic crises, the government increases its fiscal expenditure – mostly on transfer payments. This is meant to cushion households from adverse economic conditions. More so, it increases domestic demand which spurs economic growth.

In November 2020, Australia’s fiscal expenditure dropped to 49.504 billion AUD from 50.801 billion AUD in October. In May, Australia’s fiscal expenditure hit historic highs of 79.545 billion AUD. It has a score of 5.

  • Australia Bankruptcies

This shows the number of companies operating in Australia unable to continue with their operations due to the inability to repay their debts. It corresponds to changes in economic conditions and demand for goods and services by households.

In October 2020, the number of companies that declared bankruptcy in Australia dropped to 279 from 298 in September. There has been a steady decline in Australian bankruptcies since March when it reached yearly highs of 683. It has a score of 3.

Conclusion

Indicator Score Total State Comment
Australia Unemployed Persons -6 10 942100 in November 2020 Above the historic average of 696530. The increase in unemployed persons in 2020 is attributed to economic shocks of COVID-19
Australia Producer Prices Change -4 10 Dropped by 0.4% in Q3 2020 The PPI has dropped in 2020 primarily because of the depressed domestic demand
Australia Capacity Utilisation -5 10 79.32% in November 2020 The industrial sector in Australia is resuming full operations from the pandemic lockdown. The capacity utilisation is still below pre-pandemic levels
Australia Household Saving Ratio -7 10 18.9% in Q3 2020 Q2 reading was the highest in Australian history. Q3 ratio is the fourth highest. This shows that domestic demand was depressed in 2020
Australia House Price Index 2 10 Increased by 0.8% in Q3 2020 An improvement from a drop of 1.8% in Q2. Demand in real estate is picking up after easing of COVID-19 restrictions
Australia Fiscal Expenditure 5 10 49.504 billion AUD in November 2020 2020 was characterised by the unprecedented increase in fiscal expenditure as the government attempted to avert an irreversible recession
Australia Bankruptcies 3 10 279 companies in October 2020 A steady decline in the number of bankruptcy filings since May
TOTAL SCORE -12

 

JPY Endogenous Analysis

  • Japan Unemployed Persons

This indicator shows the Japanese labour market’s state by analysing the changes in the number of people who are actively seeking employment. It shows the rate at which the domestic economy is creating and shedding jobs. When the number of unemployed increases, it means that the economy is losing more jobs than creating, showing that the economy is contracting; and vice versa.

In November 2020, the number of unemployed persons in Japan dropped to 1.98 million from 2.14 million in October. Since January, it has increased by 340,000 is higher than the historic average of 1.67 million. It has a score of -7.

  • Japan Producer Prices Change

The producer price change measures the YoY change in the prices of goods and services sold to the wholesalers directly from the producers. The index covers all sectors in the Japanese economy. Hence it is a leading indicator of the overall inflation in the economy.

In November 2020, the YoY Japan producer price change dropped by 2.2% down from the 2.1% drop recorded in October. The November drop is attributed to petroleum & coal products. The historic average for the japan producer price change is 1.36%. It has a score of -3.

  • Japan Capacity Utilization

Japan’s economy is heavily dependent on industrial activity. Capacity utilisation shows the percentage of actual output from the industrial sector compared to the maximum capacity. Note that this indicator only measures the relative capacity utilisation based on a benchmark year. When it increases, the industrial sector is expanding with the available resources being put to the most use possible.

In October 2020, Japan industrial capacity utilisation increased to 95.4% from 90% in September. This is the highest recorded since March. Throughout the year, the capacity utilisation in Japan has been below the historic average of 110.32 points. It has a score of -2.

  • Japan Workers’ Households Ratio of Net Savings and Insurance

This measures the amount of income that households in Japan save in relation to their total disposable income. When the ratio increases, Japanese households are postponing consumption. This is interpreted as expectations that future economic conditions might worsen; hence, households save for a rainy day. In such a case, domestic demand for goods and services is depressed, which means that the GDP drops. Conversely, when the savings ratio decreases, expenditure increases; hence, rise in the GDP.

In October 2020, household saving rate in Japan rose to 29.7% from 19% in September. Due to the economic uncertainties of COVID-19, June 2020 recorded the highest ever personal saving ratio in Japan of 62.1% it has a score of -5.

  • Japan Residential Property Price Index

This tracks the price changes in the Japanese real estate market for residential property, including condominium, land, and detached houses. Note that price in real estate corresponds to changes in the demand. Thus, when demand is high, the residential property index increases, and drops when demand is low.

In August 2020, the Housing Index in Japan was 113.86 points up from 111.9 points in July. The August index is higher than the historic average of 104.99 points but lower than January’s 114.66 points. It has a score of -1.

  • Japan Government Spending

Japan government spending shows the amount of money that the Japanese government uses to purchase national goods and services, repayment of government debt, and transfer payments. Whenever the government intends on influencing economic growth, it adjusts the government spending as part of its fiscal policy measure. This involves adjusting budgetary targets, levels of taxes, and expenditure plans. During the coronavirus pandemic, for example, the government increased its national spending, especially in transfer payments. That was meant to shield households from the economic shocks and to stimulate economic growth.

In the third quarter of 2020, Japan government spending rose to 114.509 trillion JPY from 114.404 trillion JPY in Q2. This is the highest government spending in the history of Japan. It has a score of 4.

  • Japan Bankruptcies

Bankruptcies show the monthly change in the number of Japanese businesses unable to service their debt obligations and thus forced to cease operations. As an indicator of the domestic economy, bankruptcies show how well the economy supports businesses in terms of creating and shedding jobs. Naturally, when bankruptcies increase, it correlates with increases in job losses and contraction of the economy.

In November 2020, the number of bankruptcies in Japan was 569 down from 624 in October. It has a score of 1.

Conclusion

Indicator Score Total State Comment
Japan Unemployed Persons -7 10 1.98 million in November 2020 Above the historic average of 1.68 million. The Japanese labour market has lost about 340,000 jobs since January
Japan Producer Prices Change -3 10 Down by 2.2% in November 2020 The decrease in PPI mainly attributed to a drop in the price of petroleum and coal products
Japan Capacity Utilisation -2 10 95.4% in October The highest recorded since March. The economy is gradually returning to full operations
Japan Household Saving Ratio -5 10 29.7% in October 2020 The ratio is dropping from historic highs of 62.1% in June. Shows domestic demand is picking up
Japan House Price Index -1 10 113.86 points in August 2020 The HPI is higher than the historic average of 104.99 points; but lower than pre-pandemic levels
Japan Fiscal Expenditure 4 10 114.509 billion JPY in Q3 2020 The highest in Japan’s history
Japan Bankruptcies 1 10 569 companies in November 2020 Bankruptcy filings drop as COVID-19 restrictions ease
TOTAL SCORE -13

 

AUD/JPY Exogenous Analysis

  • Australia and Japan Terms of Trade Differential

A country’s TOT shows the ratio between the value of exports and the value of its imports. It represents the units of exports that can purchase a unit of imports. Therefore, when a country has a current account deficit, its terms of trade is less than 100%. If it has a current account surplus, its TOT is more than 100%.

In this case, the differential between Australia and Japan’s terms of trade is the difference between Australia’s terms of trade and Japan’s. When this differential is positive, it means that Australia has a higher current account balance than Japan. Consequently, implying that the AUD is in higher demand in the international market than the JPY, hence a bullish AUD/JPY. Conversely, the differential is negative when Japan has higher TOT than Australia, resulting in a bearish AUD/JPY.

Between January and October 2020, Australia TOT averaged at 97.9% while that of Japan at 106.43%. The terms of trade differential between Australia and Japan is -8.53%. It has a score of -3.

  • Annual GDP Growth Rate Differential between Australia and Japan

Annual GDP growth rate measures if a country’s economy is expanding, contracting, or stagnating. It tracks the change in GDP growth at a particular period over the preceding year. By measuring the annual GDP growth rate differential, we can effectively compare economic growth in Australia and Japan since both economies have different compositions, making absolute comparison ineffective. The differential is positive when the Australian economy is expanding faster or contracting slower than the Japanese economy. In this case, the AUD/JPY pair will be bullish, and vice versa.

In the first three quarters of 2020, Australia’s annual GDP growth rate was -8.8%, and that in Japan is -17.8%. The differential is 9%, and thus, has a score of 6.

The AUD/JPY pair’s interest rate differential shows whether the pair is bound to be bullish or bearish in the long term. If positive, then Australia has a higher interest rate than Japan which means that traders and investors would earn higher returns by selling the JPY and buying the AUD’ hence, a bullish AUD/JPY. When Japan has a higher interest rate, traders will earn higher returns by selling AUD and buying JPY; hence, a bearish AUD/JPY.

In 2020, the RBA cut interest rates from 0.75% to 0.1% while the BOJ maintained interest rate at -0.1%. Thus, the AUD/JPY interest rate differential is 0.2% and has a score of 3.

Conclusion

Indicator Score Total State Comment
Australia and Japan Terms of Trade Differential -3 10 A differential of -8.53% Japan has better terms of trade than Australia
Annual GDP Growth Rate Differential between Australia and Japan 6 10 9.00% Japanese economy contracted faster than that of Australia. This might change as economies open up
The AUD/JPY interest rate differential 3 10 0.20% The BOJ has no prospects pf changing the -0.1% interest rate. The differential is expected to change with changes in RBA’s interest rate policies
TOTAL SCORE 6

 

The exogenous factors have a score of 6 which means the AUD/JPY pair can be expected to continue trading in a bullish trend. Technical analysis of the pair’s weekly price chart shows it is attempting to breach the upper Bollinger band. More so, the pair has formed ‘hammer’ candlesticks showing that bears have failed to push the price lower.

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Forex Education Forex Fundamental Analysis

Trading Forex On the Most Important News Events

It is possible that you have come this far because you are thinking about trading when news is published and taking advantage of the big moves that occur at that time. You may also simply wonder if this is possible or how it can be done. The best thing is to go point by point to see how and what news affects when we do trading, everything you should contemplate, and some things that don’t usually tell you.

What Economic News Impacts Trading?

As you may know, there are different news items that affect trading, especially in forex, such as macroeconomic events (for example, interest rate decisions), government policy decisions, employment news publications. Basically, we can distinguish between:

Economic News: GDP, inflation, unemployment or oil reserves, any related economic aspects that can affect a country and its currency.

Political News: decisions and governmental actions that are carried out in the country in question and have direct involvement in currency.

All of them are important (though some to a lesser or greater extent than others) and you can often see how when they are published it makes the currency pair in question move significantly. But how do we know when and what data will be published and the impact it will generate?

How to NOT Predict Trading News

It’s obvious, isn’t it? We already know when they’re going to be published, we’re going to put a lot of money in and let the flute play. NO. This might not work for you. And even if you get it right, you’ll end up losing everything. Events such as the one that occurred in the Swiss Franc (black swan) or the Brexit have left the graveyard full of traders. Even some brokers have had to close. Why?

News Trading Errors

Behind an excuse of losing money by trading when a story is published there is usually one or several of these causes:

Strong Leverage: Enter the market strong with a small account to earn a lot of money in a short time. In the end, your account does not resist and a minimal movement to the contra makes you lose count. Serious error.

Bet Mode: not having a trading system and think that this goes up or down because it comes out in the media, my brother-in-law has told me or because yes. If you don’t have a system, start working for it.

Stop-loss Strategies: Strategies with very small stops often do not have good results when the price moves aggressively. The institutional (the big ones) sweep them away. It’s not that these kinds of strategies are wrong or anything, but consider reviewing how they behave when these data are posted and limiting your trading if it doesn’t affect them in a positive way. This can be done not by being in front of the screen if you operate manually or by disconnecting your systems if you do so automatically.

News-Based Trading Systems

You may have read or thought that trading with the news can be very easy if you place a purchase order and a sales order. This hypothesis starts from the idea that price moves without setbacks. Most of the time this is not the case, since the price can be directed without a trend, either in its initial phase or during the entire period.

The price moves aimlessly before the news. We place a purchase order (above) and a sale order (below). Do not take into account the zones, it is just an example to see it.

Suppose we leave them as they are. They activate both and we lose the difference. Suppose now that when the first is activated we cancel the other. In this case, we also lose because we opened activated the purchase and subsequently the price falls. This doesn’t have to be like this forever, I just give you this example to you realize that what we’re dealing with isn’t as wonderful as appears in your mind.

Be careful with it. Try it, but be very careful and check results with backtesting. Logic makes us think that this can go well but then when we see the results we realize that often this is not so. These types of operations are usually displayed by brokers and platforms so that you operate when there is a lot of volatility and with a lot of money. Then they do their business, earn commissions and win when the customer loses. As a trader, you must be above these things and concentrate on your business and your operation.

Trading with Volatility and News

It is normal that you can think after all this when you open your trading platform “what if the flute sounds? what if it does?”. We’ve all read the typical news in the newspaper where it tells you that x person won an incredible amount of money with x event. Quick and easy. Here the survival bias is very high. Don’t tell you that that could be 0.0001%

Actually, with all this, I’m not telling you that you can’t trade when news comes in, I’m telling you to get your mind off the fact that you make a lot of money luckily. If you do not use high leverage and for example apply swing trading strategies or you have a % risk in each small trade if you diversify. this news will not affect to a greater extent.

In fact, be clear that most of the time there will be a complicated situation in the market: currency wars, economic crises, political decisions. Volatility in the market can occur when you least expect it and you should be a trader who knows how to manage this well.

Mind-Set to Trade News Trading

Many traders think that news is the axis of their ills and that all their losses are due to this or the other. It’s not like that. These are just excuses. You may also have heard something like “but if the data is good, why does the price drop?”. Simply because in the financial markets prices are driven by expectations. That is, the price at which an asset is quoted includes what is expected of that asset in the future. So that’s why when you publish a piece of information that you assume is good, some institutional investors had already taken it into account and even though it would be even better.

You have to have a micro mindset (each operation counts) and a macro mindset (what is really important in the long term and its consequences). So if you play a card with a piece of information or a piece of news, you’re sending the macro to take it for granted. Keep this in mind or you’ll learn it by taking out your wallet and burning accounts.

New Is Not the Solution (or Problem)

Why, instead of focusing on speculation or news, don’t you focus on what you have objectively? That is data-based trading systems. When investing in the long term it makes sense to read and soak up some company and industry news. But by trading, we look for short-term moves. Do you really think you can from home predict a story that is public in a market as big as the currency market?

What you could do is concentrate on creating systems that have a positive statistical advantage and apply them rigorously. If it’s the news and it works well, great. But don’t get obsessed with the idea that news is the origin of everything. Focus on what you can control.

All this being said, in my case what I do is I keep in mind the news to keep in mind the moments where the market can move aggressively. If there is a moment (very punctual) where a lot of news (very important) will be published or a weekend where there is some decision that can make the markets shake, I try to close everything and be out. But this is at very specific times, perhaps less than 1%. Most of the time I take on this volatility and adapt my systems to them.

Ignoring News In the Press

In recent months, for example, a lot of news has been published about Brexit and most of it seemed definitive. The bottom line is that a year has passed and nothing has changed. Another situation: Trump’s ongoing tweets. You can’t predict that. Face it. It’s part of the equation of trading. And it also makes it different.

The press always has a good headline to justify what is happening. For example, after an event, the EUR/USD pair goes up. You can read or listen in some media: “The EUR/USD crossing goes up despite the measures of the European Central Bank.” However, if after that same event the pair falls you can read something like: “The EUR/USD crossing drops due to the measures of the European Central Bank.”

It’s kind of like knowing the end and creating an argument that makes sense to get to that end. We as traders are interested in the behavior in the price market, the rest is just noise that gives us little good. This is another of the big arguments why I trade through systems, they don’t get carried away by this kind of thing.

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Forex Education Forex Fundamental Analysis Forex Technical Analysis

Fundamental Analysis Vs. Technical Analysis

If you are trying with any kind of financial market for a significant period of time, you will start testing and forming some kind of system. Then, inevitably, you will begin to focus on technical or fundamental analysis, or maybe a little of both. The perfect understanding of the difference between the two types of analysis is the most important issue you should focus on when trying to make a decision about what kind of trader you want to be.

First, a bit of a disclaimer…

No matter what type of analysis you decide to use, it can be cost-effective. However, none of these types of analysis is 100% guaranteed. The fact that you become a good analyst from a technical or fundamental point of view does not mean you will inevitably earn money. As traders, what we’re looking for is the most likely scenario, not working with certainty. The long-term look is what you should focus on, which really means that you make transactions focused on what is most likely to happen, knowing that will not always work.

Technical Analysis

Most retail traders focus on technical analysis as it can be defined with some ease. What I mean by this is that it looks for things like support, endurance, trending lines, moving average crosses, and the like. For example, a trader who is using technical analysis to trade in the markets will observe the full share price.

With technical analysis, you can get a configuration like the following:

The EUR/USD pair has been removed from the upward movement. By using your Fibonacci recoil tool, you acknowledge that we have withdrawn 50% of the maxima, which is an area in which most traders related to Fibonacci would be interested in going long. Beyond that, we have the exponential moving average of 200 days just below the candle on the daily graph, which of course shows support. Finally, the candle formed a hammer, which is also bullish.

A trading system based on a technical analysis tells the trader to prolong.

The trader based on technical analysis is paying attention to what the price does, not necessarily to what it should do. Just follow what the market tells you in terms of price, and this makes trading in financial markets a little easier. This is why you don’t have to think about many other variables other than what the price is making and whether or not it comes close to your technical configuration concept. If you choose any other factors to participate in trade, such as fundamental analysis, something we’ll get to in a moment, things can get a little more complicated.

Fundamental Analysis

The fundamental analysis focuses on economic factors and what a market “should do”. What I want to express with that is that you will take the figures and the economic announcements and try to find out where the price is going. On an equal footing, if interest rates rise in one country over another, then that currency should rebound over the other. For example, interest rates are expected to continue to rise in the United States at the same time as the ECB remains quiet for the foreseeable future. If that is the case, the EUR / USD pair should eventually fall based on interest rate spreads. There is a multitude of announcements that could be looking at, perhaps, GDP figures, employment, and, of course, the prospects for interest rates.

Ultimately, Forex tends to move in the direction of expected interest rate movements. However, there are other problems that may arise, such as geopolitical situations. For example, Brexit has wreaked havoc on the price of sterling for some time. This is because there are many doubts and not necessarily due to the prospect of the interest rate. In a sense, however, even that route will lead to interest rates, at least in the long term. The idea, of course, is that there is a lot of uncertainty about the British economy when they leave the European Union, and we do not know what they will do with EU-related trading.

The EU is, of course, the UK’s largest trading partner, so this could obviously have a significant negative effect on the UK economy. People are essentially fleeing the British pound because of fear, or the fact that they believe that the Bank of the UK will have to keep interest rates extraordinarily low as the economy slows down. In the end, even the most opaque reasons eventually lead to interest rates, although it may not necessarily be immediately apparent.

Fundamental Vs. Technical

The most typical way traders get involved in the market is a combination of both types. For example, by using Brexit as a backdrop, we know that the British pound has fought for some time. A technical trader will understand the basics of that situation and recognize that selling the British pound makes more sense in general.

They understand the fundamentals of the negative for the British pound, although they don’t get too involved with all the nuances of economic advertisements. They just know the feeling is negative. With that information, they then begin to look for patterns of the sale in chandeliers, failures in resistance, or some other type of scenario in which we break down the support as examples.

With the use of both types of analysis, although most traders using a mixture probably use technical analysis of about 80%, the reality is that it gives you a bias in which to trade with the market. After all, fundamental long-term biases determine exactly what determines the trend, while the technical analyst simply looks for signals to get involved.

There is no right way to operate in the currency market, although it must be borne in mind that technical analysis is much simpler than fundamental because, at the end of the day, fundamental analysis suggests what “should happen,” ignoring what appears on the chart. So, I think most people use a little of both to make their trading decisions.

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Forex Fundamental Analysis Forex Market

ICO´s Are Indeed Risky, But Here’s Why You Shouldn’t Ignore Them…

What will the future of ICOs look like internationally? Without a doubt, ICOs are generating great expectations and I think there is probably an excess of them. Often these are planned too quickly or with a very unclear after business idea. But it is also true that very powerful and interesting projects are coming to light and that they are also generating a lot of benefit to many investors and also in the short term.

The regulations established and the time will make the situation normal, but we must also bear in mind which is very laborious to analyse the real potential that some blockchain companies can have in the long term. Probably, some of the ICOs that have already come out is laying the groundwork for how technology works in the near future.

What is the operation, essentially, of an ICO, why is this system born and what differentiates it from the rest?

An ICO is a new financing (and therefore investment) model for technology companies in the Blockchain sector, although they are also starting to be used in other sectors. ICO stands for Initial Coin Offering and there are certain similarities between an ICO and an OPV. In early 2012, J. R. Willett published a draft of the project he wanted to create: Mastercoin. The summer of 2013 opened a time period where users could buy Mastercoins, the future tokens that the protocol would use to perform transactions.

The idea was that with all the money raised the Mastercoin protocol could be developed, so the appraisal of the tokens would be increased and the initial investors could sell their Mastercoins more expensive than when they bought them. This way both sides would win.

Funding a project through an ICO allows you to get financing through a path that did not exist until recently and with several advantages. Many could be listed, but I will only highlight a few. For example, you can present your idea to thousands of people and not just a dozen investors, so you increase the chances of finding more people willing to invest in your proposal.

Another positive point is not having to negotiate different agreements or contracts for months with different investors. In addition, at no time do you relinquish control over decisions that are made in exchange for investment.

Also, if you look from the investor’s point of view, the ICOs are very interesting because you have a chance to get very good returns in a relatively short time and also has a great range to choose from, although we do not fool ourselves, choosing a very profitable project is not so easy. And finally, note that VCs are increasingly interested in this new figure for the liquidity that allows them and that they in their model can not have.

How to differentiate a cryptocurrency from a “Token”? On many occasions, we confuse them…

We call a cryptocurrency a currency (virtual and digital), which is encrypted using cryptography. By the latter, I mean that encryption techniques are used to secure and verify the performance of transactions.

We could then categorize cryptocurrencies in two ways: altcoins (“alternative cryptocurrency coins”) and tokens.

Altcoins could be said to be alternative currencies to Bitcoin. Some altcoins are a variant of Bitcoin, that is, they have been created using the protocol itself but changing parts of the code leading to a new currency with different features. Some examples of this type of altcoins could be Litecoin. But in addition, there are other altcoins that have not been created from the Bitcoin protocol. This means that they have been created with their own Blockchain and protocol that supports their currency. A very clear example is Ethereum. In short, it could be said that altcoins have their own independent Blockchain, where transactions relating to their native currency occur.

Tokens are the representation of a certain value or functionality and are normally located above another blockchain. For the latter reason, creating tokens is a much more “easy” process as you don’t have to modify the code of a particular protocol or create a blockchain from scratch. All you have to do is follow the requirements of a certain blockchain such as Ethereum or Waves, which allows you to create your own tokens.

In short, one of the main differences between altcoins and tokens lies in their structure. altcoins use their own blockchain, while tokens operate on a blockchain It could also be explained or differentiated in another way. Altcoins can be used as money, and tokens “only” can be used on the platform that created them. Although this does not mean that a token can also be sold or purchased at a certain price.

What is the procedure to launch an ICO? And to go to an ICO?

There are really different ways to launch an ICO but I could summarize some common points that you have to have the knowledge very clear when launching. The first, and one of the most important, is to know if the token of the ICO has a sense, a real utility, in the future project. Otherwise, it doesn’t make much sense to throw an Initial Coin Offering. Linked to the token, it is also highly recommended to correctly set the type of token sales model (reverse Dutch auctions, hybrid capped, etc.) because it is another of the many elements that can influence whether or not to collect the required amount.

Another point to bear in mind is to have the right legal and tax advice. First, because being such a recent sector it is difficult to find real professionals. And second, because if you don’t have the legal and fiscal conditions well defined, the ICO could be blocked at some point.

With regard to security, it could be said that a smart contract should be developed to raise funds and issue tokens that have passed different security audits. You have to be prepared to receive “attacks” to the web and be very attentive to the different forms of phishing that are given, either from your own web as in social networks and forums.

To achieve the highest visibility of the project, and therefore, a large number of investors is vital to proper marketing planning where I can tell you that the costs of campaigns are very high given that there are more and more ICOs that need to stand out from the rest. And more briefly, it is necessary to write a detailed Whitepaper, get agreements with the most important exchanges, have an investment committee, and that the customer service before, during, and after the ICO is excellent.

Regarding the steps to go to an ICO. To tell you that it is complex because you must have a wallet compatible with ERC-20 tokens, find a solid ICO, and with revaluation possibilities. Once you get to that point you should wait for the day of the launch of the ICO, be quick not to stay out, and also buy your tokens correctly. Well, it is usually difficult not to arrive on time because it usually takes several weeks before all the tokens have been purchased, unless it is a very important ICO since there have been cases that in a matter of hours all the tokens have been sold.

Are ICOs safe? Of course, there have been cases of failure and success.

Let’s not kid ourselves, investing in an ICO is a high-risk operation but it is proportional to the great returns you can get. However, if you take different measures you can partially minimize that risk. For example, you must read the Whitepaper several times to be well informed about the project and from there you can look for additional information: know the state of the sector where it will operate, know in more detail the equipment behind, request information in case of doubt, analyse whether the distribution and destination of the money to be collected are correct, etc.

A story, in this case, of success, because it has achieved high profitability, which I always like to name is that of the Stratis project. The price of the token during the ICO cost $0.007 and a few weeks ago I got to see it at $4.9 which is an x700. But I have also seen for example the token of Virtual Accelerator that was worth $0.04 in its beginnings and that its price has been at some point at $0.002.

And we ask ourselves the next question, what is the most important thing we need to know before we enter the world of cryptocurrencies? The most important issue we need to take into account with respect to the two big cryptocurrencies of the moment, Bitcoin and Ethereum, is that if you plan to invest in them you must do it with long-term thought and not sell even when there are moments of heavy falls. However, it is only a point of view and in the end, everyone decides their strategy and what to do with their money.

Categories
Forex Forex Fundamental Analysis

How to Profit from Trading the News

News is a fundamental part of the analysis that every Forex trader must make before placing a position. There are several ways to operate based on news and not all are efficient.

Many Forex traders like to trade in the news. They review the economic calendar of major scheduled economic data, such as the famous non-agricultural payrolls, and prepare to trade these currencies shortly before or shortly after one of these key economic events for foreign exchange markets. Of course, if something unexpected happens and they’re alert at the time, they might try to jump on it and seize the opportunity. Different trading methods are usually used to deal with the news. Let us take a look at each of them and analyze the advantages and disadvantages of each, before drawing a conclusion.

Predicting the Outcome and Operating Before Publication

This might not be as naive as it sounds, depending on what you’re predicting. For example, if you believe that, after an extensive analysis of the economic data and background of the personalities involved, the Reserve Bank of Australia will almost certainly cut the interest rate tomorrow, While the market acts as if this is a very unlikely outcome, then you could have a good reason to open a short deal on the Australian dollar, i.e., sell it. Otherwise, I would simply be betting as in a game of chance, with the odds against you even below 50%.

The advantage of taking an intelligent view ahead of a key economic report is that you will most likely get a good price for your operation without a high spread or slippage. The biggest disadvantage is that you will most likely experience a period of high volatility in the minutes leading up to the announcement that will either cause your position to touch the stop-loss or force you to have a wider stop to be sure that your position will survive, which in turn limits your potential risk relationship – reward.

Operating Immediately in Publication

This sounds logical: discover what the market expects and, the instant you see that expectations have been largely exceeded or lost, place a position accordingly. This will almost never succeed, for different reasons: the liquidity will be very low, there will be a huge slippage, the spread will be very high and your broker may very well not even have been able to give you a price. Normally, when a retail trader can enter the market following the most important market news, the price is very poor. This may not matter if the event is a real game-changer, like the US non-farm payroll, but it will work only sometimes. This trading method is always very poor.

Opening Of Pending Orders Before Publication

It may seem an excellent idea to wait for some very important economic news like the US non-agricultural payroll. or the Minutes of the FOMC Meeting and just before publication place outstanding orders with your broker to acquire maybe thirty pips ahead and sell maybe 30 pips below. Actually, it is a very bad idea, as liquidity is greatly reduced in the seconds before and after a major press release, so the price and spreads may not go anywhere. You can easily see that your two operations open and close in a second or two, a very unpleasant experience! Even if you do well, it is still very likely that you will suffer a large slippage in an activated position if the result is strong.

Waiting for the Market to Digest the News

This trading method requires some discipline, intellectual work, and market analysis, but it is really the only efficient way to trade forex with the news. You should compare the outcome of the press release with market expectations and decide whether the market’s confidence in that currency has fundamentally changed. When you’ve made that decision, then you must wait a few minutes and see where the price goes.

His reasoning should then be something like this: if the market news has changed the outlook much to be much more optimistic and the price moves strongly upwards, then expect a setback and enter long. If the news is very bullish but fails to change the fundamental picture – a much more common result- and the price is fluctuating very bullish, expect a recoil and then place a reverse operation. This method avoids slippage problems, poor liquidity, spreads, and poor execution of orders.

The Secret of Trading in Forex with the News

Here’s a little secret about how to trade in Forex with the news: most of the time, the news doesn’t change the movement of the market: it just speeds it up. When you link this with the fact that the market tends to move in a price range almost all the time – very especially after a strong movement in one direction – realizes that most opportunities to trade forex with the news are actually in negotiating against the initial movement, rather than waiting for a follow-up.

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Forex Fundamental Analysis

GBP/CAD Global Macro Analysis – Part 3

GBP/CAD Exogenous Analysis

The UK and Canada Current Account Differential

The current account differential between the UK and Canada can determine if the GBP/CAD pair is bullish or bearish. If the differential is positive, it means that the UK has a higher current account balance than Canada. This would imply that the GBP is in higher demand in the forex market than the CAD; hence, it is a bullish trend for the pair. Conversely, if the current account differential is negative, it means that the UK has a lesser current balance than Canada. It would imply that the GBP has a lower demand than the CAD in the forex market; hence, a bearish trend for the pair.

In Q3 of 2020, the UK had a current account deficit of $20.97 billion while Canada had a $5.83 billion deficit. Thus, the current account differential is -$15.14 billion. We assign a score of -2.

The interest rate differential between the UK and Canada

The interest rate differential is the difference between the Bank of England’s interest rate and that by the Bank of Canada. In the forex market, carry traders use the interest rate differential to decide whether to buy or short a currency pair. When the interest rate differential is positive, traders will earn the differential by going long. If the differential is negative, traders can earn the differential by shorting the currency pair.

Therefore, if the GBP/CAD pair’s interest rate differential is positive, the pair is bound to adopt a bullish trend. Conversely, if negative, the pair is bound to be bearish.

In 2020, the interest rate in the UK dropped from 0.75% to 0.1%. In Canada, the BOC cut interest rates from 1.75% to 0.25%. Therefore, the interest rate differential is -0.15%. The interest rate differential between the UK and Canada has a score of -1.

The differential in GDP growth rate between the UK and Canada

This differential measures the changes in the growth rate between the two economies. It is a preferred method of comparison since economies are of different sizes. Naturally, the economy with a higher GDP growth rate will have its currency appreciate more. Therefore, if the GDP growth rate differential is positive, it means that the GBP/CAD pair is bullish. If negative, then the pair is bearish.

During the first three quarters of 2020, the UK economy has contracted by 5.8%, while the Canadian economy has contracted by 3.3%. This makes the GDP growth rate differential -2.5%. Hence, a score of -1.

Conclusion

Indicator Score Total State Comment
The UK and Canada Current Account Differential -2 10 A differential of – $15.14 The UK has a higher deficit than Canada
The interest rate differential between the UK and Canada -1 10 -0.15% Expected to remain at -0.15% until either economy have recovered
The differential in GDP growth rate between the UK and Canada -1 10 3.30% The Canadian economy contracted at a slower pace than the UK economy
TOTAL SCORE -4

The cumulative score for the exogenous factors is -4. This means that we can expect the GBP/CAD pair to trade in a downtrend in the short term.

However, technical analysis shows the pair adopting a bullish trend with the weekly chart trading above the 200-period MA. More so, the pair is seen bouncing off the lower Bollinger band. Keep an eye on the near-term changes in the exogenous factors.

Categories
Forex Fundamental Analysis

GBP/CAD Global Macro Analysis – Part 1 & 2

Introduction

This analysis will evaluate the endogenous factors that affect the domestic economy in both the UK and Canada. We’ll also cover exogenous factors that influence the price of the GBP/CAD pair.

Ranking Scale

After analysis, we will rank both the exogenous and the endogenous factors on a scale from -10 to +10.

Endogenous factors will be ranked after a correlation analysis with the GDP growth rate. If negative, it means that either the GBP or the CAD have depreciated. If positive, it means that the domestic currency has appreciated.

The exogenous factors are ranked based on their correlation with the GBP/CAD pair’s exchange rate. When negative, it means that the price will drop. The price will be expected to increase if the exogenous analysis is positive.

Summary – GBP Endogenous Analysis

-15 score on Pound’s Endogenous Analysis indicates that this currency has depreciated since the beginning of 2020.

Summary – CAD Endogenous Analysis

  • Canada Employment Rate

The Canadian employment rate measures the percentage of the labor force that is employed during a particular period. The developments in the labor market are a leading indicator of overall economic growth. When the economy is expanding, there are more job openings, hence a higher employment rate. Conversely, when the economy is going through a recession, businesses close down, leading to a dropping employment rate.

In November 2020, the employment rate in Canada rose to 59.5% from 59.4% in October. Although the employment rate has been steadily increasing from the lows of 52.1% in April, it is still lower than in January. Canada’s employment rate has a score of -6.

  • Canada Core Consumer Prices

This index measures the overall change in Canada’s inflation rate based on a survey of price changes for a basket of consumer goods. The rate of inflation gauges the increase in economic activity. Typically, when demand is depressed in an economy, prices drop, resulting in lower inflation. Conversely, when demand increases, prices tend to increase, resulting in a higher rate of inflation.

In November 2020, Canada’s core consumer prices rose to 136.6 points from 136.3 in October. Between January and November, the index has increased by 2 points. It has a score of 3.

  • Canada Manufacturing Production

This index measures the YoY change in the value of the output from the Canadian manufacturing sector. Canadian manufacturing is a significant contributor to the labor market and economic growth. In the age of the coronavirus disruption, changes in manufacturing production show how faster the economy is bouncing back.

In September 2020, the YoY manufacturing production in Canada dropped by 4.24%. This is an improvement compared to the 5.34% drop recorded in August. Canadian manufacturing production has a score of -2.

  • Canada Business Confidence

The Ivey Purchasing Managers Index (PMI) measures monthly business confidence in Canada. In the survey, private and public companies rate whether the current business activity is higher or lower than the previous month. The index survey aspects including inventories, purchases, deliveries from suppliers, output prices, and employment.

When the index is over 50, it means that purchases have increased from the preceding month. Reading of below 50 shows a decrease in purchases.

In November 2020, Canadian business confidence dropped to 52.7 from 54.5 in October. This was the lowest reading since May, when the economy began rebounding from the shocks of  COVID-19. Consequently, Canada’s business confidence has a score of 1.

  • Canada Consumer Spending

This measures the final market value of all household expenditures on goods and services. It also includes expenditure by non-profit organizations that serve households in Canada but excludes purchases of homes. Consumer spending plays a critical role in economic growth.

In Q3 of 2020, consumer spending in Canada rose to CAD 1.13 trillion from CAD 1 trillion in Q2. However, it is still lower than consumer spending recorded in Q1. Thus, Canada’s consumer spending has a score of -4.

  • Canada New Housing Price Index

The Canadian NHPI measures the changes in the selling price of newly built residential houses. The price measured is that paid by the home buyers to the contractors. Note that the price comparison is strictly between houses of the same specification. The NHPI shows the construction sector’s growth trends; hence, it corresponds to changes in the labor market and GDP growth.

In November 2020, the Canadian NHPI rose to 107.9 from 107.3 in October. Thus, we assign a score of 3.

  • Canada Government Budget Value

This indicator tracks the changes in the difference between the Canadian government revenues and expenditures. It shows whether the government is running a surplus or a deficit. It also breaks down the changes in the receipts by the government. This helps to show how the overall economy is fairing.

In October 2020, the Canadian government budget had a deficit of CAD 18.51 billion compared to CAD 27.59 billion in September. Throughout the year, the budget deficits have been due to the economic shocks brought on by the coronavirus pandemic. The Canadian government had to ramp up expenditure through its Economic Response Plan, while revenues dropped in the same period. We assign it a score of -5.

Conclusion

Indicator Score Total State Comment
Canada Employment Rate -6 10 59.5% in November 2020 The employment rate is steadily increasing. It is, however, still below January levels
Canada Core Consumer Prices 3 10 136.6 points in November 2020 Since January, it has increased by 2 points. That shows demand in the economy has kept prices higher
Canada Manufacturing Production -2 10 YoY dropped by 4.24% in September 2020 A slight increase from -5.34% recorded in August. This shows that the manufacturing production is returning to the pre-pandemic levels
Canada Business Confidence 1 10 52.7 in November November level was the lowest since the economy began to recover in May. It’s expected to improve as mass vaccinations against COVID-19 rolls out
Canada Consumer Spending -4 10 Was CAD 1.13 trillion Q3 2020 Recovered from CAD 1 trillion in Q2 but still lower than Q1. This shows that demand is increasing in the economy
Canada New Housing Price Index 3 10 November NHPI was 107.9 It has been increasing, which shows that output in the construction industry is improving
Canada Government Budget Value -5 10 a budget deficit of CAD 18.51 billion in October The deficit widened in 2020, driven by unprecedented fiscal policies to curb recessionary pressure from the pandemic
TOTAL SCORE -10

A score of -10 indicates that the CAD has depreciated since the beginning of the year 2020.

In the next article, you can find the exogenous analysis of GBP/CAD where we have forecasted this pair’s future price movements. Cheers.

GBP/CAD Exogenous Analysis

  • The UK and Canada Current Account Differential

The current account differential between the UK and Canada can determine if the GBP/CAD pair is bullish or bearish. If the differential is positive, it means that the UK has a higher current account balance than Canada. This would imply that the GBP is in higher demand in the forex market than the CAD; hence, it is a bullish trend for the pair. Conversely, if the current account differential is negative, it means that the UK has a lesser current balance than Canada. It would imply that the GBP has a lower demand than the CAD in the forex market; hence, a bearish trend for the pair.

In Q3 of 2020, the UK had a current account deficit of $20.97 billion while Canada had a $5.83 billion deficit. Thus, the current account differential is -$15.14 billion. We assign a score of -2.

The interest rate differential is the difference between the Bank of England’s interest rate and that by the Bank of Canada. In the forex market, carry traders use the interest rate differential to decide whether to buy or short a currency pair. When the interest rate differential is positive, traders will earn the differential by going long. If the differential is negative, traders can earn the differential by shorting the currency pair.

Therefore, if the GBP/CAD pair’s interest rate differential is positive, the pair is bound to adopt a bullish trend. Conversely, if negative, the pair is bound to be bearish.

In 2020, the interest rate in the UK dropped from 0.75% to 0.1%. In Canada, the BOC cut the interest rate from 1.75% to 0.25%. Therefore, the interest rate differential is -0.15%. The interest rate differential between the UK and Canada has a score of -1.

  • The differential in GDP growth rate between the UK and Canada

This differential measures the changes in the growth rate between the two economies. It is a preferred method of comparison since economies are of different sizes. Naturally, the economy with a higher GDP growth rate will have its currency appreciate more. Therefore, if the GDP growth rate differential is positive, it means that the GBP/CAD pair is bullish. If negative, then the pair is bearish.

During the first three quarters of 2020, the UK economy has contracted by 5.8%, while the Canadian economy has contracted by 3.3%. This makes the GDP growth rate differential -2.5%. Hence, a score of -1.

Conclusion

Indicator Score Total State Comment
The UK and Canada Current Account Differential -2 10 A differential of – $15.14 The UK has a higher deficit than Canada
The interest rate differential between the UK and Canada -1 10 -0.15% Expected to remain at -0.15% until either economy have recovered
The differential in GDP growth rate between the UK and Canada -1 10 3.30% The Canadian economy contracted at a slower pace than the UK economy
TOTAL SCORE -4

 

The cumulative score for the exogenous factors is -4. This means that we can expect the GBP/CAD pair to trade in a downtrend in the short term. However, technical analysis shows the pair adopting a bullish trend with the weekly chart trading above the 200-period MA. More so, the pair is seen bouncing off the lower Bollinger band.

Keep an eye on the near-term changes in the exogenous factors.

 

Categories
Forex Daily Topic Forex Fundamental Analysis

GBP/AUD Global Macro Analysis – Part 3

GBP/AUD Exogenous Analysis

  1. The UK and Australia Current Account Differential

In this case, the current account differential is derived by subtracting Australia’s current account balance from that of the UK. The current account shows the net value of a country’s exports. Remember that the value of a currency is determined by its demand. Theoretically, the country’s domestic currency with a higher current account balance will have a higher demand. Therefore, its value will be higher in the forex market than in currencies with lower current account balances.

In this case, if the current account differential is positive, it means that the GBP is in higher demand than the AUD, hence a bullish trend for the GBP/AUD pair. Conversely, if the differential is negative, the GBP/AUD pair will have a bearish trend.

Australia had a $7.5 billion current account surplus in Q3 2020, while the UK had a $20.97 billion deficit. The current account differential is -$28.47 billion. Consequently, the current account differential between the UK and Australia has a score of -4.

  1. The interest rate differential between the UK and Australia

This interest rate differential is the difference between the interest rate in the UK and Australia. Typically, investors prefer to buy currencies with a higher interest rate. Therefore, if the interest rate differential for the GBP/AUD pair is positive, it means that the UK offers higher interest rates than Australia. Traders would then sell AUD and buy the GBP, which implies that the GBP/AUD pair will have a bullish trend. Conversely, if the interest rate differential is negative, Australia offers a higher interest rate. Thus, traders would sell the GBP and buy the AUD, which will force the GBP/AUD pair into a downtrend.

In 2020, the Reserve Bank of Australia cut interest rates from 0.75% to 0.25% and finally to 0.1% in December. The BOE cut interest rates from 0.75% to 0.1%. As of December 2020, the interest rate differential for the GBP/AUD pair is 0%. Thus, we assign a score of -1.

  1. The differential in GDP growth rate between the UK and Australia

The differential in GDP growth rate measures the difference in domestic economic growth in the UK and Australia. It is expected that the domestic currency of the country whose GDP is expanding at a faster pace will appreciate faster. Therefore, if the GDP growth differential between the UK and Australia is positive, we should expect a bullish trend for the GBP/AUD pair. Conversely, we should expect a downtrend in the pair if the differential is negative.

The Australian economy has contracted by 4% in the first three quarters of 2020, while the UK has contracted by 5.8%. Thus, the GDP growth rate differential is -1.8%. Hence, the score of -3.

Conclusion

Indicator Score Total State Comment
The UK and Australia Current Account Differential -4 10 A differential of – $28.47 Australia has a current account surplus while the UK is running a deficit. The differential is expected to increase as COVID-19 restrictions ease
The interest rate differential between the UK and Australia -1 10 0.00% Neither the RBA nor the BOE intends to change the interest rate policy in the near term. The differential of 0% is expected to persist in the near term
The differential in GDP growth rate between the UK and Australia -3 10 -1.80% The Australian economy contracted slower than the UK’s
TOTAL SCORE -8

Since the cumulative exogenous score for the GBP/AUD pair is -8, we can expect the pair to continue a bearish trend.

According to the above picture’s technical analysis, this pair is trading below the 200-period MA and attempting to breach the lower Bollinger band, supporting our fundamental analysis. Cheers.

Categories
Forex Daily Topic Forex Fundamental Analysis

GBP/AUD Global Macro Analysis – Part 1 & 2

Introduction

This analysis will look into endogenous factors that influence economic growth both in the UK and Australia. We will also analyze the exogenous factors that impact the exchange rate of the GBP/AUD pair.

Ranking Scale

We will conduct correlation analysis, which we will use to rank the endogenous and exogenous factors on a scale of -10 to 10.

In ranking the endogenous factors, we will conduct a correlation analysis against the GDP growth rate. If the score is negative, the endogenous factor has resulted in depreciation of either the GBP of the AUD. Conversely, if the score is positive, then the factor has resulted in an appreciation of the local currency.

When the exogenous analysis is negative, the factor has resulted in a decline of the GBP/AUD exchange rate. If the score is positive, then the factor has led to an increase in the exchange rate.

Summary – GBP Endogenous Analysis

-15 score indicates that the Pound has depreciated since the starting of 2020.

Summary – AUD Endogenous Analysis

A score of -8 indicates that the Australian dollar has depreciated as well since the beginning of 2020.

Indicator Score Total State Comment
Australia Employment Rate -3 10 61.2% in October The employment rate hit 20-year lows during the pandemic. It’s expected to continue recovery as the economy recovers
Australia Core Consumer Prices 2 10 117.49 in Q3 2020 The inflation rate still lower than Q1, but the demand is increasing in the economy
Australia Manufacturing Production -3 10 Q3 projected to drop by 3.5% Q2 dropped by 6.2%. Production expected to improve in Q3 as business operation resume some normalcy
Australia Business Confidence 6 10 NAB business confidence was 12 in November It’s the highest level since April 2018. This shows that businesses are highly optimistic about their future operations
Australia Consumer Spending -3 10 Was 253.648 billion AUD in Q3 2020 Q3 levels still lower than Q1 domestic expenditure. Expected to increase further when the economy recovers to pre-pandemic levels
Australia Construction Output -3 10 Q3 output dropped by 2.6% Q3 drop caused by a reduction in residential and non-residential construction, engineering, and building works
Australia Government Budget Value -4 10 a budget deficit of 10.974 billion AUD in October The government budget deficit is improving. This shows that the revenue stream is improving as businesses resume operations
TOTAL SCORE -8
  1. Australia Employment Rate

This indicator shows the number of working-age Australians who are employed during a particular period. As an indicator of growth in the labor market, the employment rate shows if the economy is adding or shedding jobs. Thus, it is used to show periods of economic growth and contractions.

The Australian labor market has been recovering from the coronavirus pandemic shocks when the employment rate hit a 20-year low of 58.2%. In October 2020, Australia had an employment rate of 61.2%, up from 60.4% in September. However, it is still lower than January’s 62.6%. Australia’s employment rate has a score of -3.

  1. Australia Trimmed Mean Consumer Prices

This indicator is also called core consumer prices. It measures the price changes of goods and services that are frequently purchased by Australian households. The computation of the trimmed mean consumer prices excludes goods and services whose prices are volatile.

In Q3 2020, the core consumer prices in Australia rose to 117.49 from 117.04 in Q2. Q3 levels are also higher than the 117.17 points recorded in Q1. This shows that the economy is recovering since an increase in prices implies an increase in domestic demand for goods and services. We assign a score of 2.

  1. Australia Manufacturing Production

This indicator shows the YoY change in the value of output from the manufacturing sector. The Australian economy is heavily dependent on industrial production; hence, manufacturing production changes provides invaluable insights into the domestic economic growth. It also shows how the economy is recovering from the impact of COVID-19.

In Q2 2020, the YoY manufacturing production in Australia dropped by 6.2%, compared to 2.7% growth in Q1. Q3 YoY manufacturing production is expected to drop by 3.5%. Consequently, Australian manufacturing production has a score of -3.

  1. Australia Business Confidence

Business confidence in Australia is measured by conducting a monthly survey of about 600 businesses. They include small, medium, and large companies operating in non-agricultural sectors. The survey gauges the businesses’ expectations in terms of profitability, trading volume, and employees. The index is derived by considering the percentage of respondents who have good and very good expectations and those who have a bad and very bad outlook.

In November 2020, the NAB business confidence increased to 12 from 3 in October, which has been the highest since April 2018. Australia’s business confidence has a score of 6.

  1. Australia Consumer Spending

The indicator records the quarterly change in the value of goods and services consumed by domestic households. It includes expenditure by non-profit organizations that provide goods and services to Australian households and the value of backyard productions.

In Q3 of 2020, consumer spending in Australia rose to AUD 253.648 billion from AUD 235.131 billion in Q2. Although it’s lower than Q1 expenditure, domestic demand in the economy is rebounding from the slump of COVID-19. Consequently, Australian consumer spending has a score of -3.

  1. Australia Construction Output

This indicator shows the quarterly change in the value of construction work in Australia. The total value involves both private and public sector building and engineering work.

In the third quarter of 2020, Australia’s construction output dropped by 2.6% from a 0.5% growth in Q2. This drop was caused by output drop in residential and non-residential construction, engineering, and building works. Thus, we assign a score of -3.

  1. Australia Government Budget Value

The government budget value measures whether the Australian government has a budget surplus or deficit. A budget surplus implies that the government’s expenditure is less than its revenue. Similarly, a budget deficit means that the government spends more than it collects in terms of revenue.

In October 2020, Australia had a budget deficit of AUD 10.974 billion, up from a deficit of 33.613 billion in September. We assign a score of -4.

In the next article, you can find the Exogenous analysis of the GBP/AUD currency pair and also our forecast on its price movement in the near future. Cheers.

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Forex Fundamental Analysis

GBP/NZD Global Macro Analysis – Part 3

GBP/NZD Exogenous Analysis

  1. The UK and New Zealand Current Account Differential

The current account differential between the UK and NZ is the value of the subtraction of the NZ current account balance and the UK’s current account. For the GBP/NZD pair, if the current account differential is positive, it means that the UK has a higher current account balance than NZ. Thus, the price of the GBP/NZD pair will increase. Conversely, if the differential is negative, NZ has a higher current account balance than the UK. Theoretically, this means that traders would be bullish on the NZD; hence, the GBP/NZD pair price would drop.

In Q3 2020, NZ had a current account deficit of $2.48 billion while the UK a deficit of $20.97 billion. This means that the current account differential is -$18.49 billion. Thus, we assign a score of -5.

  1. The interest rate differential between the UK and New Zealand

The interest rate differential for the GBP/NZD pair is the difference between the UK and NZ’s interest rate. Carry traders and investors would direct their money to the currency, which offers higher interest rates. Therefore, if the interest rate differential for the GBP/NZD pair is positive, it means that the UK offers a higher interest rate than NZ. Hence, traders will be bullish on the GBP/NZD pair. Conversely, if the interest rate differential is negative, it means that NZ has a higher interest rate than the UK. This means that traders would be bearish on the GBP/NZD pair.

In 2020, the Reserve Bank of New Zealand cut its official cash rate from 1% to 0.1%, while the BOE cut the interest rate from 0.75% to 0.1%. In this case, the interest rate differential is 0%. Thus, we assign a score of 0.

  1. The differential in GDP growth rate between the UK and New Zealand

This differential shows which economy is expanding faster between the NZ economy and the UK economy. Comparing domestic economies using their GDP growth rates is more effective than using absolute GDP figures since they vary in size.

If the GDP growth rate differential is negative, the NZ economy is growing faster than the UK economy. This would result in a bearish trend for the GBP/NZD pair. Conversely, the pair will have a bullish trend if the differential is positive since it would mean that the UK economy is expanding more than the NZ economy.

The first three quarters of 2020 saw the NZ economy expand by 0.4% and the UK contract by 5.8%. In this case, the GDP growth rate differential is -6.2%. Hence, the score of -4.

Conclusion

Indicator Score Total State Comment
The UK and New Zealand Current Account Differential -5 10 A differential of – $18.49 NZ has a lower current account deficit than the UK.
The interest rate differential between the UK and New Zealand 0 10 0.00% The 0% interest rate differential is expected to persist in the short-term. That’s because neither the RBNZ and the BOE have scheduled changes in the monetary policy
The differential in GDP growth rate between the UK and New Zealand -4 10 -6.20% New Zealand’s economy expanded by 0.4% in the first three quarters of 2020, while the UK contracted by 5.8%
TOTAL SCORE -9

GBP/NZD exogenous factors have a cumulative score of -9. It means we should expect a continued downtrend in the pair for the short term.

In the above image, we can see that this pair’s weekly chart trading below the 200-period MA for the first time since August 2019. Cheers.

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Forex Fundamental Analysis

GBP/NZD Global Macro Analysis – Part 1 & 2

Introduction

In this analysis, we will analyze endogenous factors that influence both the UK and New Zealand economies. The analysis will also include exogenous factors that impact the exchange rate between the GBP and the NZD.

Ranking Scale

We’ll rank the endogenous and exogenous factors on a scale from -10 to +10.

The score of the endogenous factors will be determined from correlation analysis between the GDP growth rate. If the score is negative, the endogenous factor had a devaluing effect on the domestic currency. Conversely, if the score is positive, the factor led to the appreciation of the domestic currency.

Similarly, we’ll do a correlation analysis between the exogenous factors and the GBP/NZD exchange rate. If the correlation is negative, the factor results in a drop in the exchange rate. If positive, then the exogenous factor increases the exchange rate.

Summary – GBP Endogenous Analysis

-15 score on Pound’s Endogenous Analysis indicates that this currency has depreciated since the beginning of 2020.

Summary – NZD Endogenous Analysis

A positive 5 indicates that the New Zealand dollar has appreciated since the beginning of this year.

Indicator Score Total State Comment
New Zealand Employment Rate -7 10 66.4% in Q3 2020 The NZ labor market is yet to recover from the economic disruptions of the pandemic
New Zealand Core Consumer Prices 1 10 1054 points in Q3 2020 From Q1 to Q3, inflation has increased by 1 point
New Zealand Industrial Production 5 10 A 3.1% increase in Q3 The NZ industrial sector is rebounding from a 12.1% drop in Q2.
New Zealand Business Confidence 7 10 Was 9.4 in November November showed the first positive reading in ANZ business confidence since August 2018
New Zealand Consumer Spending 5 10 Q3 spending was 41.335 billion NZD. Q3 consumer spending was the highest recorded in 2020. This shows that the domestic demand has recovered beyond the pre-pandemic period
New Zealand Construction Output -4 10 Q2 output dropped by 24.2% The worst decline in construction output in about 18 years. It’s bound to increase as COVID-19 restrictions ease
New Zealand Government Budget Value -2 10 2020 projected deficit of 4.5 billion NZD This would be a drop from a surplus of 7.5 billion NZD in 2019. Attributed to the increase in government spending during the pandemic
TOTAL SCORE 5
  1. New Zealand Employment Rate

The employment rate shows the growth in New Zealand’s labor market. The change in the labor market shows how the economy is performing – especially in the coronavirus pandemic. The labor market shows if the economy is churning out new jobs or if jobs are lost. Thus, the growth of the labor market is a leading indicator of economic growth.

In Q3 2020, New Zealand’s employment rate dropped to 66.4% from 67.1% in Q2 and 67.7% in Q1. This shows that the labor market is yet to recover from the economic shocks of the pandemic. The New Zealand employment rate has a score of -7.

  1. New Zealand Core Consumer Prices

This indicator samples the price changes in a basket of the most commonly purchased goods and services by households. The price changes represent the rate of inflation in the overall economy. Note that the computation of the core consumer prices excludes goods and services whose prices tend to be volatile. It helps avoid seasonal distortions in the index.

In Q3 of 2020, the core consumer prices in New Zealand rose to 1054 points from 1048 in Q2. The index had only increased by 1 point in 2020. Thus, we assign a score of 1.

  1. New Zealand Industrial Production

Industrial production in New Zealand refers to the YoY change in total manufacturing sales. It measures the YoY change in sales volume in the manufacturing sector. A survey of 13 industries across the manufacturing sector is surveyed to derive the YoY manufacturing sales data for the whole sector. Some of these industries include; petroleum and coal products, metal products, machinery, equipment and furniture, and food and beverage. Naturally, expansion in industrial production corresponds to the expansion of the economy.

New Zealand manufacturing sales rose by 3.1% in Q3 2020 from a drop of 12.1%. This is the largest YoY increase in manufacturing sales in three years. It shows that the economy is rebounding. We assign a score of 5.

  1. New Zealand Business Confidence

NZ business confidence is a survey of about 700 businesses. They are polled to establish their expectations about the future business operating environment and economic growth in general. Some aspects surveyed include; activity outlook, employment prospects, capacity utilization, and investment decisions.

In December 2020, the NZ ANZ business confidence rose to 9.4 from -6.9 in November. This shows an increased optimism in NZ businesses since it is the first positive reading since August 2018. Thus, we assign a score of 7.

  1. New Zealand Consumer Spending

This measures the value of the quarterly consumer expenditure in NZ. Changes in consumer expenditure go hand in hand with domestic demand changes in the economy, which drive GDP growth.

In Q3 2020, the NZ consumer spending increased to NZD 41.335 billion from NZD 35.197 billion in Q2. More so, the Q3 consumer spending is more than the NZD 40.04 billion recorded in Q1. Consequently, the NZ consumer spending has a score of 5.

  1. New Zealand Construction Output

This indicator shows the overall change in the value of all construction work done by contractors in NZ. It compares the YoY quarterly change, which helps to show if the economy is expanding or contracting.

In Q2 2020, the NZ construction output dropped by 24.2% compared to the 4.1% drop in Q2. This is the worst drop in over 18 years. Thus, we assign a score of -4.

  1. New Zealand Government Budget Value

This is the difference between the revenues that the NZ government collects and the amount it spends. Deficits arise if the revenues are less than expenditures, while surplus occurs when the revenues exceed expenditure.

In 2019, the NZ government had a budget surplus of NZD 7.5 billion. In 2020, it was projected that the budget would hit a deficit of NZD 4.5 billion. This is due to increased government expenditure to alleviate the pandemic’s economic shocks while revenues have been depressed due to nationwide shutdowns. Thus, we assign a score of -2.

For the exogenous analysis of both of these currencies, you can check our very next article. In case of any queries, let us know in the comments below. Cheers.

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Forex Fundamental Analysis

GBP/CHF Global Macro Analysis – Part 3

GBP/CHF Exogenous Analysis

  1. The UK and Switzerland Current Account Differential

A country’s current account shows the sum of its net exports, net secondary income, and net primary income. In this case, the current account differential is the difference between the UK’s current account balance and Switzerland.

In international trade, when a country has a current account surplus, it means the value of its exports is higher than imports. Thus, its domestic currency is in higher demand in the forex market. Therefore, if the current account differential is positive, it implies that the UK has a higher current account than Switzerland. We can then expect that the price of the GBP/CHF pair will increase. Conversely, a negative differential would mean that Switzerland has a higher current account than the UK. In this case, the price of the GBP/CHF pair is expected to drop.

Switzerland had a current account surplus of $10.11 billion in the third quarter of 2020, while the UK had a $20.97 billion deficit. The current account differential is -$31.08 billion. Hence a score of -7.

  1. The interest rate differential between the UK and Switzerland

Interest rate differential is the swiss interest rate subtracted from the interest rate in the UK. Forex carry traders use a pair’s interest rate differential to establish whether to buy or short the pair. For GBP/CHF, if the interest rate differential is positive, it means that the UK’s interest rate is higher than in Switzerland. This makes traders and investors go long on the pair; hence, a bullish trend.

Conversely, if the interest rate differential is negative, it means that Switzerland’s interest rate is higher than in the UK. Thus, forex traders will short the GBP/CHF pair; hence, a bearish trend.

The Swiss National Bank has maintained the interest rate at -0.75%, while the UK’s interest rate is 0.1%. Therefore, the GBP/CHF interest rate differential is 0.85%. It has a score of 3.

  1. The differential in GDP growth rate between the UK and Switzerland

GDP growth rate differential is the difference between the economic growth in the UK and Switzerland. A negative differential means that the UK’s economy is expanding faster than that of Switzerland. Consequently, the GBP/CHF pair will adopt a bullish trend. Conversely, if the GDP growth rate differential is negative, the swiss economy is growing faster than that of the UK. Hence, the GBP/CHF pair will adopt a bearish trend.

The UK economy has contracted by 5.8% in the first three quarters of 2020, while the swiss economy has contracted by 1.5%. That means the GDP growth rate differential is -4.3%. We assign a score of -3.

Conclusion

Indicator Score Total State Comment
The UK and Switzerland Current Account Differential -7 10 A differential of – $31.08 Switzerland has a $10.11 billion current account surplus, while the UK has a deficit of $20.97 billion
The interest rate differential between the UK and Switzerland 3 10 0.85% The differential is expected to remain at 0.85% all through 2021
The differential in GDP growth rate between the UK and Switzerland -3 10 -4.30% Switzerland’s economy contracted by 1.5% in the first three quarters of 2020 while the UK by 5.8%
TOTAL SCORE -7

The exogenous analysis of the GBP/CHF pair has a cumulative score of -7. Thus, we can expect a short-term downtrend in the pair.

In technical analysis, GBP/CHF’s weekly price is seen bouncing off from the upper Bollinger band.

We hope you find this analysis informative. Let us know if you have any questions in the comments below. Cheers.

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Forex Fundamental Analysis

GBP/CHF Global Macro Analysis – Part 1 & 2

Introduction

The global macro analysis of the GBP/CHF currency pair will involve analysing endogenous and exogenous factors. Endogenous factors drive the domestic GDP growth in the UK and Switzerland. Exogenous factors influence the exchange rate for the currency pair.

Ranking Scale

The analysis will rank the endogenous and exogenous factors on a scale from -10 to +10. The score for endogenous factors will be determined from a correlation analysis with the domestic GDP growth rate. If the score is negative, it means that the endogenous factor has led to the domestic currency depreciation. If positive, it has caused the appreciation of the domestic currency.

The exogenous analysis score is from a correlation analysis with the exchange rate for the GBP/CHF pair. When the score is negative, traders can expect the bearish trend for the pair. If positive, then the pair is expected to have a bullish trend.

Summary – GBP Endogenous Analysis

A -15 score implies that GBP has depreciated since the beginning of 2020.

Summary – CHF Endogenous Analysis

A score of 3 implies that CHF has partially appreciated since the beginning of this year.

Indicator Score Total State Comment
Switzerland Employment Rate -3 10 79.7% in Q3 2020 Slightly below the 80.4% recorded in Q1.
Switzerland Core Consumer Prices 4 10 100.82 points in November Inflation, as measured by the core consumer prices, rose by 0.28 points from January to November
Switzerland Manufacturing Production -2 10 4.7% decrease in Q3 2020 The YoY swiss manufacturing production is recovering
Switzerland Business Confidence 3 10 103.5 in November Swiss KOF Economic Barometer dropped in October and November. The majority of the consecutive drop was driven by private consumption
Switzerland Consumer Spending 5 10 Q3 spending was 91.929 billion CHF Q3 had the highest consumer spending compared to Q1 and Q2.
Switzerland Construction Output -2 10 A 0.4% drop in Q3 2020 Q3 output recovered from the 5% drop in Q2 but is still lower than the 3.1% growth in Q1
Switzerland Government Budget Value -2 10 An expected deficit of 2.2 billion CHF in 2020 Switzerland had a surplus of 8.1 billion CHF in 2019. The projected deficit is on account of aggressive government stimulus program and decreases in revenue due to COVID-19
TOTAL SCORE 3
  1. Switzerland Employment Rate

The Swiss employment rate measures the quarterly change in the percentage of the labour force that is employed. Changes in the number of people employed in the economy are a leading indicator of economic growth. When the economy is expanding, businesses create more job opportunities; hence, higher employment rate. Conversely, a shrinking economy leads to job cuts, which result in a lower employment rate.

In 2020 Q3, the Switzerland employment rate rose to 79.7% from the 6-year lows of 79.1%. Although the Q3 employment rate is lower than the 80.4% recorded in Q1, it shows that the Swiss economy is recovering from the economic shocks of COBID-19. The swiss employment rate scores -3.

  1. Switzerland Core Consumer Prices

Core consumer prices measure the rate of inflation by monitoring the price changes of only a select basket of goods and services. Consumer products with volatile prices are excluded. The rate of inflation is a leading indicator of economic growth. That’s because when inflation rises, it means domestic demand is on the rise, too, hence a higher GDP growth rate. Similarly, a decrease in the inflation rate means domestic demand is depressed, which may be followed by a contracting economy.

In November 2020, the swiss core consumer prices dropped to 100.82 points from 100.89 points in October. However, it is still higher than 100.54 points recorded in January. It has a score of 4.

  1. Switzerland Manufacturing Production

This measures the YoY change in the value of output from the swiss manufacturing sector. This sector plays a significant role in the Swiss economy. Therefore, growth in manufacturing production is accompanied by growth in the labour market and, consequently, the domestic economy’s expansion.

In Q3 of 2020, the YoY swiss manufacturing production dropped by 4.7%. That’s an improvement from the 9.6% drop in Q2. We assign a score of -2.

  1. Switzerland Business Confidence

The KOF Swiss Economic Institute compiles this index. It measures company managers’ optimism based on their perspective of the economy and the growth prospects of their businesses. The business that is surveyed are drawn from multiple sectors in the economy and contains 219 different variables.

In November 2020, the Swiss KOF Economic Barometer dropped to 103.5 from 106.3 in October. This marks the send consecutive month of a drop in the swiss business confidence. Notably, the drop in the index is primarily driven by the manufacturing sector and private consumption. Swiss business confidence has a score of 3.

  1. Switzerland Consumer Spending

This is the value of the total consumption by Swiss households. Domestic consumption is a primary driver of GDP growth. More so, it also an indicator of the performance in the labour market. With a higher rate of employment, disposable income increases, which increases consumer spending.

Swiss consumer spending increased to CHF 91.929 billion in the third quarter of 2020, which is the highest recorded compared to CHF 89.79 billion in Q1 and CHF 82.03 billion in Q2. It has a score of 5.

  1. Switzerland Construction Output

This indicator measures the percentage change in the value paid for construction work in Switzerland. The construction work includes building and engineering works done by public and private companies. Typically, when construction work increases, it is expected to be accompanied by an increase in the employment rate and economic growth.

In the third quarter of 2020, the YoY swiss construction output dropped by 0.4%. That is an improvement compared to the 5% drop in Q2 but still less than the 3.1% growth recorded in Q1. It has a score of -2.

  1. Switzerland General Government Budget Value

This represents the difference between the revenues received by the Swiss government and its expenditures. Government expenditure includes all transfer payments and purchases of goods and services. The general government budget value shows if the Swiss government has a surplus or a deficit. Too much deficit means that the economy is probably not responding to expansionary fiscal policies.

In 2019, the Swiss government had a budget surplus of CHF 8.097 billion. In 2020, the general government budget was expected to hit a deficit of CHF 2.2 billion. This deficit is primarily driven by a significant drop in revenue collection due to COVID-19. It has a score of -2.

In the very next article, you can find the Exogenous analysis of the GBP/CHF currency pair, so make sure to check that out. Cheers.

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Forex Fundamental Analysis

GBP/JPY Global Macro Analysis – Part 3

GBP/JPY Exogenous Analysis

  • The United Kingdom and Japan Current Account Differential

The current account data is the most comprehensive measure of a country’s participation in international trade. It is the sum of net exports, net factor income, and net transfer payments. Remember that in the forex market, the value of a country’s fluctuates depending on its demand. Therefore, when a country has a current surplus account, it means that the demand for its currency is higher, and vice versa.

In this case, the current account differential is the difference between the UK and Japan’s current account balance. If the current account differential is positive, it means that the GBP will appreciate more than JPY hence a bullish GBP/JPY. Conversely, if the current account differential is negative, JPY will appreciate faster than the GBP hence a bearish trend for GBP/JPY.

In Q3 2020, Japan had a current account surplus of $15.4 billion while the UK had a $20.97 billion deficit. Thus, the current account differential between GBP and JPY is – $36.37 billion. Thus, the UK and Japan current account differential have a score of -3.

In the forex market, the interest rate is one of the most closely monitored economic indicators. Suffice to say, traders and investors monitor every other domestic economic indicator to predict the interest rate policy changes. The interest rate differential for the GBP/JPY pair is the difference between the UK’s interest rate and that in Japan.

If the differential is positive, traders and investors can receive better returns by selling the JPY and buying the GBP, hence, bullish GBP/JPY. Conversely, if the interest rate differential is negative, currency traders would prefer to sell the GBP and buy JPY hence, the bearish GBP/JPY pair.

In 2020, the BOE cut interest rates from 0.75% to 0.1%, while the BOJ has maintained an interest rate of -0.1%. Therefore, the GBP/JPY interest rate differential is 0.2%. It has a score of 4.

  • The differential in GDP growth rate between the UK and Japan

The GDP growth rate differential measures the difference between the UK and Japan’s average annual growth rate. This is an effective way of comparing two economies since all economies vary in size and composition.

When the GDP growth rate differential is positive, it means that the UK economy has expanded more than Japan. Hence, the GBP/JPY will be bullish. Conversely, if the differential is negative, Japan’s economy has expanded faster than the UK’s. Hence, the GBP/JPY pair will be bearish.

In the first three quarters of 2020, the UK economy has contracted by 5.8% while Japan contracted by 3.5%. The GDP growth rate differential is -2.3%. Thus, we assign a score of -3.

Conclusion

Indicator Score Total State Comment
The UK and Japan Current Account Differential -3 10 A differential of – $36.37 The UK has a current account deficit of $20.97 billion, while Japan has a surplus of $15.4 billion. This is expected to continue to widen as both economies recover from the pandemic
The interest rate differential between the UK and Japan 4 10 0.20% Both the BOJ and the BOE have no plans to change their monetary policies in the foreseeable future. This means the differential will remain at 0.2% in the short-term
The differential in GDP growth rate between the UK and Japan -3 10 -2.30% The UK economy contracted more than the Japanese economy. As economic recovery progresses, this differential could change
TOTAL SCORE -2

The cumulative score for the exogenous factors is -2. That means that the GBP/JPY pair is set on a bearish trend in the short-term.

Technical analysis of the pair shows the weekly chart attempting to break below the middle Bollinger band.

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Forex Fundamental Analysis

GBP/JPY Global Macro Analysis – Part 2

JPY Endogenous Analysis

Summary

An overall score of -13 implies that this currency (JPY) has depreciated since the beginning of this year.

Indicator Score Total State Comment
Japan Employment Rate -4 10 60.4% in October 2020 The Japanese labor market has shed about 820,000 jobs between January and October 2020
Japan Core Consumer Prices -1 10 101.2 points in November 2020 The index has dropped marginally by 0.8 points in the first 11 months
Japan Manufacturing Production 2 10 3.1% drop in October The decrease in YoY manufacturing production is slowing down
Japan  Business Confidence -2 10 Q4 reading was -10 Businesses are growing increasingly optimistic
Japan Consumer Spending -2 10 Was ¥280.8 trillion in Q3 2020 The increase in Q3 expenditure by households shows that the economy is steadily recovering
Japan Construction Industry Activity -2 10 YoY drop of 6.9% in July 2020 The July drop was the second-worst recorded in over ten years
Japan Government Budget Value -4 10 the budget deficit of ¥308414 in Q2 2020 This is the worst deficit in 20 years. It’s expected to improve as the economy goes back to normal
TOTAL SCORE -13
  • Japan Employment Rate

This indicator shows the number of Japanese nationals employed as a percentage of the entire Japanese working-age population. With this indicator, we can track the Japanese economy’s performance since employment corresponds to the expansion and contraction of the economy.

In October 2020, the Japan employment rate rose to 60.4% from 60.3% in September. Although Japan’s employment rate is higher than in January, the labor market has lost about 820,000 jobs since January. We assign a score of -4.

  • Japan Core Consumer Prices

Core consumer prices measure the inflation rate in Japan based on a select basket of goods. The core consumer prices do not include goods and services with volatile prices. Typically, when inflation rises, it implies that the economy is expanding and the labor market is growing. Conversely, when the index drops, it means that the labor market is shrinking.

In November 2020, Japan Core Consumer Prices dropped to 101.2 points from 101.3 in October. Since January, the index has shed 0.8 points. Thus, it scores a -1.

  • Japan Manufacturing Production

This indicator measures the percentage change in the value of the output in the manufacturing sector. Since the Japanese economy is highly reliant on the manufacturing sector, changes in this indicator can be considered a leading indicator of economic growth.

In October 2020, the YoY manufacturing production in Japan decreased by 3.1% compared to the 9% decrease recorded in September. The October decrease is the slowest since February.  We assign a score of 2.

  • Japan Business Confidence

In Japan, the business confidence index results from a survey of about 1100 large manufacturers with a capital of at least ¥1 billion. The survey evaluates the current industry trends, business conditions within the company and the industry, and expectations for the next quarter and year. The sentiment in Japanese businesses is ranked with an index of a scale from -100 to +100. The negative index shows pessimism, while a positive index shows optimism.

In Q4 of 2020, the Bank of Japan’s Tankan business sentiment index increased to -10 from -27 in Q3. This improvement shows that the economy is potentially recovering from the impact of the COVID-19 pandemic. However, it is still lower than the -8 registered in Q1. Thus, we assign a score of -2.

  • Japan Consumer Spending

It tracks the quarterly value of expenditure by households. In Japan, the consumption expenditure accounts for both the supply-side and demand-side. The supply-side from the survey of family income, while the demand-side is from the expenditure survey. The weighted average of both these estimates represents the final consumption expenditure.

In Q3 2020, the consumer spending in Japan rose to ¥280.8 trillion from ¥268.2 trillion in Q2. However, it is still lower than the consumer spending recorded in Q1. Japan consumer spending scores -4.

  • Japan Construction Industry Activity

This index tracks the YoY changes in the construction industry in Japan. It shows the changes in companies’ monetary value of construction work and billed to the clients. Note that in Japan, the construction industry accounts for about 6% of the total industrial activity. Thus, the construction output index can be a leading indicator of the entire industrial activity. More so, since it is a tertiary industry, it can signal longer-term changes in the GDP.

In July 2020, Japan’s YoY construction output dropped by 6.9%. This drop is the second-worst in over ten years. The worst was recorded in June at -7.9%. The Japan construction industry activity scores -2.

  • Japan Government Budget Value

In Japan, the government budget value evaluates the difference between government revenues and expenditure. This is meant to determine whether there is a government budget surplus or deficit. A budget surplus arises when revenues exceed the expenditure, while a deficit occurs when government expenditure is more than revenues.

In Q2 of 2020, Japan has a government budget deficit of ¥308414. This is the worst deficit recorded in over two decades. Thus, the Japan Government Budget Value has a score of -4.

In the upcoming article, you can find the Exogenous analysis of the GBP/JPY currency pair where we have forecasted its price movements. All the best.

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Forex Fundamental Analysis

GBP/JPY Global Macro Analysis – Part 1

Introduction

The GBP/JPY pair’s global macro analysis interrogates the endogenous factors that drive the GDP growth in the UK and Japan. The analysis will also cover exogenous factors that affect the exchange rate between the GBP and the JPY.

Ranking Scale

The analysis will use a sliding scale from -10 to +10 to rank the endogenous and exogenous factors’ impact. Endogenous factors impact the value of the domestic currency. Thus, when it is negative, it means that the domestic currency has depreciated. When positive, it means that the domestic currency has increased in value during the period under review. The ranking of the endogenous factors is based on correlation analysis with the domestic GDP.

On the other hand, a positive ranking for the exogenous factors means that the GBP/JPY pair’s price will increase. Conversely, when negative, it means that the price of the pair will drop. This ranking is derived from correlation analysis between the exogenous factors and the GBP/JPY exchange rate fluctuation.

GBP Endogenous Analysis – Summary

A score of -15 implies that GBP has depreciated since the beginning of this year.

Indicator Score Total State Comment
UK Employment Rate -5 10 75.2% in September 2020 Dropped by 1.4% from January to September. The labor market has shed around 551,000 jobs
UK Core Consumer Prices 2 10 109.82 points in November 2020 The UK core consumer prices have increased by 1.82 points since January. Shows that the demand in the domestic economy has not been depressed
UK Factory Orders 3 10 Was -25 in November The CBI trends orders are improving. The -25 recorded in November was the highest since February
UK Business Confidence -2 10 Neutral in Q4 of 2020 UK businesses are still pessimistic about the future operating environment.
UK Consumer Spending -5 10 Was £304.5 billion in Q3 2020 Q3 household expenditure shows domestic demand is recovering from the lows of Q2. Consumer spending is still below the pre-pandemic Q1 levels
UK Construction Output -2 10 YoY drop of 7.5% in October 2020 The construction output is improving, which implies that the UK economy is steadily recovering from the economic disruptions of the pandemic
UK Government Budget Value -6 10 UK public sector net borrowing deficit was £22.3 billion The growing budget deficit is a result of increased government expenditure in the wake of COVID-19 pandemic. Also worsened by reduced revenues due to business disruption
TOTAL SCORE -15
  • United Kingdom Employment Rate

The employment rate shows the percentage of the UK labor market that is actively and gainfully employed. It is a comprehensive representation of the growth in the labor market. Note that the changes in the employment rate measure the changes in the economic activities of a country.

In September 2020, the UK employment rate dropped to 75.2% from 75.3% in August. From January to September 2020, the employment rate has dropped by 1.4%, equivalent to about 551,000 job loss. The UK employment rate scores -5.

  • United Kingdom Core Consumer Prices

This index measures the change in the rate of inflation in the UK by tracking price changes of specific consumer products. The index calculation excludes items whose prices tend to be highly volatile, such as fuel and energy.

In November 2020, the core consumer prices in the UK dropped to 109.82 from 109.9 in October. The index has increased by 1.82 points since January. The UK core consumer prices score 2.

  • United Kingdom Factory Orders

In the UK, the CBI Industrial Trends Orders tracks orders from about 500 companies in 38 sectors of the manufacturing industry. The survey’s components include domestic goods orders, exports, inventory, output prices, and expectations of future investments and output levels. The surveyed manufacturers respond whether the current conditions are normal, above, or below normal. This is used as a leading indicator of industrial production.

In December 2020, the UK CBI trends orders were -25, 15 points up from -40 in November. This is the highest level since February 2020 but still lower than -18 in January. We assign a score of 3.

  • United Kingdom Business Confidence

This index gauges the optimism of businesses operating in the UK. A survey is conducted on 400 small, medium, and large companies to determine their optimism. The survey covers exports, output levels and prices, capacity, order books, inventory, competitiveness in the domestic market,  innovation, and training. The business sentiment is then ranked from -100 to +100, with 0 showing neutrality.

In the fourth quarter of 2020, the UK business confidence was neutral at 0, a slight change from -1 in Q3. It is, however, still below the 23 recorded in Q1. We assign a score of -2.

  • United Kingdom Consumer Spending

Expenditure by households contributes to a significant proportion of the domestic GDP. In the UK, this index tracks quarterly changes in the amount of money spent by households and Non-profit institutions serving households (NPISH). Note that when the economy is performing well, consumer spending is high. Conversely, a poorly performing economy corresponds to low consumer spending.

In Q3 2020, consumer spending in the UK rose to £304.5 billion from £258.3 billion in Q2. However, the Q3 expenditure is still lower than Q1. The UK consumer spending scores -5.

  • United Kingdom Construction Output

This economic indicator tracks the yearly change in the value of work done in the construction sector. The amount of money charged by construction companies in the UK is based on a sample of 8000 companies that employ over 100 employees. Note that in the UK, the construction sector contributes about 6.4% of the GDP.

In October 2020, the UK’s YoY construction output dropped by 7.5%, up for the 10% drop recorded in September. This marks the smallest decrease in the UK’s construction output since the pre-pandemic period. We assign a score of -2.

  • United Kingdom Government Budget Value

This indicator tracks the changes between the government’s revenues and expenditure. When the revenue exceeds the expenditure, it is a surplus and indicates that the economy is expanding. When the deficit is increasing, it means that the government is spending much more than it receives. This poses a threat of overburdening the economy with future debt repayment obligations.

In October 2020, the UK public sector net borrowing deficit was £22.3 billion. This is an improvement from the deficit of £28.6 billion in September. In January 2020, the UK had a surplus of £9.6 billion. Thus, we assign a score of -6.

In the next article, we have discussed the endogenous analysis of JPY currency to see how it has performed in the year’s due course. Make sure to check that out. Cheers.

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Forex Fundamental Analysis

EUR/CHF Global Macro Analysis – Part 3

EUR/CHF Exogenous Analysis

  • The EU and Switzerland Current Account to GDP differential

The ratio of the current account to GDP helps us determine the level of a country’s participation in the international market. When a country has net exports, it means that it will have a current account surplus; and, the larger the surplus, the higher the current account to GDP ratio. Conversely, a country with higher imports than exports; it means it has a current account deficit, and its current account to GDP ratio will be lower.

The domestic currency will be in higher demand in the forex market when a country is a net exporter.

In 2020, the Swiss Current Account to GDP is projected to reach 7.5% and that of the EU 3.4%. Thus, the current account to GDP differential between the EU and Switzerland is -4.1%. That means we should expect that the CHF will be in higher demand than the EUR. Thus, we assign a score of -5.

The interest rate differential for the EUR/CHF pair determines which of these currencies is preferable to investors and carry traders in the forex market. When the interest rate differential is positive, it means that investors will earn more by buying the EUR. Similarly, carry traders will be bullish on the EUR/CHF pair, thus driving the exchange rate higher. A negative interest rate differential implies that the Swiss Franc will be preferable to investors, while carry traders will be bearish on the pair.

The Swiss National Bank has maintained the interest rate at -0.75% throughout 2020, and the ECB interest rate has been at 0%. The interest rate differential for the EUR/CHF pair is 0.75%. We assign a score of 2.

  • The EU and Switzerland GDP Growth Rate differential

The GDP growth differential is the difference between the rate at which the EU and the Swiss economy are growing. This will help us identify which economy is growing faster. A positive GDP growth differential between the EU and Switzerland will result in a higher exchange rate for the EUR/CHF pair. A negative one will lead to a drop in the exchange rate for the pair.

In the first three quarters of 2020, the EU economy has contracted by 2.9% while the Swiss economy contracted by 1.5%. The GDP growth rate differential is -1.4%. We assign a score of -3.

Conclusion

The exogenous factors between the EUR/CHF pair have a score of -6; which implies that the pair can be expected to be on a downtrend in the short term.

As you can see above, the Technical analysis shows that the weekly chart for the EUR/CHF pair has failed to breach the upper Bollinger band successfully and has bounced off of it supporting our fundamental analysis. All the best.

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Forex Fundamental Analysis

EUR/CHF Global Macro Analysis – Part 1 & 2

Introduction

In conducting the global macro analysis of the EUR/CHF pair, we’ll focus on endogenous economic factors that contribute to the growth of GDP in the EU and Switzerland. Exogenous factors that influence the exchange rate of the EUR/CHF in the forex market will also be analysed.

Ranking Scale

A sliding scale of -10 to +10 will be used to rank the impact of endogenous and exogenous factors.

The ranking of the endogenous factors will be based on their correlation analysis with the GDP growth rate. A negative score implies that they resulted in the contraction of the economy hence depreciating the domestic currency. A positive score implies that they led in economic expansion hence appreciation of the domestic currency.

The exogenous factors are ranked based on their correlation with the EUR/CHF exchange rate. A positive score means that the pair lead to an increase in the exchange rate, while a negative ranking means that the exchange rate has decreased.

EUR Endogenous Analysis – Summary

The EUR’s endogenous analysis has a score of -3. This implies that the Euro had marginally depreciated in 2020.

CHF Endogenous Analysis – Summary

The change in the level of employment covers the quarterly developments in the labour market in Switzerland. The statistic includes the changes in both fulltime and parttime employment. Typically, changes in employment is a result of changes in business activities.

In Q3 of 2020, 5.08 million people were employed in Switzerland compared to 5.02 million in Q2. The employment level is still below the 5.11 million registered in Q1. We assign a score of -4.

  • Switzerland GDP Deflator

Switzerland GDP deflator is used to calculate the change in real GDP in terms of prices of all goods and services produced within the country. This is a comprehensive measure of inflation compared to measures like CPI and PPI, which only focus on a small portion of the economy.

In Q3 2020, Switzerland GDP deflator rose to 98.8 from 98 in Q2.  Up to Q3, the GDP deflator has increased by 0.8 points. The increase in inflation can be taken as an indicator that the economy is bouncing back from the economic shocks of the coronavirus pandemic. We assign a score of 3.

  • Switzerland Industrial Production

This indicator shows the changes in output for firms operating in the manufacturing, mining, quarrying, and electricity production. Although Switzerland is not heavily dependent on industrial production, it is still an integral part of the economy.

In Q3 2020, the industrial production in Switzerland increased by 5% from a drop of 9% in Q2. The YoY industrial production for Q3 was down 5.1%. For the first three quarters of 2020, the industrial production is down 3.8%. We assign a score of -3.

  • Switzerland Manufacturing PMI

This is an indicator of the economic health of the Swiss manufacturing sector. The purchasing managers are surveyed based in a questionnaire which covers the output in the sector, suppliers’ deliveries, inventories, new orders, prices, and employment. A PMI of above 50 shows that the Swiss manufacturing sector is expanding, while below 50 shows that the sector is contracting.

In November 2020, Switzerland manufacturing PMI rose to 55.2 from 52.3 in October. This is the highest reading since December 2018 and the fourth consecutive month of expansion since July. We assign a score of 7.

  • Switzerland Retail Sales

The retail sales measure the consumption of final goods and services by households in Switzerland. The expenditure by households drives the aggregate demand in the economy, which results in the changes in GDP.

In October 2020, Switzerland retail sales increased by 3.2% from a drop of 3.2% in September. YoY retail sales increased by 3.1% in October from 0.4% in September. Up to October 2020, the average retail sales has increased by 0.84%. We assign a score of 1.

  • Switzerland Consumer Confidence

About 1000 Swiss households are surveyed in January, April, July and October. They are evaluated based on their opinions about the economy, job security, financial status, inflation, and purchases. Consumer confidence tends to be higher when the economy is expanding and low during recessions.

In Q4 2020, the Swiss consumer confidence dropped to -12.8 from 12 in Q3. Although it is higher than it was in Q2 at the height of the pandemic, it is still lower than in Q1. The expectations on households’ financial situation also dropped to -6.6 from -4.2 in Q2. Households were increasingly pessimistic about the labour market and their job security. this can be attributed to the uncertainties that surround the ongoing coronavirus pandemic. We assign a score of -2.

  • Switzerland Government Gross Debt to GDP

This is the total amount that the Swiss government owes to both domestic and international lenders is expressed as a percentage of the GDP. It helps us to understand and evaluate the size of the debt relative to the size of the economy. At below 60%, the government is seen as being able to service its debt obligations and have room to acquire more debt without straining the economy.

In 2019, the Switzerland government gross debt to GDP was 41% same as in 2018. In 2020, it is expected to range between 49% and 51% due to aggressive expenditure to alleviate the shocks of coronavirus pandemic. We assign a score of -1.

In the very next article, you can find the exogenous analysis of the EUR/CHF Forex pair. Please check that and let us know if you have any questions below. Cheers.

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Forex Fundamental Analysis

EUR/JPY Global Macro Analysis – Part 3

EUR/JPY Exogenous Analysis

  • The EU and Japan Current Account to GDP differential

The current accounts have three basic components: net exports, the difference in incomes that countries pay each other, and transfer payments that countries make to each other. A country that has a surplus in international trade has a higher current account to GDP ratio. Since its domestic currency is in higher demand, it tends to appreciate. Conversely, a country with current account deficits will need to buy more foreign currencies to finance its imports – which weakens the domestic currency in the forex market.

In 2020, the Japanese currency account to GDP ratio was expected to drop to 3.5% while that of the EU 3.4%. This means that the 2020 current account to GDP differential between the EU and Japan is -0.1%. In this case, we expect a bullish JPY; hence, we assign a score of -2.

The interest rate differential between the EUR/JPY pair is used to determine whether traders are bullish or bearish. If the interest rate differential is positive, it means that traders can receive higher returns by selling the JPY and buying the EUR since the EUR offers higher returns. Thus, they are bullish on the pair. Conversely, if the interest rate differential is negative, it means that traders can receive higher returns by selling the EUR and buying the JPY, which means they will be bearish on the EUR/JPY pair.

In 2020, the Bank of Japan maintained the interest rates at -0.1% while the ECB maintained at 0%. Therefore, the interest rate differential for the EUR/JPY pair is 0.1%. We assign a score of 2.

  • The EU and Japan GDP Growth Rate differential

The rate at which an economy is growing impacts the strength of the domestic currency in the forex market. Since it is impractical to compare countries’ economic performance using absolute GDP numbers, we will use their growth rate. In this case, if the GDP growth rate differential is positive, it means that the EU economy has been growing at a faster pace than that of Japan hence a bullish outlook for the EUR/JPY pair. Conversely, when negative, it implies a bearish outlook for the pair.

The Japanese economy contracted by 3.5% in the first three quarters of 2020, while the EU economy contracted by 2.9. Thus, the GDP growth rate differential is 0.6%. Thus, we assign a score of 2.

Conclusion

The exogenous factors have a cumulative score of 2. That means we can expect a short-lived bullish trend for the EUR/JPY pair. The weekly EUR/JPY chart shows that the pair has crossed the 200-period MA for the first time since August and attempting a breach of the upper Bollinger band.

We hope you find this article informative. In case of any questions, please let us know in the comments below. Cheers.

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Forex Fundamental Analysis

EUR/JPY Global Macro Analysis – Part 1 & 2

Introduction

The global macro analysis of the EUR/JPY forex pair will involve the analysis of endogenous and exogenous economic factors. The endogenous analysis will cover indicators that drive economic growth in the EU and Japan. Exogenous factors will cover the analysis of factors that impact the exchange rate between the Euro and the Japanese Yen.

Ranking Scale

We will use a scale of -10 to +10 to rank the impact of these factors. When the endogenous factors are negative, it implies that they resulted in the depreciation of the local currency. a positive ranking implies that they led to an increase in the value of the domestic currency. The ranking of the endogenous factors is determined by their correlation with the domestic GDP growth.

When the exogenous factors get a negative score, it means they have a bearish impact on the EUR/JPY pair. A positive score implies they’ve had a bullish impact. The ranking of the exogenous factors is determined by their correlation to the exchange rate of the EUR/JPY pair.

EUR Endogenous Analysis – Summary

The endogenous analysis of the EUR has an overall score of -3. Based on the factors we have analyzed, we can expect that the Euro had marginally depreciated in 2020.

JPY Endogenous Analysis – Summary 

A score of -12 implies a strong deflationary effect on the JPY currency pair, and we can conclude that this currency has depreciated this year.

  • Japan Employed Persons

This indicator measures the changes in the number of workers over a particular period. It only tracks the section of the labor force that has attained the minimum working age. Changes in the labor market are seen as leading indicators of economic development.

In October 2020, the number of employed persons in Japan increased to 66.58 million from 66.55 million in September. The number of employed persons in Japan is still lower than the 67.4 million recorded in January. We assign a score of -5.

  • Japan GDP Deflator

The GDP deflator is used to measure the comprehensive changes in the overall inflation of the Japanese economy. Since it measures the price changes of the entire economic output, it is used as a key predictor of future monetary and fiscal policies. An increase in GDP deflator means that the economy is expanding, which may lead to the appreciation of the JPY.

In Q3 of 2020, the Japan GDP deflator dropped to 100.4 from 103.5 in Q2. Up to Q3, the Japan GDP deflator has marginally increased by 0.2 points. We assign a score of 1.

  • Japan Industrial Production

This indicator covers the changes in the output value of mining, manufacturing, and utility sectors. The Japanese economy is highly industrialized. The industrial sector contributes approximately 33% of the GDP. That means the GDP growth rate in Japan is sensitive to the changes in industrial production.

The MoM industrial production in Japan increased by 3.8% in October 2020 while the YoY dropped by 3.2% – the slowest since February 2020. On average, the MoM industrial production in Japan is -0.15%. We assign a score of -5.

  • Japan Manufacturing PMI

About 400 large manufacturers are surveyed monthly by The Jibun Bank. These manufacturers are classified according to the sector of operations, their workforce size, and contribution to GDP. The overall manufacturing PMI is an aggregate of employment, new orders, inventory, output, and suppliers’ deliveries. The Japanese manufacturing sector is seen to be expanding when the PMI is above 50 and contracting when below 50.

In November 2020, the Japan Manufacturing PMI was 49 compared to 48.7 in October. The November reading is almost at par with the January levels. We assign a score of 1.

  • Japan Retail Sales

The retail sales measure the change in the monthly purchase of goods and services by Japanese households. Since it is a leading indicator of consumer demand and expenditure, it is best suited to gauge possible economic contractions and expansions.

In October 2020, Japan retail sales rose by 0.4% from 0.1% recorded in September. YoY retail sales increased by 6.4%, which marks the first month of increase since February 2020. The growth of retail sales is mainly attributed to an increase in motor vehicle sales, machinery and equipment, and medicine & toiletry. On average, the first ten months of 2020 have had a 0.4% increase in MoM retail sales. Thus, we assign a score of 2.

  • Japan Consumer Confidence

This is a monthly survey of about 4700 Japanese households with more than two people. The survey covers the households’ opinion on the overall economic growth, personal income, employment, and purchase of durable goods. An index of above 50 shows that the households are optimistic, while below 50 shows that they are pessimistic.

In November 2020, Japan’s consumer confidence was 33.7 – the highest recorded since March. It is, however, still lower than the pre-pandemic levels of 39.1. We assign a score of -3.

  • Japan General Government Gross Debt to GDP

Prospective domestic and international lenders use the government debt to GDP ratio to determine the ability of an economy to sustain more debt. Among the developed nations, Japan has the highest government debt to GDP ratio. However, it has minimal risk of default since most of the debt is domestic and denominated in Japanese Yen, which poses a low risk of inflating the domestic currency in the international market.

In 2019, the general government gross debt to GDP in Japan was 238%, up from 236.6% in 2018. In 2020, it was projected to hit a maximum of 250%. We assign a score of -3.

In our upcoming article, we have performed an Exogenous analysis of the EUR/JPY Forex pair and gave our optimal forecast. Make sure to check that out. Cheers.

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Forex Fundamental Analysis

EUR/CAD Global Macro Analysis Part 3

EUR/CAD Exogenous Analysis

  • The EU and Canada Current Account to GDP differential

When a country has a high current account to GDP ratio, it means that it is running a current account surplus. That implies that the country is highly competitive in international trade as the value of its exports is higher than its imports. Conversely, a country with a low or negative current account to GDP ratio, is running a current account deficit. It means that the value of its imports is higher than exports.

In 2020, Canada’s current account to GDP is expected to hit -2.7% while that of the EU 3.4%. Thus, the current account to GDP differential between the EU and Canada is  6.1%. This means that the EUR is in higher demand in the international market than the CAD. We assign a score of 5.

In the forex market, interest rate differential helps to show investors and traders which currency will earn them higher returns. In a carry trade, forex traders tend to be bullish on the currency that offers a higher interest rate differential. This means that the currency with the higher interest rate will have a higher demand than the lower interest rate.

The European Central Bank has maintained interest rates at 0% throughout 2020, while in Canada, interest rates were cut from 1.75% to 0.25%. Thus, the interest rate differential for the EUR/CAD pair is -0.25%. We assign a score of -2.

  • The EU and Canada GDP Growth Rate differential

Since countries vary in the economy’s size, it makes it hard to compare them based on absolute GDP. However, the GDP growth rate helps filter out the effects of the economy size and instead compares countries based on their growth.

From January to September 2020, the Canadian economy has contracted by 4.3% while the EU economy has contracted by 2.9%. That means that the GDP growth rate differential between the EU and Canada is 1.4%. i.e., the Canadian economy has contracted more than the EU economy. We assign a score of 4.

Conclusion

The exogenous analysis of the EUR/CAD pair has a score of 8, which means we can expect a bullish trend for the pair in the short-term. This is supported by our technical analysis, which shows the weekly chart bouncing off the lower Bollinger band, implying that an uptrend is looming.

We hope you find this article informative. In case of any queries, please let us know in the comments below. All the best.

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Forex Fundamental Analysis

EUR/CAD Global Macro Analysis Part 1 & 2

Introduction

The global macro analysis of the EUR/CAD pair will analyze endogenous factors that drive the domestic GDP in the EU and Canada. We’ll also analyze exogenous factors that affect the dynamics of the EU and Canada economies, hence affecting the EUR/CAD exchange rate.

Ranking Scale

We’ll rank both endogenous and exogenous factors on a sliding scale from -10 to +10. When the endogenous factors are negative, it means they caused the domestic currency to depreciate. A positive ranking means they resulted in an appreciation of the currency during the period under review. The endogenous scores are based on correlation with the domestic GDP growth.

Similarly, when the exogenous factors get a negative score, they resulted in a drop in the exchange rate. A positive exogenous score means it increased the exchange rate of the EUR/CAD pair. The exogenous scores are based on a correlation with the price of the EUR/CAD pair.

EUR Endogenous Analysis – Summary

The endogenous analysis of the EUR has presented a score of -3. Based on the indicators that we have analyzed, we can conclude that the Euro has depreciated marginally this year.

CAD Endogenous Analysis – Summary

This economic indicator shows the monthly change in the number of Canadians who are employed. It covers both full-time and part-time employment. Normally, employment changes correspond to an increased business activity, which corresponds to changes in the GDP.

In November 2020, employment in Canada increased by 62,000, down from the 83,600 increase registered in October. The November employment change was the lowest since May 2020, when economic recovery from the effects of the coronavirus began. Up to November 2020, the Canadian economy has shed about half a million jobs. We assign a score of -6.

  • Canada GDP Deflator

The GDP inflator is a comprehensive measure of the change in the inflation rate in Canada. It is comprehensive since it reflects the changes in the prices of all goods and services produced within the economy. This contrasts with other measures of inflation like the CPI, which only measures changes in the price of a select basket of goods and services.

In Q3 of 2020, the GD deflator in Canada rose to 111.6 from 108.8 in Q2. Q3 reading is the highest ever in the history of Canada. This shows that the Canadian economy is bouncing back from the economic downturn brought about by the pandemic. We assign a score of 2.

  • Canada Industrial Production

This indicator measures the total output from businesses operating in the industrial sector. Canadian industrial production comprises mining, manufacturing, and utilities. It is the backbone of the Canadian economy, with crude oil production alone accounting for almost 10% of the GDP.

In September 2020, the YoY Canadian industrial production dropped by 7.9%, while the MoM increased by 1.41%, up from the 0.13% drop in August. Up to September, the overall industrial production is down 5.54%. We assign a score of -5.

  • Canada Manufacturing PMI

This indicator measures the Canadian manufacturing sector’s performance from the perspective of firms’ purchasing managers in the sector. The PMI aggregates the following indexes; inventories, employment, new orders, output, and suppliers’ deliveries. The sector is expanding if the index is above 50, while a reading below 50 shows contraction.

In November 2020, the Canada Manufacturing PMI rose to 55.8 from 55.5 in October. This marked the fifth consecutive expansion in the manufacturing sector from July 2020. Thus, we assign a score of 4.

  • Canada Retail Sales

The Canada retail sales data measures the changes in the value of final goods and services purchased by households over a particular period. It is a critical leading indicator of the overall economic growth since households’ consumption is considered the primary driver of GDP growth.

In September 2020, the MoM retail sales in Canada increased by 1.1%  compared to a 0.5% increase in August. YoY retail sales rose by 4.6% compared to 3.7% in August 2020. Up to September 2020, the retail sales figure has risen by an average of 1.38%. We assign a score of 3.

  • Canada Consumer Confidence

Canada consumer confidence is calculated from an aggregate of 11 questions from the survey of households. This survey estimated the current situation to that expected by households in about six months. The questions touch on the areas of the economy, personal finances, job security, household purchases, and savings vs. expenditure goals. Their confidence is measured on a scale from 0 to 100.

In November 2020, consumer confidence in Canada rose to 44.5 from 42.08 in October. It is, however, still lower than during the pre-pandemic period. We assign a score of -5.

  • Canada Government Gross Debt to GDP

In 2019, Canada had a government debt to GDP ratio of 88.6%, down from 89.7% in 2018. The 2019 ratio was the fourth consecutive year since 2016, when the government debt to GDP ratio dropped.

In 2020, it is projected that the Canadian government debt to GDP ratio will increase to 97%. This increase is due to the increased expenditure to alleviate the economy during the coronavirus pandemic. Over the long term, Canada’s government debt to GDP ratio is expected to stabilize around 90%. We assign a score of -2.

In the next article, you can find the exogenous analysis of the EUR/CAD forex pair where we have qualitatively forecasted the future price movement of this pair. Cheers.

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Forex Fundamental Analysis

EUR/AUD Global Macro Analysis – Part 3

EUR/AUD Exogenous Analysis

  • The EU and Australia Current Account to GDP differential

The current account to GDP shows the percentage of a country’s international trade that makes up the GDP. Countries with higher current account surplus have a higher current account to GDP ratio while those running deficits have a negative current account to GDP ratio.

In this case, if the GDP differential is positive, it means that the exchange rate for the EUR/AUD pair will increase. But if the differential is negative, then the exchange rate for the pair will drop.

In 2020, the current account to GDP ratio in the EU is expected to hit 3.4% and -1.5% in Australia. Thus, the current account to GDP differential is 4.9%. We assign a score of 3.

Typically, investors put their money into financial instruments that offer higher interest rates. Therefore, the country with a higher interest rate should be expected to have more inflow of funds than that with a lower interest rate. Note that when foreign investors invest in the local economy, they have to convert their money into the domestic currency. This conversion increases the demand for the domestic currency in the forex market hence increasing its value.

In forex trading, if the EUR/AUD pair has a positive interest rate differential, it means that the exchange rate of the pair will increase. Conversely, a negative interest rate differential implies that the pair has a bearish outlook.

In 2020, the Reserve Bank of Australia cut the cash rate from 0.75% to 0.1%, while the ECB has maintained interest rates at 0%. Therefore, the interest rate differential for the EUR/AUD pair is -0.1%. We assign a score of -3.

  • The EU and Australia Growth Rate differential

In any economy, the value of the domestic currency is mostly determined by the growth of the local economy. Therefore, a country whose economy is growing faster will see its domestic currency appreciate faster.

If the growth rate differential is negative for the EUR/AUD pair, we can expect a bearish outlook. If it is positive, it implies that the exchange rate for the pair will rise.

For the first three quarters of 2020, the Australian economy contracted by 4% and the EU economy by 2.9%. The GDP growth differential is 1.1%. We assign a score of 2.

Conclusion

The EUR/AUD exogenous factors have a score of 2. If the conditions observed in the exogenous factors persist, we can expect that the pair will adopt a bullish trend in the short-term.

The technical analysis of the EUR/AUD shows the weekly price chart bouncing off the oversold region of the lower Bollinger bands. More so, the pair is still trading above the 200-period MA. All the best.

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Forex Fundamental Analysis

EUR/AUD Global Macro Analysis – Part 1 & 2

Introduction

Global macro analysis of the EUR/AUD pair will focus on the endogenous analysis of fundamental factors driving economic growth in the EU and Australia. It will also involve exogenous analysis that will focus on factors that influence the EUR/AUD pair’s exchange rate.

Ranking Scale

This analysis will assign a score between -10 and +10, depending on the endogenous and exogenous factors’ impact.

A negative score for the endogenous factors means that the local currency shed some value. When positive, it means that the domestic currency has appreciated. The endogenous score is determined through correlation analysis between the endogenous factors and the GDP growth rate.

On the other hand, when the exogenous factors have a negative score, it means that the exchange rate between the EUR and the AUD will drop. A positive score means that the exchange rate will rise. The exogenous score is determined via a correlation analysis between the exogenous factors and the EUR/AUD pair’s exchange rate.

EUR Endogenous Analysis – Summary

The endogenous analysis of the EUR has an overall score of -3. Based on the factors we have analyzed, we can expect that the Euro has marginally depreciated in 2020.

AUD Endogenous Analysis – Summary

As you can see in the below image, according to the Endogenous Indicators of AUD, we can conclude that this currency has depreciated as well in 2020.

The employment change in Australia tracks the monthly number of people who are gainfully employed or engaged in unpaid work. The fluctuation in the number of those employed on a full-time or parttime basis helps to show economic growth.

Between September and October 2020, the number of those employed in Australia increased by 178,800. This shows that the economy is recovering and adding more jobs to the labor market. However, from January to October, the Australian labor market has lost about 190,100 jobs. Hence, we assign a score of -6.

  • Australia GDP Deflator

The GDP deflator measures the overall inflation for the economy. It is a comprehensive measure of inflation rate compared to other measures since it accounts for the changes in the prices of all goods and services produced within Australia. Changes in the prices often correspond to changes in economic growth.

In the third quarter of 2020, the Australia GDP deflator rose to 102.03 points from 101.64 in Q2. Up to Q3, the GDP deflator in Australia has dropped by 0.07 points. We assign a score of -2.

  • Australia Industrial Production

Industrial production measures the quarterly changes in output from the manufacturing sector, utilities, and mining. Note that the Australian economy is heavily dependent on commodity exports, which means that industrial production changes significantly impact economic growth.

In Q2, the industrial production in Australia dropped by 3.3%, while the YoY Q3 industrial production dropped by 2.02%. The drop in Q2 is the largest quarterly drop in over 25 years. We assign a score of -6.

  • Australia Manufacturing PMI

This PMI is from a survey of companies operating in the industrial sector. The index shows whether the manufacturing sector in Australia is expanding or contracting. In Australia, the Ai Group surveys the changes in new orders, employment, inventory, output prices, and production levels. When the index is above 50, it means that the manufacturing sector is expanding and contracting when it’s below 50.

In November 2020, the AIG Australian manufacturing PMI dropped to 52.1 from 56.3 in October. Despite the drop, the Australian manufacturing PMI points to growth in the industrial sector. Hence, we assign a score of 6.

  • Australia Retail Sales

The retail sales data in Australia tracks the monthly change of the consumer expenditure on goods and services. Consumer goods include items of clothing and footwear, food, and household items. Purchases made in restaurants, departmental stores, and hotel services and deliveries are also included as retail sales.

In October 2020, the MoM retail sales increased by 1.4% from a 1.1% drop in September. In 2020, the average MoM retail sales have grown by 0.97%. We assign a score of 2.

  • Australia Consumer Confidence

The Melbourne Institute and Westpac Bank survey about 1200 households in Australia and constructs the consumer confidence index. The index is based on households’ evaluation of their financial condition for the preceding year and in the next 12 months. It also includes their economic expectations in the next one and five years. When the index is above 100, it shows that households are optimistic and pessimistic if the index is below 100. Note that consumer confidence about their finances and the economy determines their level of expenditure; hence, it drives the rate of GDP growth.

In December 2020, consumer confidence in Australia rose to 112 from 107.7 in November, which is the highest in over ten years. We assign a score of 5.

  • Australia Government Debt to GDP

The government debt to GDP determines the ability of the economy to service its debts. It also impacts the ability of the government to take on more debt to advance an economic agenda. A debt level of below 60% of the GDP is preferable since it ensures that the government can take on more debt without over-leveraging the economy.

In 2019, the Australian government debt to GDP rose to 45.1% from 41.5% in 2018. In 2020, it is expected to reach 50% on account of increased government expenditure during the coronavirus pandemic. We assign a score of -3.

Please check our following article where we discuss the Exogenous analysis of the EUR/AUD Forex pair. Cheers.

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Forex Fundamental Analysis

EUR/NZD Global Macro Analysis – Part 3

EUR/NZD Exogenous Analysis

  • The EU and New Zealand Current Account to GDP differential

An economy’s current account comprises the balance of trade, net transfer payments, and net factor income. In international trade, a country with a higher current account surplus experiences higher demand for its domestic currency. That means the value of its currency will be higher. Typically, a higher current account to GDP means that the country has more current account surplus.

For the EUR/NZD pair, if the differential of the current account to GDP is negative, it means that the pair’s exchange rate will fall. If it’s positive, we can expect the pair’s exchange rate to increase.

In 2020, New Zealand’s current account to GDP is forecasted to reach -0.8% while that of the EU 3.4%. Thus, the current account to GDP differential between the EU and New Zealand is 4.2%. We assign a score of 4.

The prevailing interest rate in a country determines the flow of capital from foreign investors. Naturally, the country that offers a higher interest rate will attract more foreign investors who seek higher returns. Similarly, a country with lower interest rates will experience an outflow of capital by foreign investors. In the forex market, a currency pair with a positive interest rate differential tends to be bullish since traders are buying the base currency – which offers a higher interest rate and sell the quote currency – which has a lower interest rate. Conversely, a currency pair is expected to be bearish if the interest rate differential is negative since investors will sell the base currency and buy the quote currency.

In 2020, the Reserve Bank of New Zealand cut the official cash rate to 0.25%, while the ECB maintained the interest rate at 0%. Hence, the interest rate differential for the EUR/NZD pair is -0.25%. We assign a score of -3.

  • The EU and New Zealand GDP Growth Rate differential

The value of a country’s domestic currency is impacted by the growth rate of the local economy. Thus, comparing the growth rate between countries’ GDP growth rates helps determine which currency appreciated or depreciated more than the other.

The New Zealand economy contracted by 3.2% in the first three quarters of 2020 and that of the EU by 2.9%. The GDP growth rate differential is 0.3%. We assign a score of 2.

Conclusion

The EUR/NZD exogenous analysis has a cumulative rank of 3. This means that the pair is expected to trade in a bullish trend in the short-term.

The bullish trend can also be observed from the technical analysis of the weekly price charts. The pair is trading above the 200-period MA and the weekly price rebounding from the lower Bollinger Band.

We hope you found this analysis informative. If you have any questions, please let us know in the comments below. Cheers!

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Forex Fundamental Analysis

EUR/NZD Global Macro Analysis – Part 1 & 2

Introduction

In conducting the global macro analysis for the EUR/NZD pair, we will analyze the endogenous factors that impact the EU and New Zealand economic growth. We’ll also analyze exogenous economic factors that affect the EUR/NZD pair’s exchange rate in the forex market.

Ranking Scale

We will rank the effects of the endogenous and exogenous factors on a sliding scale of -10 to +10. The endogenous factors will be ranked based on correlation analysis with the GDP growth rate. When the endogenous ranking is negative, it means that the domestic currency will depreciate and appreciate when positive.

Similarly, the exogenous factors are scored based on correlation analysis with the EUR/NZD pair’s exchange rate. A positive score means that the EUR/NZD pair’s price will rise and drop if the score is negative.

Summary – EUR Endogenous Analysis

Based on the factors we have analyzed, we have got a score of -3, and we can expect the Euro to be marginally depreciating in 2020.

Summary – NZD Endogenous Analysis

A score of -4 on NZD Endogenous Analysis implies that in 2020, the NZD has depreciated as well.

Employment change measures the quarterly change in the number of people who are gainfully employed. It can be used as a comprehensive measure of the labor market changes, which corresponds to economic growth.

In Q3 of 2020, Employment in New Zealand dropped by 0.8%, from a 0.3% drop in Q2 to 2.709 million. The Q3 reading is the largest drop in QoQ employment since Q1 of 2009. We assign a score of  -6.

  • New Zealand GDP Deflator

This indicator measures the quarterly changes in the price of all economic output in New Zealand. It is regarded as the most specific inflation measure since it covers price changes for every good and service produced.

In Q2 of 2020, the New Zealand GDP deflator dropped to 1238 points from 1242 in Q1. This shows that the economy contracted in Q2. Hence, we assign a score of -3.

  • New Zealand Manufacturing Sales

New Zealand manufacturing sales track the change in the volume of total sales made in the manufacturing sector. The indicator tracks the sales in 13 industries, which comprehensively represents New Zealand’s economy. The changes in the volume of sales are directly correlated to the growth of the economy.

In Q3 of 2020, the YoY manufacturing sales in New Zealand increased by 3.1% after dropping by 12.1% in Q2 and 1.9% in Q1. The increase in Q3 is the largest recorded since January 2017. However, since the overall industrial production is still at multi-year lows, we assign a score of -6.

  • New Zealand Manufacturing PMI

This index is aggregated from a survey of purchasing managers in the manufacturing sector. It is a composite of scores regarding output in the sector, prices, expected output, employment, new orders, and inventory. When the PMI is above 50, it means that the manufacturing sector is expanding. A PMI score below 50 shows that the sector is contracting. Naturally, these periods of expansions and contractions are leading indicators of changes in the GDP growth rate.

In November 2020, the New Zealand manufacturing PMI rose to 55.3 from 51.7 in October. The rise was due to increased new orders, inventory, production, and deliveries, as uncertainties surrounding COVID-19 decreased. We assign a score of 4.

  • New Zealand Retail Sales

The retail sales track the changes in the quarterly purchase of final goods and services by households in New Zealand. Although retail sales are often affected by seasonality and tend to be highly volatile, it is a significant measure of the overall economic growth since consumer expenditure is one of the primary drivers of GDP growth.

In Q3 of 2020, New Zealand retail sales increased by 28% from 14.8% recorded in Q2. Historically, the Q3 retail sales increase is the largest rise recorded in New Zealand since 1995. The increase was driven by increased expenditure on groceries, vehicles, and household goods. On average, the QoQ New Zealand retail sales figure has grown by 4.1%. We assign a score of 4.

  • New Zealand Consumer Confidence

The New Zealand consumer confidence is also called the Westpac McDermott Miller Consumer Confidence Index. The index measures the quarterly change in consumers’ pessimism or optimism about the performance of the economy. When the index is above 100, it shows increased optimism by households, and that below 100 shows pessimism.

In the fourth quarter of 2020, New Zealand consumer confidence rose to 106 from 95.1 in Q3. The increased optimism was driven by higher readings in both the current and expected financial situation. We assign a score of 2.

  • New Zealand Government Net Debt to GDP

Investors use this ratio to determine if the economy is capable of servicing its debt obligations. Consequently, the government’s net debt to GDP affects the government securities yield and determines a country’s borrowing costs. Typically, levels below 60% are deemed favorable.

In 2019, the New Zealand Government Net Debt to GDP dropped to 19% from 19.6% in 2018. In 2020, it is projected to range between 27% to 32%, which would be the highest since 1998. We assign a score of 1.

In the next article, we have done the exogenous analysis of both EUR and NZD pairs to accurately forecast this currency pair’s future trend. Please check that out. Cheers.

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Forex Fundamental Analysis Forex Technical Analysis

Fundamental Analysis Vs Technical Analysis: Know the Differences!

Traders make decisions about when and what to trade based on several different factors. Fundamental and technical analysis are two different methods that one can use to predict what will happen with any given instrument by looking at different types of data. As a forex trader, you’ll need to understand the differences between these key schools of thought so that you can make more informed trading decisions. Both fundamental and technical analysis can give you an edge in the markets, but you’ll need to decide which one sounds the most appealing or consider using both methods. 

Fundamental Analysis

Fundamental analysis aims to measure the intrinsic value of a stock by looking at several different factors about the company. This method considers earnings, outgoing costs, assets, liabilities, the overall business model, the status of those in charge, and many other things about a company in order to get the best idea of where prices will go. Some of these things can be measured in simple numerical terms, while others can’t.

For example, you’ll find statistics and numbers when it comes to things like earning reports but evaluating the company’s business model is more of a personal interpretation. Real-time events can also affect the company evaluation. If a scandal goes down involving a certain company, for example, you can expect its revenue to fall. All of these things are taken into consideration when one measures the intrinsic value of a company through fundamental analysis. 

Technical Analysis

Technical analysts exclusively consider a stock’s price and volume, with no need to calculate extra factors. Traders using this method look at charts in order to identify the history of patterns and trends for an idea of what they will do in the future. Some examples of the most popular forms of technical analysis include simple moving averages, support & resistance, trend lines, and other indicators. There are three main types of technical analysis – bar, candlestick, and line charts. Each of these is created using the same price data but will display the data in different ways. This school of thought believes in the idea that charts are great for predicting the past. 

The Bottom Line

While fundamental and technical analysis both aim to predict where a stock’s price will go, each school of thought uses very different methods to come up with its prediction. Fundamental analysts aim to measure the intrinsic value of a company by taking several factors into account, including hard numbers and some personal interpretation. Technical analysts study charts from the past with the stock’s volume and price being the only information considered. While technical analysts look at more complex information about companies that affect a stock’s price in the present and future, technical analysts study charts from the past to get an idea of where the price will go in the future. Both methods have been proven to be effective, so one would need to personally decide which to use.

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Forex Fundamental Analysis

EUR/GBP Global Macro Analysis – Part 3

EUR/GBP Exogenous Analysis

  • The EU and the UK Current Account to GDP differential

This indicator is used to measure how competitive an economy is in the international market. When a country has a higher trade surplus, the current account to GDP ratio is higher. Conversely, if a country has a lower trade surplus or deficit, the ratio is smaller.

Typically, economies with a higher surplus in terms of the balance of trade tend to have more exports than imports. That means that their value on exports is higher than imports, implying that the domestic currency is in high demand in the forex market. Similarly, a running deficit means lower demand for the domestic currency in the forex market since it is a net importer.

In 2020, the EU current account to GDP is expected to hit 3.4% while that of the UK -4%. The differential is 7%. Based on the correlation with the exchange rate of the EUR/GBP pair, we assign a score of 6. That means we expect a bullish trend for the pair.

This helps determine where the most investor capital will flow. Expectedly, investors will direct their capital to the country with a higher interest rate to earn superior returns. In the forex market, traders tend to be bullish when a currency pair has a positive interest rate differential and bearish if it has a negative interest rate differential.

In the EU, the ECB has maintained interest rates at 0%, while the BOE cut interest rates from 0.75% to 0.1%. Therefore, the interest rate differential for the EUR/GBP pair is -0.1%. Based on the correlation with the EUR/GBP exchange rate, we assign a score of -2.

  • The EU and the UK GDP Growth Rate differential

The differential in GDP growth helps to efficiently compare economic growth by eliminating the aspect of the size of different economies.

For the first three quarters of 2020, the EU economy has contracted by 2.9% while the UK has contracted by 6.8%. That makes the GDP growth rate differential between the two economies 3.9%. It means that the EU economy contracted at a slower pace than the UK. Based on the correlation with the EUR/GBP price, we assign a score of 5.

Conclusion

The exogenous analysis of the EUR/GBP pair has a score of 9. This inflationary score means that we can expect a bullish trend for the pair in the short-term.

Our technical analysis shows the pair trading above the 200-period MA. More so, notice that the EUR/GBP pair bounces off the lower Bollinger band crossing above the middle band, supporting our fundamental analysis. Happy  Trading.

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Forex Fundamental Analysis

EUR/GBP Global Macro Analysis – Part 2

GBP Endogenous Analysis – Summary

The GBP endogenous analysis has a score of -9. We can therefore understand that the GBP has depreciated in 2020.

  • United Kingdom Employment Change

The UK unemployment change measures the changes in the number of people who are above 16 years and employed. This data is a 3-month moving average of the change in employment, which measures a general trend in the labor industry changes, which typically corresponds to fluctuations in the economy.

In the three months to September 2020, the number of employed people in the UK dropped by 164,000. The YoY employment change shows a drop of 247,000 jobs, which is the worst in ten years. Based on correlation analysis, we assign a score of -7.

  • United Kingdom GDP Deflator

The UK GDP deflator is used as a measure of the comprehensive change in inflation. It filters out any nominal price changes in the entirety of the goods and services produced within the UK.

In Q3 of 2020, the UK GDP deflator dropped to 109.12 from 111.9 in Q2 – the highest ever recorded in UK history. The UK GDP deflator has increased by 6.41in 2020. We, therefore, assign a score of 4 based on its correlation with the GDP growth.

  • United Kingdom Industrial Production

This indicator tracks the changes in all the firms operating under the industrial sector in the UK. The manufacturing sector accounts for about 70% of the total industrial output. The major components of the manufacturing sector are food, tobacco, and drinks, which account for 11%. The manufacture of transport equipment and basic metals account for 17%, pharmaceuticals and non-metallic 6% each. Quarrying and mining activities account for 12% of the industrial production, with 10% for oil and gas extraction.

In September 2020, MoM industrial production in the UK rose by 0.5 while YoY dropped by 6.3%. Despite the growth and recovery of industrial activity from the coronavirus pandemic, the output is still 5.6% lower than the pre-pandemic levels. Thus, we assign a score of -3 based on correlation with GDP growth.

  • United Kingdom Manufacturing PMI

This index is a result of a survey of about 600 companies in the industrial sector. It is a composite of new orders, which accounts for 30%, output 25%, employment 20%, deliveries from suppliers 15%, and inventory 10%. When the index is above 50, it shows that the manufacturing sector is expanding. Below 50, the manufacturing sector is expected to contract, which impacts the GDP output.

In November 2020, the UK manufacturing PMI was 55.6 – the highest recorded in three years. This was mainly driven by increased inventories and increased new orders as a result of Brexit. We assign a score of 3 based on correlation with the GDP growth rate.

  • United Kingdom Consumer Spending

Consumer spending in the UK shows the amount of money that households spent on the purchase of goods and services in the retail sector. Note that expenditure by households is among the primary drivers of GDP growth.

In Q3 of 2020, the UK consumer spending rose to £304.5 billion from £258.32 billion in Q2. This increase is attributed to the restriction imposed at the onset of the coronavirus outbreak, resulting in the economic slowdown. It is, however, still lower than the pre-pandemic levels. Thus, we assign a score of -5 based on correlation with the GDP growth rate.

  • United Kingdom Consumer Confidence

In the UK, GfK surveys about 2000 households to establish their opinions about the past and future economic conditions, their financial situation, and prospects of saving. The survey period covers about 12 months into the future, which makes it a leading indicator of consumer spending, and by extension, the overall economy.

In November 2020, the UK consumer confidence dropped to -33 edging closer to yearly lows of -34 registered at the height of the pandemic. We assign a score of -5 based on its correlation with the GDP growth rate.

  • United Kingdom Public Sector Net Debt to GDP

This ratio tracks the indebtedness of the UK economy. Based on the economy out, both domestic and foreign investors use the ratio to determine whether the UK can be able to service its debt obligations in the future comfortably.

In the financial year 2018 – 2019, the UK’s public sector net debt to GDP was 80.8%, down from 82.4%. In 2020, it is expected to hit 100% with a longer-term average of 91%. We assign a score of 4 since the increased net pubic debt managed to avoid a deeper recession in 2020.

In the next article, we have performed the Exogenous analysis of the EUR/GBP pair and concluded what trend to expect in this currency pair in the near future. Cheers.

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Forex Fundamental Analysis

EUR/GBP Global Macro Analysis – Part 1

Introduction

A global macro analysis attempts to analyze the endogenous factors that influence the value of a country’s domestic currency and exogenous factors that affect how the domestic currency fairs in the forex market. The endogenous analysis will cover fundamental economic factors that drive GDP growth in the UK and the Euro Area. The exogenous factors will analyze the price exchange rate dynamics between the EUR and the GBP.

Ranking Scale

Both the endogenous and the exogenous factors will be ranked on a scale of -10 to +10. A negative ranking for the endogenous factors means that they had a deflationary effect on the domestic currency. A positive ranking implies that they had an inflationary impact. Similarly, a negative score for the exogenous factors means the EUR/GBP is bearish and bullish when the score is positive.

EUR Endogenous Analysis – Summary

The endogenous analysis of the EUR has an overall score of -3. Based on the factors we have analyzed, we can expect that the Euro has marginally depreciated in 2020.

This is a quarterly measurement of the changes in both part-time and full-time employment in the EU. It includes individuals working for profit or pay and those who perform family work unpaid. Changes in employment help put economic growth in perspective since an expanding economy corresponds to increased employment opportunities and a contracting economy leads to job losses.

In the third quarter of 2020, employment in the EU increased by 0.9% compared to the 2.7% drop in Q2. Up to Q3 2020, employment in the EU has dropped by 2.1 %. Based on correlation with GDP, we assign a score of -5.

  • European Union GDP Deflator

The GDP deflator is an in-depth measure of the rate of inflation. It measures the changes in the price levels of all goods and services produced in an economy. Therefore, it is the perfect measure of the changes in real economic activities. i.e., it filters out any nominal changes in price.

In Q3 of 2020, the EU GDP deflator rose to 107.17 from 106.37 in Q2. Cumulatively, the EU GDP deflator in 2020 has increased by 2.45. We assign a score of 3 based on the weak correlation between the inflation rate and GDP.

  • European Union Manufacturing Production

In the EU, manufacturing production accounts for about 80% of the total industrial output. With most EU economies heavily reliant on manufacturing, the sector forms a significant portion of the GDP and the labor market.

In September 2020, the YoY manufacturing production in the EU decreased by 6.1%. This is an improvement from the decline of 6.3% in August. The overall industrial production reduced by 5.8% during the period.

We assign a score of -5 based on its correlation with the GDP.

  • Euro Area Manufacturing PMI

Markit surveys about 3000 manufacturing firms. The Markit manufacturing PMI comprises five indexes: new orders accounting for 30% weight of the index, output 25%, employment 20%, delivery by suppliers 15%, and inventory 10%. The Euro Area manufacturing is seen to be improving when the index is above 50 and contracting when below 50. At 50, the index shows that there is no change in the manufacturing sector.

In November 2020, the IHS Markit Eurozone Manufacturing PMI was 53.8, down from 54.8 registered in October. The October reading was the highest ever recorded in the past two years. Despite the November drop, the manufacturing PMI is still higher than during the pre-pandemic period. We, therefore, assign a score of 5.

  • European Union Retail Sales

Retail Sales measures the change in the value of goods and services purchased by households for final consumption. In the EU, food, drinks, and tobacco contribute to the highest in retail sales – 40%. Furniture and electrical goods account for 11.5%, books and computer equipment 11.4%, clothing and textile 9.2%, fuel 9%, medical and pharmaceuticals 8.9%, non-food products and others 10%.

In October 2020, the MoM EU retail sales increased by 1.5%, while the YoY increased by 4.2%. Based on our correlation analysis with EU GDP, we assign a score of 3.

  • Euro Area Consumer Confidence

The consumer confidence survey in the Euro Area covers about 23,000 households. Their opinions are gauged from issues ranging from economic expectations, financial situation, savings goals, and expenditure plans on households’ goods and services. These responses are aggregated into an index from -100 to 100. Consumer confidence is a leading indicator of household expenditure, which is a primary driver of the GDP.

In November 2020, the Euro Area consumer confidence was -17.6, down from -15.5 in October. It is also the lowest reading since May – primarily because of the new lockdown measures bound to impact the labor market. Based on correlation with GDP, we assign a score of -3.

  • Euro Area Government Debt to GDP

This is meant to gauge whether the government is over-leveraged and if it might run into problems servicing future debt obligations.

The Euro Area Government Debt to GDP dropped from 79.5% in 2018 to 77.6% in 2019. In 2020, it is projected to hit 102% but stabilize around 92% in the long run. Based on correlation with GDP, we assign a score of -1.

In our very next article, we have performed the Endogenous analysis of GBP to see if it has appreciated or depreciated in this year. Make sure to check that and let us know in case of any questions in the comments below. Cheers.

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Forex Fundamental Analysis

NZD/USD Global Macro Analysis – Part 3

NZD/USD Exogenous Analysis

To effectively compare the US and the New Zealand economies, we will conduct exogenous analysis using the following fundamental aspects;

  • The US and New Zealand balance of trade difference
  • GDP growth differential in the US and New Zealand
  • The US and New Zealand interest rate differential

The US and New Zealand balance of trade difference

A country’s participation in international trade tends to determine the demand for its domestic currency. If a country is a net exporter, its currency will be in high demand in the forex market, increasing its value against other currencies.

In October 2020, New Zealand’s trade deficit was NZD 500 million compared to the US trade deficit of $63.1 billion. Although New Zealand’s trade deficit is improving, it is still lower than the balance of trade in January. On the other hand, the US trade deficit has been widening throughout the year. The difference between the two countries’ balance of trade is the trade deficit differential. Based on its correlation with the price of the NZD/USD pair, we assign a score of 4.

GDP growth differential in the US and New Zealand

GDP growth differential is the difference between the rate at which the US and New Zealand economies are expanding. It will help to show which economy is growing at a faster pace hence impacting the exchange rate between the two countries. A country whose GDP is expanding faster will enjoy favorable domestic macroeconomic conditions. Hence its currency will appreciate.

In Q3 of 2020, the New Zealand GDP contracted by 12.2% while that of the US expanded by 33.1%. That represents a GDP growth rate differential of 45.3%. If this trend continues, we should expect that the USD will strengthen against the NZD hence a bearish NZD/USD pair.

Based on our correlation analysis, we assign the GDP growth differential between the US and New Zealand a score of -4.

The US and New Zealand interest rate differential

The interest rate differential is the difference between the prevailing interest rates in New Zealand and the US. The country with a higher interest rate tends to attract more capital, inceasing the value of its currency.

At the onset of the coronavirus pandemic, the Reserve Bank of New Zealand cut its official cash rate from 1% to 0.25%. During the same period, the US Federal Reserve cut the interest rate from 1.75% to 0.25%. Presently, the interest rate differential in NZD/USD is 0%.

Based on the correlation with the price of the NZD/USD pair, we assign a score of 1.

Conclusion

The NZD/USD pair has an exogenous score of 1. That means we should expect that the pair will continue on a mild bullish trend in the short-term. Note that this trend is also supported by technical analysis.

As seen in the above 1-week chart, the NZD/USD has successfully breached the upper Bollinger band indicating bullish momentum. This supports our fundamental analysis, as well. All the best.

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Forex Fundamental Analysis

NZD/USD Global Macro Analysis – Part 1 & 2

Introduction

The global macro analysis of the NZD/USD pair will involve the endogenous and exogenous analyses of the US and New Zealand economies. The endogenous analysis will focus on domestic macroeconomic factors that drive the economy. The exogenous analysis will focus on economic indicators that comprehensively compare both the US and New Zealand economies.

Ranking Scale

Both the endogenous and exogenous factors will be ranked on a scale of -10 to +10. A negative ranking for the endogenous means that the factor had a negative impact on either the currency, while a positive ranking had a bullish impact on the currency.

Similarly, when the exogenous factor is negative, it has a bearish impact on the currency pair, while a positive ranking means it had a bullish impact.

Summary – USD Endogenous Analysis

From the above table, a clear deflationary effect can be seen on the USD currency and implies that USD has depreciated in its value since the beginning of 2020. For the complete USD Endogenous Analysis, please check here.

Summary – NZD Endogenous Analysis

The NZD endogenous analysis has a total score of 4. This shows that the NZD appreciated in 2020.

  • New Zealand Inflation Rate

The CPI is the most commonly used measure of inflation in New Zealand. Here are the top categories included in the CPI: Housing with a weight of 24.2%; food and non-alcoholic drinks 18.8%; transportation 15%; recreation 9.4%; alcoholic drinks 7%; clothing, household goods and services, health, and education all have a combined weight of 18.2%.

In September 2020, New Zealand CPI increased by 0.7%. Based on the correlation with the GDP, we assign a score of -1.

  • New Zealand Unemployment Rate

This rate shows the number of New Zealand’s working population out of work and actively looking for gainful employment. As an economic indicator, it can be used to show the economy’s ability to add new jobs to the market.

In Q3 of 2020, the New Zealand unemployment rate increased to 5.3% from 4% in Q2. This shows that the labor market is yet to recover from the economic shocks of the coronavirus pandemic. Based on correlation analysis, we assign a score of -5.

  • New Zealand Manufacturing PMI

This is an index that measures the growth in the manufacturing sector in New Zealand. It is a composite of new orders, employment, inventories, and orders delivered from the manufacturing sector. When the index is above 50, it means that the manufacturing sector in New Zealand is expanding. The sector is seen to be contracting when the index is below 50.

In October 2020, the index declined to 51.7 from 54. However, the index is above the pre-coronavirus levels. That implies the manufacturing sector is recovering swiftly. Based on the correlation analysis with GDP, we assign it a score of 3.

  • New Zealand Business Confidence

In any economy, business confidence goes hand-in-hand with business confidence. In New Zealand, the business confidence index is based on a survey of about 700 businesses. The index is the difference between the number of businesses that anticipate economic improvements and those that expect the economic conditions will decline. The index covers export intentions, profit expectations, employment intentions, activity outlook, and capacity utilization.

In November 2020, the ANZ Business Confidence was -6.9 compared to -15.7 in October. Although in the negative territory, the November reading is the highest since September 2017. This shows that more businesses are becoming optimistic about the future operating environment, mostly thanks to the aggressive expansionary monetary and fiscal policies.

Based on correlation analysis with the GDP, we assign ANZ business confidence a score of 4.

  • New Zealand Retail Sales

In New Zealand, retail sales data is aggregated quarterly. It measures the change in the value of goods and services purchased by households. Remember that consumer expenditure is the main driver of economic growth, which makes the retail sales data a leading indicator of GDP growth.

In Q3 of 2020, the New Zealand retail sales increased by 28% from a drop of 14.6% and 1.2% in Q2 and Q1, respectively. The 28% increase is the largest quarterly increase in 25 years. The YoY retail sales increased by 8.3% in Q3 compared to a 14.2% drop in Q2. Based on our correlation analysis, we assign the New Zealand retail sales a score of 6.

  • New Zealand Consumer Confidence

In New Zealand, consumer confidence tends to correlate with households’ willingness to spend in the economy. The Westpac McDermott Miller Consumer Confidence Index gauges the optimist of New Zealand households regarding the economy. The index covers households’ views on their finances, purchases in the economy, and the overall economy.

A score of above 100 shows an increasing level of optimism, while below 100 shows increasing pessimism.

In Q3 of 2020, the New Zealand consumer confidence index dropped to 95.1 from 97.2 in Q2 and 104.2 in Q1. Q3 reading is the lowest in New Zealand since 2008. Based on its correlation with GDP, we assign a score of -4.

  • New Zealand Government Net Debt to GDP

Gross national Debt to GDP helps both local and foreign creditors gauge a country’s ability to service its debt. This indicator shows the level at which the domestic economy is leveraged. A lower ratio is preferable since it means that the country has a higher GDP compared to its debt. This means that it can be able to access cheap debt in the future.

In the 2018/2019 fiscal year, the New Zealand government debt to GDP dropped to 19% from 19.6% in the 2017/2018 fiscal year. In 2020, the New Zealand government debt to GDP is projected to increase to 27% on account of the government’s aggressive spending to ease the economic pressure from the coronavirus pandemic. Based on correlation analysis with GDP, we assign New Zealand government debt to GDP a score of 1.

In the very next article, let’s analyze the exogenous indicators and forecast if this currency pair seems to be bullish or bearish in the near future.

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Forex Fundamental Analysis

USD/CHF Global Macro Analysis – Part 3

USD/CHF Exogenous Analysis

The exogenous analysis covers fundamental indicators that can compare the performance of the US and Swiss economies. Note that this comparison between the two economies is what drives the exchange rate of USD/CHF. They are:

  • US and Swiss interest rate differential
  • The difference in the GDP growth in the US and Switzerland
  • Balance of trade differential

Balance of trade differential

For each country, the balance of trade shows the demand for the domestic currency in the international market. When a country has a surplus of the balance of trade, it means that its currency is in high demand in international trade. The rationale behind this is that when a country exports more than it imports, other countries will need more of that country’s currency to participate in international trade.

The balance of trade differential measures the difference between the balance of trade in Switzerland and the US. If the Swiss balance of trade is higher than that of the US, the USD/CHF pair will be bearish.

In October 2020, Switzerland had a trade surplus of CHF 2.9 billion while the US a deficit of $63.1 billion. Throughout 2020, the US trade deficit has been widening from $37 billion in January, while the Swiss trade surplus has increased from CHF 2.8 billion.

Based on the correlation with the USD/CHF pair, we assign the balance of trade differential a score of -5.

US and Switzerland interest rate differential

Typically, the country with a higher interest rate attracts more foreign capital seeking superior returns. A higher interest rate increases the domestic currency demand, which makes it appreciate in the forex market. More so, forex traders tend to be bullish on the currency with the higher interest rate.

The interest rate by The Swiss National Bank is -0.75% since January 2015. In the US, the federal funds rate is 0.25%. That makes the interest rate differential 1% for the USD/CHF pair.

Based on the correlation analysis with the USD/CHF pair, we assign the interest rate differential a score of 3.

The difference in the GDP growth in the US and Switzerland

A country’s GDP is primarily driven by domestic consumption. Although the GDP size differs in absolute terms, we can compare the US and Swiss GDP in terms of growth rate. An expanding economy is accompanied by appreciating currency. Therefore, if the US growth rate is higher than Switzerland’s, we can expect a bullish trend for the USD/CHF pair.

In Q3 of 2020, the Swiss economy expanded by 7.2% and the US by 33.1%. It means that the US economy is recovering faster than that of Switzerland. We, therefore, assign a score of 2. This implies that the GDP growth rate differential between the US and Switzerland has led to a bullish USD/CHF.

Conclusion

The USD/CHF pair has an exogenous score of -2. This implies that we can expect the pair to continue with its current bearish trend in the near future.

Note that the USD/CHF pair has breached the lower Bollinger band. Therefore, we can expect the downtrend to continue for a while, which supports our fundamental analysis. All the best.

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Forex Fundamental Analysis

USD/CHF Global Macro Analysis – Part 1 & 2

Introduction

When conducting the global macroeconomic analysis, endogenous and exogenous factors are considered. These analyses can be used to explain the price dynamic of a currency pair. In this case, we will analyze the endogenous factors that drive the economy in the US and Switzerland. We will also analyze the exogenous factors that primarily drives the price of the USD/CHF pair.

Ranking Scale

A sliding scale from -10 to +10 will be sued to ranks the impact of the individual endogenous and exogenous factors on the currency. A negative ranking for the endogenous factors means that they had a depreciating impact on the individual currencies, while a positive ranking means they resulted in currency appreciating.

Similarly, a negative ranking for the exogenous factors implies that they’ve had a bearish impact on the currency pair, while a positive ranking means they’ve had a bullish impact.

Summary of USD Endogenous Analysis

From the above table, we can see a clear deflationary effect on the USD currency and implies that it has depreciated in its value since the beginning of the year. You can find the complete USD Endogenous Analysis here.

Summary of CHF Endogenous Analysis

Overall, the endogenous analysis of CHF has a score of -5. That implies that the CHF is expected to have depreciated marginally in 2020.

  • Switzerland Inflation Rate

The rate of inflation is used to measure the changes in the price of consumer goods in Switzerland over a specified period – usually monthly or yearly. Here are the components of the CPI in Switzerland: Housing and energy, which accounts for 25% of the total CPI weight; 16% for healthcare; Transport accounts for 11%; Food and non-alcoholic drinks 11%; hotel and restaurant services 8%; 4% for Household goods and services; and clothing 3%. Education, communication services, and alcoholic beverages cumulatively account for 7% of the total CPI weight.

In November 2020, the YoY CPI in Switzerland dropped by 0.7%, while the MoM CPI dropped by 0.2%. The fall in prices of the hotel and holiday packages contributed to the drop in the inflation rate. The Switzerland CPI is at the lowest point since January 2018.

Based on our correlation analysis, we assign the Switzerland rate of inflation a score of -3.

  • Switzerland Unemployment Rate

This economic indicator shows the percentage of the total Swiss labor force that is actively seeking a job. Note that not all unemployed portion of the working-age population are seeking employment; so, they are not captured by the unemployment rate.

The unemployment rate can also be used to show the rate at which the economy is adding or cutting job opportunities. This can be used to show economic growth.

In October 2020, the Swiss unemployment rate was 3.2%, down from highs of 3.4% in May, while the employment rate in Q3 2020 was 79.7%. Although it is higher than the 79.1% registered in Q2, it is still significantly lower than the pre-pandemic rate of 80.4%.

The Swiss unemployment rate has a high correlation with the GDP, but since it only increased marginally, we assign it a score of -2.

  • Switzerland Manufacturing PMI

The Swiss procure.ch Manufacturing Purchasing Managers’ Index surveys the executives in the manufacturing sector. The index is a measure of the Swiss manufacturing sector’s performance and serves as a leading indicator for business expectations.

The Manufacturing PMI is an aggregate of five components: new orders, which a weight of  30%, output 25%, employment 20%, supplies 15%, and inventory 10%. The manufacturing sector is expected to expand when the index is above 50 and contract when the index is below 50.

In November 2020, the Swiss procure.ch Manufacturing PMI increased to 55.2, the highest since December 2018. Based on the correlation analysis with the GDP, we assign a score of 7 since it shows a robust expansion.

The Swiss services industry employs over 60% of the working population and accounts for 73% of Switzerland’s GDP. This makes the services PMI a crucial indicator of the overall economy. The Services PMI is obtained through a comprehensive survey of 300 purchasing managers in the services sector to evaluate the changes in business activities.

The survey covers areas such as customer new orders, purchasing, and sales prices, and changes in the employment level.

In November 2020, the Swiss services PMI dropped to 48 from 50.4 in October, primarily attributed to new orders’ contraction. Although it is almost double the 21.4 recorded in April, it is still lower than the 57.3 recorded in January 2020. We, therefore, assign it a score of -4.

  • Switzerland Consumer Confidence

In Switzerland, consumer confidence is used to evaluate households’ opinion on the overall economy and their financial position. Typically, consumer confidence is higher when there is high GDP growth, and the unemployment rate is low.

In the fourth quarter of 2020, the Swiss consumer confidence was -12.8, better than Q2 -39.3. Consumer confidence is used to show the likelihood of how much households will spend in the economy. Hence we assign it a score of -2.

  • Switzerland Government Gross Debt to GDP

The Swiss government debt is the totality of the government’s amount owed to both domestic and foreign lenders. This debt is expressed as a percentage of the GDP o help determine the indebtedness of the economy. Lenders also use this metric to determine if there is a possibility of default by the government. Typically, government debt that is less than 60% of the economy is considered ideal.

In 2019, Switzerland’s government gross debt to GDP was 41%, and it’s projected to hit 49% in 2020 due to increased government expenditure to curb the economic slowdown brought about by the coronavirus pandemic. However, the Swiss government’s gross debt to GDP has been steadily declining since 2004, averaging at around 37%. Based on our correlation analysis and the fact that it has marginally increased in 2020, we assign a score of -1.

Now we know that both USD and CHF have depreciated according to their respective endogenous indicators. Please check our next article to know if this pair is expected to be bullish or bearish in the near future according to their exogenous indicators. Cheers.

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Forex Fundamental Analysis

AUD/USD Global Macro Analysis – Part 3

AUD/USD Exogenous Analysis

In the exogenous analysis, we will compare the differentials in the US and the Australian economies at an international level. We will use:

  • The differential in GDP growth in the US and Australia
  • The US and Australian interest rate differential
  • The differential in the US and Australian balance of trade

The differential in GDP growth in the US and Australia

Domestically, the value of USD and AUD are pushed by the changes in the macroeconomic factors that drive GDP growth. The dynamic of the AUD/USD exchange rate is affected by the difference in the GDP growth rate. The country with a faster GDP growth will see its currency appreciate more than the one with slower growth.

In Q3 of 2020, the Australian GDP increased by 3.3% compared to the 7% drop in Q2. The US economy expanded by 33.1% in Q3 2020 compared to a 31.4% drop in Q2. In the first three quarters, the US economy has contracted by 3.3% while the Australian economy has contracted by 4%. Therefore, the GDP growth differential between Australia and the US is -0.7%. Based on the correlation analysis with the AUD/USD pair, we assign a score of -2.

The US and Australian interest rate differential

This measures the difference between the interest rate set by the Reserve Bank of Australia (RBA) and the US Federal Reserve. In the forex market, carry traders tend to be bullish when a currency pair has a positive interest rate differential and bearish when it is negative. That is because more investor funds flow towards the country with a higher interest rate.

At the onset of the COVID-19 pandemic, the RBA cut interest rates from 0.75% to 0.1%, while the Federal Reserve cut interest rates from 1.75% to 0.25%. That makes the interest rate differential for the AUD/USD pair -0.15%. Based on correlation analysis with the exchange rate for the AUD/USD pair, we assign a score of -2.

The differential in the US and Australian balance of trade

The difference between the balance of trade for Australia and the US will help determine which currency is in higher demand in international trade. Note that increased demand in the forex market also increases the value of that currency.

In October 2020, Australia’s trade surplus increased to AUD 7.46 billion compared to 5.82 billion in September. However, it is still lower than the highest recorded AUD 9.62 billion surpluses in March. The US had a trade deficit of $63.1 billion in October, which has been expanding since January. The balance of trade differential is $68.633 billion between Australia and the US. Based on the correlation with the AUD/USD exchange rate, we assign a score of 6.

Conclusion

The exogenous score for the AUD/USD pair is 2. It means that we can expect that the pair will be on a bullish trend in the short-term.

In technical analysis, the short-term bullish trend is supported by the fact that the pair is trading above the 200-period MA and breaching the upper Bollinger Band. Cheers!

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Forex Fundamental Analysis

AUD/USD Global Macro Analysis – Part 1 & 2

Introduction

In the global macro analysis of the AUD/USD pair, we will look at the endogenous economic factors that drive GDP growth in both Australia and the US. We’ll also analyze the exogenous factors that affect the exchange rate dynamic between the AUD and the USD.

Ranking Scale

We will use a sliding scale from -10 to +10 to rank the impact of the endogenous and exogenous factors. When the endogenous factors are negative, it means that they resulted in the depreciation of either the USD or the AUD. When positive, it implies they resulted in the appreciation of the individual currencies. Similarly, negative endogenous factors result in a bearish trend for the AUD/USD and a bullish trend for when they are positive.

USD Endogenous Analysis – Summary

A -19.1 score on Endogenous analysis on USD implies a deflationary effect on this currency. It means that the US Dollar has lost its value since the starting of 2020.

You can find the complete USD Endogenous Analysis here.

AUD Endogenous Analysis – Summary

The endogenous factors have an overall score of 3, implying that the AUD has appreciated in 2020.

  1. Australia Inflation Rate

The consumer price index in Australia is calculated quarterly. Housing accounts for 22.3% of the total CPI weight, food and non–alcoholic drinks 16.8%, recreation 12.6%, transportation 11.6%, household goods and services 9.1%, alcohol and tobacco 7.1%, healthcare 5.3%, financial service 5.1%, clothing, education and communication 10.2%.

In Q3 of 2020, the YoY Australian CPI increased by 0.7% from a drop of 0.3% in Q2. The QoQ CPI rose by 1.6% compared to 1.9$ in Q2. Note that the Q3 CPI is marginally lower than in the pre-pandemic levels in Q1. Based on inflation’s correlation with GDP growth, we assign a score of -1.

  1. Australia Unemployment Rate

The unemployment rate is the percentage of the labor force that is actively looking for employment opportunities. The unemployment rate can be used to show the state of the economy. When high, it means that the economy is shedding jobs faster and can be said to be contracting.

In October 2020, the Australian unemployment rate was 7% up from 6.9% in September. The increase in the Australian unemployment rate can be attributed to the prolonged COVID-19 crisis. Note that during the period, the employment rate increased to 61.2% from 60.4% in September. This was mainly driven by the surge in full-time, part-time job numbers coupled with a drop in the underemployment rate to 10.4% from 11.4% in September.

From January to date, the unemployment rate has increased by 1.7% while the employment rate has dropped by 1.4%. Based on its correlation with GDP, we assign a score of -5.

  1. Australia Mining Production

The Australian economy significantly relies on mining, which accounts for up to 11% of the GDP. Australia is among the top producers of precious metals in the world. Therefore, a significant portion of the labor market is dependent on the mining sector.

The YoY mining production increased by 1.2% in the second quarter of 2020, down from a 5.1% increase in Q1. In Q3, it is projected to increase by at least 2.5% and 5% by the end of 2020. This would mean that the end of year levels would be equivalent to the pre-pandemic levels.

Based on our correlation analysis, we assign Australia mining production a score of -3.

  1. Australia Business Confidence

The National Australia Bank (NAB) surveys about 350 leading companies in Australia to establish the prevailing business conditions. Typically, the present business sentiment can be used as a leading indicator of future business activities such as hiring, spending, and investments. We can say that business confidence is a leading indicator of GDP change.

Reading above 0 shows that business conditions are improving, while below 0 shows that business conditions are worsening.

In October 2020, Australian business conditions improved to 5 from -4 in September. The October reading is the highest since August 2019. The increase was primarily driven by improvement in sentiment profitability and employment in the mining and transportation sectors.

Based on correlation with GDP, we assign a score of 8.

  1. Australia Consumer Confidence

The Melbourne Institute and Westpac Bank aggregate consumer confidence in Australia. The survey 1200 households representative of the entire households in Australia. The index is based on the five year average of these components: anticipated economic conditions, personal finances, and purchase of essential household goods. Consumer confidence is a leading indicator of consumer expenditure, which is a significant driver of the GDP.

In November 2020, the Australian consumer confidence increased to 107.7 from 105 in October. This is the highest level in 7 years, indicating that consumers are highly optimistic about the future despite the COVID-19 challenges.

Based on correlation analysis with the Australian GDP, we assign it a score of 5.

  1. Australia Government Debt to GDP

This measures the levels of indebtedness of the Australian government. Domestic and foreign lenders use this ratio to estimate the ability of the government to service its debts without straining the growth of the economy. Generally, a ratio of below 60% is considered to be ideal.

In 2019, the government debt to GDP in Australia jumped to 45.1% from 41.5% in 2018. In 2020, it is projected to reach 50%. Therefore, we assign a score of -3.

  1. Australia Retail Sales

The change in retail sales shows the trend in household expenditure on final goods and services in the economy. An increased expenditure corresponds to an increase in GDP levels.

In October 2020, the MoM retail sales increased by 1.4% compared to a 1.1% drop in September. Based on the correlation with the GDP growth rate, we assign a score of 2.

Now we know that USD has depreciated and AUD has appreciated according to their respective endogenous indicators. In the very next article, let’s see if this pair is bullish or bearish according to the exogenous indicators.

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Forex Fundamental Analysis

USD/JPY Global Macro Analysis – Part 3

USD/JPY Exogenous Analysis

In the exogenous analysis, we will analyze economic indicators that exhaustively compare the performance of the US and the Japanese economies. These factors impact the dynamic of the USD/JPY pair in the forex market. They include:

  • US and Japan interest rate differential
  • The difference in the GDP growth in the US and Japan
  • Balance of trade

US and Japan interest rate differential

The interest rate differential is the difference between the interest rate in the US and that of Japan. Investors would prefer to invest their funds in a country that offers higher returns. Furthermore, carry traders are often bullish on the currency with a higher interest, which ensures that they earn higher yields.

The Bank of Japan has kept the interest rates at -0.1% since 2016. The current federal funds rate in the US is 0.25%. Thus, the interest rate differential for the USD/JPY is 0.35%. Since there are no foreseeable changes in the interest rates in either country, we assign it an inflationary score of 2.

Balance of trade

Balance of trade determines whether a country has a trade surplus or deficit in international trade. A trade surplus results from a country’s exports being of higher value than that of its imports. A deficit occurs when the imports are of higher value than exports. Japan mostly exports machinery and electronics, which puts it at a significant advantage due to the value of these goods. On the other hand, the US is a net importer.

In October 2020, japan has a trade surplus of ¥872.9 billion, which has been steadily increasing since June. The US has a trade deficit of $63.9 billion, which has been growing throughout the year.

The balance of trade differential between the US and Japan has been widening in favor of Japan. Based on our correlation analysis with the USD/JPY, we assign it a score of -6. It means that if this trend persists, we expect the USD/JPY to be bullish in the near term.

The difference in the GDP growth in the US and Japan

Although the US has a higher GDP than Japan, we can compare the two economies based on their growth rates.

The US economy had a GDP growth rate of 33.1% in Q3 2020, while Japan’s economy expanded by only 5%. The US economy is seen to be expanding at a faster pace than that of Japan. Based on the correlation with the price of the USD/JPY pair, we assign an inflationary score of 2. This means that we should expect a bullish trend on the USD/JPY pair if the US economy keeps expanding faster than that of Japan.

Conclusion

The total score from the exogenous analysis of the USD/JPY pair is -2. This implies that in the near term, we should expect a bearish trend in the pair.

Technical analysis of the USD/JPY pair shows that the weekly chart is still trading way below the 200-period MA. Furthermore, the pair has failed to successfully breach the middle Bollinger band, which has served as its resistance level. All the best!

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Forex Fundamental Analysis

USD/JPY Global Macro Analysis – Part 1 & 2

Introduction

Global macro analysis of the USD/JPY pair involves the analysis of endogenous factors that impact both the USD and the JPY; and exogenous analysis for the USD/JPY pair.

In the endogenous analysis, we’ll focus on domestic macroeconomic factors that drive the domestic growth in the US and Japan. The exogenous analysis will involve the analysis of global macroeconomic factors that define the dynamics of the USD/JPY pair.

Ranking Scale

We will rank both the endogenous and the exogenous factors on a sliding scale of -10 to +10. Whenever the ranking is negative, it means that the macroeconomic indicator led to the depreciation of the currency. A positive ranking means that the indicator had an inflationary impact.

USD Endogenous Analysis – Summary

A score of -19.1 implies a clear deflationary effect on the US Dollar. This means that USD has lost its value since the beginning of 2020, according to these indicators.

You can find the complete USD Endogenous Analysis here.

JPY Endogenous Analysis – Summary

The endogenous analysis for the Japanese economy resulted in an overall inflationary score of 3. Based on this analysis, we can expect that the JPY had appreciated marginally in 2020.

  • Japan Inflation Rate

The inflation rate in Japan is measured by the consumer price index  (CPI). The CPI weights various consumer expenditures depending on their level of importance. Food is weighted at 25%, Housing 21%, transport and communication 14%, recreation 11.5%, energy and water 7%,  medical care 4.3%, and clothing 4%.

A higher rate of inflation is necessary for economic growth. It also forestalls a possible interest rate hike, which is accompanied by currency appreciation.

In October 2020, the MoM inflation rate in Japan decreased by 0.1% constant change since August. The YoY inflation rate decline by 0.4%, the first decline in about four years.

Based on our correlation analysis, we assign Japan’s inflation rate, a deflationary score of -2.

  • Japan Unemployment Rate

The unemployment rate measures the number of Japanese citizens eligible for employment who are currently seeking gainful employment opportunities.

An increasing rate of unemployment means that more jobs are lost in the economy faster than new jobs are being created. That’s an indicator that the economy is contracting.

In October 2020, Japan’s unemployment rate increased to 3.1%, representing 21.4 million people, the highest recorded since May 2017.

Due to the high correlation between the unemployment rate and GDP, we assign it a score of -5.

  • Japan Manufacturing PMI

The Japan manufacturing PMI is also known as the Jibun Bank Japan Manufacturing PMI. The PMI is compiled through a series of monthly questionnaires surveying about 400 manufacturers. The manufacturers are segregated depending on their industry’s contribution to GDP, and their responses aggregated into a diffusion index. When the index is above 50, it means that the manufacturing activity increased while a below 50 reading implies a slow-down in the manufacturing sector.

Japan is a highly industrialized economy, and its manufacturing activities have a high correlation with its GDP growth rate.

In November 2020, the Japan Manufacturing PMI was 49, inching closer to the highest recorded 49.3 in January. Since the manufacturing PMI has been steadily increasing from the lows of 38.4 in May, we assign it an inflationary score of 6.

This PMI is also known as Jibun Bank Japan Services PMI. It is a survey of over 400 services companies operating in the Japanese services industry. A Survey of the purchasing managers is used to track industry changes in employment, inventories, sales, and prices. Sectors covered by the survey include transport and communication, personal services, financial services, hotel industry, and IT. The responses are weighted based on the sector’s size and aggregated into an index from 0 to 100.

When the index is above 50, it signals that there is an expansion in the services industry, while below 50 shows contraction.

In November 2020, the Japan services PMI dropped to 46.7 from 47.7 in October. Although the index is above the lows of 21.5 recorded at the height of the coronavirus pandemic, it is still lower than the levels observed in the pre-pandemic period.

Based on our correlation analysis, we assign Japan services PMI an inflationary score of 2.

  • Japan Retail sales

The monthly retail sales measure the change in the value of goods consumed directly by households. In any economy, the growth in GDP is primarily driven by the demand by households. Thus, retail sales can be considered a significant indicator of economic growth.

In October 2020, the MoM retail sales in Japan increased by 0.4%, while YoY retail sales increased by 6.4%. The increase in October is the first time the YoY retail sales have increased since February. This shows demand in the Japanese economy is growing after the easing restrictions implemented in the wake of the pandemic.

Due to its high correlation with the GDP, we assign Japan retail sales an inflationary score of 5.

  • Japan General Government Gross Debt to GDP

This is the ratio between the amount of debt, both domestic and foreign, that the Japanese government has accumulated to national GDP. Typically, lenders use this ratio to determine if a country’s economy is overly leveraged and if the government might default in the future.

Note that Japan has the largest national debt to GDP in the world. However, although it is heavily indebted, unlike many other countries, Japanese debt is denominated in Yen. More so, foreigners only hold about 6.5% of the total debt. That is why Japan can continue to accumulate such massive debts without any fears of hyperinflation or default risks. But that doesn’t mean that the debt isn’t weighing down on the economy.

In 2019, the Japan national debt to GDP was 238%, an increase from 236.6% in 2018. In 2020, it is projected to exceed 240% due to the measures implemented to fight the pandemic. Based on our correlation analysis, we assign it a deflationary score of -3.

Please check our next article to find the Exogenous analysis of both USD and JPY currencies. We have also come to a conclusion on whether you should expect a bullish or bearish trend in this pair.

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Forex Fundamental Analysis

EUR/USD Global Macro Analysis – Part 3

EUR/USD Exogenous Analysis

In the exogenous analysis, we’ll analyze the economic fundamentals that impact the Euro-US Dollar exchange rate. For this analysis, we’ll focus on:

EU and the US GDP Growth Difference

The primary drivers of GDP growth in an economy are domestic demand and international trade. When a country’s exports increase, it means that the demand for its currency also increases, which makes it appreciate.

The US and the EU GDP change are in tandem. In Q3 of 2020, the EU GDP expanded by 11.6%, while that of the US expanded at an annualized rate of 33.1%. Although this change seems much, the US GDP level is still about 3.5% lower than the pre-coronavirus pandemic levels.

Based on the correlation analysis of the GDP differential and the EUR/USD pair changes, we assign a deflationary score of -2. It implies that the difference in GDP growth between the EU and the US will lead to a bearish EUR/USD.

Trade Balance Difference

For each country, the trade balance shows if an economy is running on deficits in international trade. The trade balance is simply the difference between exports and imports. Surplus trade balance happens when an economy exports more than it imports. A negative trade balance means an economy is importing more than it exports.

The EU recorded a trade surplus of €24489.40 million in September 2020, while the US had a $63.9 billion trade deficit in the same period. The trade balance has a high correlation with the exchange rate of the EUR/USD pair. Therefore, we assign it an inflationary score of 7, meaning we expect a widening trade balance between the EU and the US to result in bullish EUR/USD.

EU and US Interest Rate Differential

This indicator measures the difference between the interest rates in the EU and that in the US. The economy with a higher interest rate will attract more investments from foreigners seeking higher returns.

In the US, the Federal Reserve has kept the interest rate within a range of 0% – 0.25%. In the EU, the ECB interest rate is 0%. Since the interest rate differential between the two economies is low, we do not expect it to impact the EUR/USD exchange rate. Therefore, we assign a deflationary score of -1. That means we expect it to result in a mild bearish trend for the EUR/USD pair.

Conclusion

The exogenous analysis of the EUR/USD fundamentals gives an inflationary score of 4. This implies that in 2020, the EUR/USD pair has had a bullish trend. In the short term, this bullish trend is expected to persist.

Note that the EUR/USD pair has formed a support level along with the middle Bollinger band. Therefore we can say that our Fundamental analysis is being supported by our Technical Analysis as well. Cheers!

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Forex Fundamental Analysis

EUR/USD Global Macro Analysis – Part 1 & 2

Introduction

In this analysis, we’ll focus on endogenous economic growth factors in the EUR and the US. We’ll also analyze the exogenous factors that will help us compare the economic performance in both regions.

Endogenous economic factors are inherent within the domestic economy and are primarily driven by domestic demand. On the other hand, exogenous factors are external economic factors that result from a country’s participation in the international markets. Both of these factors influence the fluctuation of the currencies from both countries.

Ranking Scale

We will rank both the endogenous and the exogenous economic factors on a scale of -10 to +10. A negative ranking shows that the economic factor had a deflationary impact on the currency. Conversely, a positive ranking implies that it had an inflationary impact.

USD Endogenous Analysis – Summary

The USD endogenous factors recorded a score of -19.1, implying a deflationary effect on the USD. This essentially means that according to these indicators, the USD has lost its value since the beginning of this year.

You can find the complete USD Endogenous Analysis here.

EUR Endogenous Analysis – Summary

The endogenous analysis of the EU economy shows a modest deflationary score of -8.5. This means that in 2020, the Euro has shed some of its inherent value.

The endogenous economic indicators in the Eurozone are an aggregate of the 27 member countries in the EU.

  • Monthly retail sales

It measures the inflation-adjusted value of retail sales. About 40.1% of all retail sales in the EU are from food, drinks, and tobacco. Electronics and furniture account for 11.5%, while computer equipment accounts for11.4%. 9.2% of the retail sales are attributed to clothing and footwear,  while pharmaceutical and medical products account for 8.9%.

In September 2020, retail sales in the EU dropped by 2%. Given that retail sales account for about 70% of the GDP, our correlation analysis, we assign the EU retail sales an inflationary score of 2.5.

  • Industrial production

This indicator measures the total output by manufacturers, mines, and utility industries in the EU. The value is adjusted for inflation. Note that the industrial sector in the EU is among the top employers.

In September 2020, industrial production dropped by 0.4%, which is an improvement from the drop of 17.1% recorded in April. However, the change in industrial production has been steadily falling from a peak of 12.4% in May.

Based on our correlation analysis, we assign the EU change in monthly industrial production a deflationary score of -2.

  • Unemployment rate

This indicator shows the percentage of the total workforce in the EU who are seeking gainful employment. The data shows the monthly change.

In September 2020, the unemployment rate in the EU was 8.3%. Throughout the year, the EU has experienced a steady increase in the unemployment rate. This is due to the economic effects of the coronavirus pandemic. However, our correlation analysis shows the minimal impact of the unemployment rate on the EU GDP. Therefore, we assign it a deflationary score of -2.

  • Employment change

As an economic indicator, employment change shows the quarterly change in the number of EU citizens who are gainfully employed. This indicator can also be used to show the ability of the economy to create more jobs. It measures both full-time and part-time employment.

In the third quarter of 2020, the EU employment change increased by 0.9%, showing that the EU economy is recovering from the slump of Q2 2020. Our analysis shows a higher correlation of the employment change with the changes in GDP. Hence, we assign it an inflationary score of 4.

  • Business confidence

The business sentiment is also referred to as the Industry Sentiment. It measures the economic sentiment among manufacturers, consumers, and employers in the EU by rating the current and future economic conditions.

The lowest business confidence recorded in 2020 was -32.3 in April 2020. Since then, the indicator has been steadily improving to -9.5 in October. Based on the correlation analysis with the EU GDP, we assign business confidence a deflationary score of -3.

  • Consumer Spending

Consumer spending measures the quarterly amount that households spend on goods and services for personal consumption. As an economic indicator, it can be used to show households’ welfare and the prevailing economic conditions. Since consumer expenditure accounts for about 70% of the EU GDP, any changes in the quarterly expenditure are bound to impact the GDP levels directly.

In Q2 of 2020, consumer spending dropped to € 1511.14 billion from € 1716.59 billion in Q1 of 2020. It is the largest drop ever recorded in history and can be attributed to the pandemic-induced economic recession.

Due to its high correlation to the change in GDP, we assign consumer spending a deflationary score of -5.

  • European Union Government Debt To GDP

This ratio compares what the EU economy produces and what it owes. It shows the efficiency of the economic process and the capability of the government to service its debts without overstretching the available resources. Investors can use this ratio to gauge whether the debt in an economy is becoming unsustainable.

Increasing levels of government debt and a stagnating GDP results in a deflationary effect for the domestic currency.

By the end of 2020, the EU government debt to GDP is expected to reach 95% from 79.3% recorded in 2019. The higher government debt to GDP in 2020 is a direct result of the aggressive measures out in place to curb deep recessions from the coronavirus pandemic.

Based on our correlation analysis, we assign a deflationary score of -6 to the EU government debt to GDP.

  • EU Rate of inflation

In the EU, the inflation rate is best measured using the consumer price index (CPI). It measures the overall monthly change in the prices of consumer goods and services. The rate of inflation can be used as gauge the purchasing trends among households.

In theory, a rise in inflation implies that consumers’ demand for goods and services is increasing. Conversely, a drop in inflation implies that demand is shrinking hence corresponding to lower GDP levels.

In September 2020, the rate of inflation in the EU decreased by 0.2%. It is, however, an improvement from the -0.4% recorded in July and August. Based on its correlation with GDP, we assign the EU rate of inflation a score of 3.

In the next article, we have posted the Exogenous Analysis of the EUR/USD pair to have a clear idea of whether this pair is bullish or bearish market conditions.

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Forex Fundamental Analysis

GBP/USD Global Macro Analysis – Part 3

Introduction

The exogenous analysis will cover international aspects that impact both the UK and the US and how they influence the GBP/USD price. These factors include:

  • Good trade balance
  • Interest rate differential
  • GDP growth differential

GBP/USD Exogenous Analysis – Summary 

The score for the exogenous analysis of the GBP/USD pair is -3. This deflationary score implies that we should expect that the pair will adopt a bearish trend in the near term.

Goods trade balance

The goods trade balance is the difference between the value of goods a country imports and its exports. When the balance is negative, it means that the country is importing more than it exports. If the goods trade balance is a surplus, it means that a country’s value of exports is more than its imports.

In September 2020, the UK’s goods trade deficit increased to £9.35 billion while that of the US increased to $80.29 billion. Based on the correlation between t goods trade balance and the price of GBP/USD, we assign it an inflationary score of 2. It means if the goods trade balance keeps widening between the two countries, we can expect that the GBP/USD pair will continue being bullish.

The UK and the US Interest rate differential

This is the difference between the interest rate set by the Bank of England and the interest rate fixed by the US Federal Reserve. Capital tends to flow towards the economy with a higher interest rate since investors are bound to earn higher returns.

The BOE has set the interest rate at 0.1%, while the FED has it at 0.25%. therefore, the interest rate differential for the GBP/USD pair is 0.1% – 0.25% = -0.15%. Based on the interest rate differential, the GBP/USD pair should have a bearish trend. Therefore, we assign it a score of -3.

GDP growth differential

The actual size of the GDP varies from country to country. However, we can compare the rate at which they grow and analyse the impact of this growth rate on the exchange rate.

In the third quarter of September 2020, the UK GDP expanded by 15.5% while that of the US expanded by 33.1%. Over the years, we can observe that the US GDP growth has been at a faster rate than that of the UK. In this case, we assign a deflationary score of -2 on the UK and the US GDP growth rate differential. That means if the US economy keeps expanding at a faster rate, we can expect a bearish GBP/USD in the near term.

Our technical analysis also supports the forecasted bearish trend in the near term. Note that the GBP/USD pair has failed to breach the upper Bollinger band forming a resistance level for the past two years.

We hope you found this analysis useful and informative. Let us know if you have any questions by commenting below. All the best.

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Forex Fundamental Analysis

GBP/USD Global Macro Analysis – Part 1 & 2

Introduction

To properly understand the dynamics of the price of the GBP/USD pair, we’ll conduct endogenous and exogenous analyses of the UK and the US economies.

The endogenous analysis will focus on the significant fundamental economic indicators that drive economic growth in either country. The exogenous analysis will dig deeper into how both the US and the UK economies interact with each other in terms of international trade that impact the currency exchange.

Ranking Scale

Both the endogenous and the exogenous factors that we will analyse will be ranked on a sliding scale from -10 to +10. A negative score means that the indicator resulted in currency depreciation, while a positive score implies that it led to currency appreciation.

USD Endogenous Analysis – Summary

The USD endogenous factors recorded a score of -19.1, implying a deflationary effect on the USD. This essentially means that according to these indicators, the USD has lost its value since the beginning of this year.

You can find the complete USD Endogenous Analysis here.

GBP Endogenous Analysis – Summary

The endogenous analysis of the UK economy results in an expansionary score of 2. Therefore, we could expect the GBP increased in 2020.

Markit Manufacturing PMI

This is a survey done on about 600 purchasing managers in the manufacturing industry, who rate the level of the business environment such as prices, new orders, inventories, supply deliveries, labour conditions, and production levels.

This is a leading indicator for the economy because businesses react almost instantly to the changing operating environment, and the purchasing managers have the most relevant insight. In November 202, the UK Manufacturing PMI was 55.2, showing that the economy is undergoing a sustained recovery. Due to its low correlation with the GDP, we assign an inflationary score of 3.

UK inflation

The CPI is based on a monthly survey done by the Office for National Statistics. This is done by comparing the current average of sample consumer items by the previous month’s prices. The BOE uses the data to adjust interest rates and QE levels to set inflation targets for the economy.

Rising inflation levels lead to higher interest rates, which makes CPI a vital currency valuation indicator. The UK inflation rate increased by 0.7% in October 2020 but is still lower than the rate in the pre-pandemic period. Based on our correlation analysis. We assign it a score of -4.

Manufacturing Production

It measures the change in the total value of inflation-adjusted output by the manufacturers in the whole economy. It is a leading indicator of the economy’s performance since production levels adjust quickly to the business cycles and heavily dependent on consumer conditions like employment changes and earning levels.

Manufacturing contributes about 80% of the UK’s industrial output and accounts for up to 42.4% of GDP changes. The year-on-year manufacturing production change in September 2020 was -7.9%. This marks the smallest decline since the onset of the coronavirus pandemic. Due to its high correlation with GDP, we assign it an inflationary score of 6.

Claimant count change

It measures the change in the number of people who are seeking unemployment benefits. Hence, it is the primary indicator of unemployment levels, which makes it a vital signal of consumer expenditure levels and labour market conditions. In the UK, claimant count change is considered the best measure of the employment situation, and it accounts for 30% of changes in the GDP.

In September 2020, the number of people in the UK who claimed unemployment benefits dropped by 29800. However, the unemployment rate remains at yearly highs of 4.8%. For this reason, we assign a score of -5.

Industrial Production

It measures the change in output from the mines, manufacturers, and utilities, adjusted for inflation. While manufacturing makes up 80% of the industrial production, mines and utilities make up 20%, and their effects on the real economy are thus overshadowed.

It is a significant leading indicator of the economy’s health since industrial activities correspond to labour market conditions and sensitive to business cycles. In September 2020, the UK industrial MoM production increased by 0.5%. However, on a YoY basis, it is down 6.3% from September 2019. In this case, we assign industrial production a score of -3.

Retail Sales

It measures the change in the inflation-adjusted value of all sales at the retail level in the whole economy. It is the primary measure of how much consumer expenditure accounts for most of the country’s economic activity.

In October 2020, the UK MoM retail sales increased by 1.2%, which is the 6th consecutive increase in retail sales from the slump recorded at the height of the coronavirus pandemic. Based on its correlation with GDP, we assign retail sales an inflationary score of 4.

Markit Services PMI

This is a survey on about 400 purchasing managers in the services industry, who rate the business environment using factors such as employment, new orders, pricing, inventories, and supplier deliveries. A score of above 50 signifies an expansion, while below 50 indicates a contraction in the services industry.

In November 2020, the Marking UK Services PMI was 45.8 – a significant drop from 51.4 in October. Although the Services PMI has increased from the April lows, it is still lower than in January 2020. Combined with its low correlation with the UK GDP, we assign a deflationary score of -3.

United Kingdom Public Sector Net Debt to GDP

This is also called Government Debt to GDP Ratio. Most investors, bilateral and multilateral lenders use this ratio to determine a country’s ability to service any debt they take on. Naturally, when the ratio is higher, it means that the government is piling on more debt, but the GDP is not increasing at the same rate. Since higher GDP would mean higher sources of revenue, if the GDP is not increasing at the same pace as the amount of debt, it implies that the government might struggle with debt repayment.

In 2020, the UK Public Sector Net Debt to GDP is projected to reach historic highs of 96.6%. This increase is mainly attributed to governments’ efforts to prop up the economy through aggressive expansionary policies during the pandemic. Based on our correlation analysis, the increase in the United Kingdom Public Sector Net Debt to GDP in 2020 served its purpose to avoid irreversible recessions. We, therefore, assign an inflationary score of 4.

In our next article, we will analyze the Exogenous factors of both USD and GBP to come to an appropriate conclusion.

Categories
Forex Fundamental Analysis

Understanding ‘US TIC Net Long-Term Transactions’ Fundamental Forex Driver

Introduction

When foreign investors prefer investing in the domestic economy, they strongly believe that they can get better returns than in any other market. The US is considered the leading economy in the world; therefore, hence US securities are highly trusted by most investors. Similarly, since the USD is the most traded currency in the international market, its value would fluctuate depending on investors’ optimism in the capital and money market of the US.

Understanding US TIC Net Long-Term Transactions

As an economic indicator, the US TIC Net Long-Term Transactions measures the net flow of financial securities in the US economy. The financial securities under consideration include; Treasury and agency securities, corporate bonds, and equities.

Therefore, the ‘net’ in the US TIC Net Long-term Transactions means the difference between US financial securities’ gross purchases and sales by foreign investors. This data provides a vivid overview of the participation of foreigners in the US capital and money markets. When the US TIC net long-term transactions data is positive, it means that more foreigners are buying into the US economy than those selling. Similarly, when the US TIC net long-term transactions data is negative, it means more foreigners are exiting the US economy compared to those buying into the economy.

So, what is TIC? TIC stands for Treasury International Capital, a financial report from the US Department of Treasury. It shows the flow of capital into and out of the US in both the short and long term. The TIC report is published monthly and quarterly; it details the flow of capital explicitly in the sale and purchase of US financial securities.

According to the TIC reports, the classification of foreigners does not necessarily mean individuals and institutions from abroad. Foreigners in this context also include foreign branches of US institutions. For example, if a US bank has a branch in London, that branch is considered a foreigner.

Using US TIC Net Long-Term Transactions in Analysis

The main point of the US TIC Net Long-Term Transactions Report is it shows the demand for USD stocks and investors’ sentiment towards the US economy. Let’s break down the US TIC Net Long-Term Transactions depending on the market.

If the US TIC net long-term transactions, it could signal that the US treasuries and bonds are in high demand. First, you should know why investors would demand more of US treasuries. The US treasuries and bonds are considered to be risk-free. The reason for this is because investors are guaranteed to receive a fixed amount of coupon rate until maturity.

More so, the US treasuries also come with an inherent guarantee that the US government will not default the interest payment and that investors will receive their principal upon maturity. Furthermore, the US’s interest rates are relatively higher than other developed nations; this means that investors in the US government securities stand to profit more by investing in the US.

The level of purchase of the US TIC net long-term transactions also says a lot about the expected inflation. In the long term, most investors worry that if the rate of inflation increases rapidly, it will reduce their profits. Thus, any investor would prefer to invest in a country with stable inflation, which would ensure that their returns are not severely affected.

Therefore, when the US TIC net long-term transactions are positively increasing, it means that foreign investors expect the US economy to be relatively stable over the long term. It is taken as confidence that the Federal Reserve will keep long term inflation in check.

Source: St. Louis FRED

Conversely, if the US TIC net long-term transactions are negative, it implies that there are more sellers than buyers. This scenario could imply that foreign investors believe that the long-term inflation rate will exceed the rate of returns they will receive from their investments. Since their expected real returns will be diminished, they prefer to invest their money in other economies.

The US TIC net long-term transactions can also be used to show impending recessions and optimism about economic recoveries. Let’s use the recent coronavirus pandemic as an example. In the first quarter of 2020, the US TIC net long-term transactions plunged to historic lows. It means that more foreign investors were exiting the US capital and money markets and presumably investing their funds elsewhere. This net outflow was a result of the uncertainty of what the pandemic might bring.

 Source: Trading Economics

In the second quarter of 2020, the US TIC net long-term transactions jumped back to positive territory, implying that foreign investors were pouring back into the US capital and money markets. Note that this net inflow coincides with the passing of the $2 trillion stimulus package. Therefore, we can argue that the net inflow of US TIC net long-term transactions was a vote of confidence by foreign investors that in the long term, the US economy will rebound from the pandemic-induced recession.

Impact of US TIC Net Long-Term Transactions on Currency

The impact of the US TIC net long-term transactions on the USD is pretty straightforward. In the international market, foreigners are obliged to convert their currencies into the USD. Therefore, an increase in the US TIC net long-term transactions means that the demand for the USD increases as well. Consequently, the increase in the demand for the USD makes it appreciate relative to other currencies.

Conversely, when US TIC net long-term transactions show net outflows, the USD will depreciate relative to other currencies. This is because when foreigners sell the US financial securities, they will convert the USD to their domestic currencies when repatriating their money.

Data Sources

The US Department Of The Treasury is responsible for collating and publishing the monthly and quarterly US TIC net long-term transactions. Trading Economics has detailed historical data on the US TIC net long-term transactions.

How US TIC Net Long-Term Transactions Release Affects The Forex Price Charts

The latest monthly publication of the US TIC net long-term transactions was on October 16, 2020, at 4.00 PM EST. The release can be accessed at Investing.com. Moderate volatility on the USD can be expected when the US TIC net long-term transactions report is released.

In August 2020, the US TIC net long-term transactions were $27.8 billion compared to $11.3 billion in July 2020. In theory, this increase should be positive for the USD.

Let’s see how this release impacted the GBP/USD pair.

GBP/USD: Before US TIC Net Long-Term Transactions Release on October 16, 2020, 
just before 4.00 PM EST

Before the publication of the US TIC net long-term transactions, the GBP/USD pair was trading in a subdued uptrend. The 20-period MA was almost flattened with candles forming just above it.

GBP/USD: After US TIC Net Long-Term Transactions Release on October 16, 2020, 
at 4.00 PM EST

After the publication of the US TIC net long-term transactions, the pair formed a 5-minute bearish candle. Subsequently, GBP/USD adopted a bearish trend showing that the USD significantly strengthened against the GBP. The 20-period MA steeply fell as candles formed further below it.

Bottom Line

From this analysis, it is evident that the US TIC net long-term transactions release has a significant impact on the forex market. The report shows the confidence of investors in the US economy and the demand for the US Dollar.

Categories
Forex Fundamental Analysis

The Ugly Truth About a Potential Trade War

Donald Trump provokes China, but Beijing is no longer the same as at the beginning of 2020. When I look at some people, and in my head, there’s only one thing: how to get a gun license? The last thing the world economy that is fighting the pandemic needs is the resumption of the great trade war between China and the United States.

However, Donald Trump does not give up and continues to roll barrels in Beijing. Then it threatens import duties for the alleged origin of the coronavirus in the laboratory and the non-fulfillment of obligations to buy US products, likewise, it prohibits the largest federal pension fund in the US to invest funds in Chinese stocks, then raises its voice over the final breakdown of relations, which will allow the United States to save $500 billion. Doesn’t Donald Trump wear masks in the White House? They are necessary to keep quiet.

Meanwhile, China, aware of the benefits of its country’s position that brought the coronavirus to its knees, is no longer the same as at the beginning of 2020. China makes it clear that it cannot break the ties. Unless it is a barbed wire. And if the US is going to send her away, it needs to know that the Chinese are lazy, so the Americans themselves will have to take them. Beijing is increasingly moving from diplomacy to threats: it stops buying pork from Australia in retaliation for Canberra’s intention to conduct an international investigation into the origin of the coronavirus, spreading rumors about an American plot against his country, encouraging States loyal to him.

China’s belief that it will be able to defeat the rotten West, as it was after the crisis of 2007-2009, when thanks to the growth of Chinese GDP, the world economy managed to recover. It feels like we’re watching the second part of a 12-year-old action film “Before the World Stayed In Whales, Now In Chinese”.

As for Trump, Beijing has long chosen the same tactics as Fed president Jerome Powell. Ignore the angry speeches of the President of the United States. Everyone knows that ignoring is one of the oldest forms of emotional abuse. The relationship between the two countries increasingly resembles a family idyll, when the husband speaks and gives instructions, trying to prove that he is the head of the family, and the smart wife agrees with him but does everything in her own way. Like it didn’t get to the point where “my husband took me off the friend list, and told her to get out of my house “.

Trump’s discourse on a total breakdown of the relationship seems very much like a man’s desire to break the marriage bond:

– Why did you separate from your wife?

– We have no common interest, except for nine children…

China and the United States have a relationship too close to breaking without pain. And the removal of Chinese companies from supply chains, in which Americans participate, is seriously discussed in the White House, it is almost impossible to implement. Globalization reigns in the world and the solid rally of US stock indices speaks of no trade war. Where does the S&P 500 come from? The wisdom of the crowd… However, people are not always right. They are not always sober.

Categories
Forex Fundamental Analysis

Everything About ‘Economy Watchers Current Index’ Economic Indicator

Introduction

It has long been posited that in any economy, the first people to experience growth or contraction are those who provide basic-everyday services to the households. These service providers are considered to be “in touch” with the realities of the economy since they directly interact with their customers. While most people do not pay close attention to this index, its fluctuations could provide valuable insights into the economy.

Understanding Economy Watchers Current Index

For this analysis, we will focus on the Japanese Economy Watchers Current Index. This index attempts to measure the present economic conditions in Japan, especially from the perspective of households. From its name ‘economy watchers,’ it directly measures the mood of businesses who are in constant touch with the final consumers.

The index is compiled by surveying about 2050 employees in every sector of the economy. Here is the list of the sectors surveyed in the economy.

  • In household activity related sectors
    • Retail establishments like supermarkets and automobile sellers
    • Food and beverage establishments like restaurants
    • Services to households such as transportation, telecommunication, and leisure facility operators
    • Housing services
  • Corporate activity related sectors, including:
    • Operators in the manufacturing sectors
    • Employees and operators in the nonmanufacturing sector
    • Employees in the primary sectors like agriculture, mining, and fishing
  • Employee-related sectors such as;
    • Temporary labour placement agents
    • Job magazine editors
    • Staffing agencies
    • Professionals who understand labour market trends

In all the above sectors, the data is compiled as per the regions in which it was collected. It is to say that the survey is divided based on the area being surveyed in japan. It covers the 11 regions in Japan.

The people who are surveyed are well-placed in positions that enable them to observe first-hand the changes in economic activities. These are the questions that the survey asks.

  • How they assess the current economic conditions and detailed reasons for their answer
  • Their assessment of future economic conditions and their reasons for this assessment

The survey is conducted monthly from the 25th to the end of that month. Note that the Japanese Cabinet Office selects regional research organisations to administer these surveys. Based on the responses obtained, a ‘diffusion index’ is compiled. This diffusion index is then converted into a percentage to give the Japanese Economy Watchers Current Index. Here’s how the responses are weighted in the diffusion index.

  • Better is +1
  • Slightly better is +0.75
  • Unchanged is +0.5
  • Slightly worse is +0.25
  • Worse is 0

Using Economy Watchers Current Index in Analysis

Any value above 50 indicates that respondents are optimistic about the future, while values below 50 show that they are pessimistic. Now, note that a rise in the Economy Watchers Current Index doesn’t mean that all sectors of the economy are optimistic. It just means that majority of the sectors in the economy are optimistic.

For example, economy watchers in every other sector might be optimistic, but those in the nonmanufacturing sectors are pessimistic. This scenario means that majority of economy watchers are optimistic. Similarly, when the Economy Watchers Current Index shows pessimism about the economy, it doesn’t mean that every sector in the economy shows pessimism. Some economy watchers could be optimistic.

When the economy watchers are optimistic about the future, it means that they expect the economy to grow. Remember that these economy watchers are sampled from virtually every sector of the economy in every region of Japan. For example, let’s say that economy watchers in the manufacturing sector are optimistic about the economy.

This means that they expect the manufacturing sector to expand, which means that the output from the sector will increase. Going back to the basic knowledge of the economy, we know that suppliers and producers take their cue from consumers. Therefore, an increase in production in the manufacturing sector, or any other sector, means that consumer demand has also increased.

Let’s think of the factors that drive an increase in consumer demand. The primary factor is the increase in money supply in the economy, which is driven by easy access to cheap finance or an increase in the employment rate. Here, consumers have increased disposable income, which means that the economy is expanding.

Conversely, when the Economic Watchers Current Index is decreasing and showing increased pessimism, it could mean that the economy is contracting. Let’s use the example of household activity related sectors. When they are pessimistic, it means that they are experiencing a shortfall in demand for their goods and services. Since we have established that household demand drives these sectors, a decrease in demand could mean that households are cutting back on their expenditures.

This reduction in consumption is a direct consequence of lower disposable income in the economy. When households have reduced disposable income, they will prioritise expenditure on only the most essential goods and services. It means that consumer discretionary industries will take a hit, as will the overall economy – GDP will fall as the economy contracts.

Observe in the graphs below that the fall in the Japanese Economy Watchers Current Index corresponds to the drop in Japanese GDP in Q1 2020.

Source: Trading Economics

Source: St. Louis FRED

Impact of the Japanese Economy Watchers Current Index on the JPY

We have seen that the Economy Watchers Current Index can directly be linked to the money supply in the economy.; which means it can also be used as a leading indicator of inflation.

When the Economy Watchers Current Index is continually rising, it can be taken as a sign that there is increasingly more money supply in the economy. In this case, governments and central banks might step in to implement contractionary policies like hiking interest rates. In the forex market, this will increase the value of JPY. Conversely, when the Economy Watchers Current Index steadily drops, it might trigger expansionary policies, which will make the JPY depreciate.

Data Sources

The Cabinet Office of Japan is responsible for the survey and publication of the Japanese Economy Watchers Current Index. In-depth and historical data is also available at Trading Economics.

How the Japanese Economy Watchers Current Index Affects The Forex Price Charts

The recent publication from the Cabinet Office of Japan was on October 8, 2020, at 2.00 PM JST. The release is available at Investing.com. The publication of the Japanese Economy Watchers Current Index is expected to have a low impact on the JPY.

In September 2020, the Japanese Economy Watchers Current Index was 49.3 compared to 43.9 in August 2020.

Let’s find out how this release impacted the JPY.

AUD/JPY: Before Japanese Economy Watchers Current Index Release on 
October 8, 2020, just before 2.00 PM JST

The AUD/JPY pair was trading in a weak uptrend before the publications of the Japanese Economy Watchers Current Index. The 20-period MA was merely slightly rising with candles forming just above it.

AUD/JPY: After Japanese Economy Watchers Current Index Release on 
October 8, 2020, at 2.00 PM JST

The pair formed a 5-minute “Doji” candles immediately after the publications of the index. Since the index showed pessimism in the Japanese economy, the JPY is expected to be weaker compared to the AUD. As expected, the pair subsequently traded in a renewed uptrend with the 20-period MA steeply rising and candles forming further above it.

Bottom Line

The article has shown the importance of the Economy Watchers Current Index in the Japanese economy. More so, the significance of the index has been evidenced by the price chart analysis. Note that although the index is usually a low-impact indicator. However, its significance is observed in the current coronavirus pandemic since it can be used as a leading indicator of economic recovery.

Categories
Forex Fundamental Analysis

Does ‘Retail Sales Monitor’ (RSM) Economic Indicator Impacts The Forex Market?

Introduction

The level of demand can be said to be the primary driving factor in any economy. In the long run, the fiscal and monetary policies that are implemented by governments and central banks can be traced back to the aggregate demand within the economy. The consumption by households accounts for over 65% of the national GDP. Since retail sales account for most of the consumption by households, monitoring retail sales data can provide a useful predictor of the GDP and inflation.

Understanding Retail Sales Monitor

The Retail Sales Monitor is a precise measure of the performance in the retail sector. The RSM is measured monthly in the UK by the British Retail Consortium (BRC), whose participating members represent about 70% of the UK’s retail industry.

Source: The UK Office for National Statistics

The BRC is comprised of over 170 major retailers and thousands of independent retailers. The BRC member businesses have sales of over £180 billion and with 1.5 million employees. Since the RSM measures the change in the actual value of same-store sales in BRC-member retail outlets in the UK, the data can be used as a confident measure of the UK’s retail sector health and the broader economy.

In the UK, the retail sector is the largest employer in the private sector, which means that tracking the retail sector changes gives an overview of the economy and business cycles and insights into the labor market.

Using Retail Sales Monitor in Analysis

The RSM data couldn’t be more relevant in the current climate of Coronavirus afflicted economy and post-Brexit operating environment. Here are some of the ways this data can and is used for analysis.

In any economy, growth is driven by demand. Household purchases account for over 65% of the GDP, which makes the RSM data a vital leading indicator of economic health. When the retail sales monitor shows an increase in households’ consumption, it means that more money is circulating in the economy.

Several factors can be attributed to increased demand by households. Firstly, increased employment levels in the economy or an increase in real wages mean that the economy’s overall disposable income also increases. As a result, households can now consume more quantities of goods and services. More so, the increased disposable income tends to lead to the flourishing of discretionary consumer industries and a general rise in the aggregate demand.

An increase in aggregate supply leads to the expansion of production activities hence overall economic growth. Secondly, increased demand can be a sign of easy access to affordable funding by the households. Generally, if households and businesses have easy access to cheaper financing sources, it forebodes an increase in economic activities, which leads to economic expansion.

As an economic indicator, the retail sales monitor can be used as an authoritative leading indicator of recessions and recoveries since its data covers over 70% of the retail sector. For example, when the economy is at its peak, it is characterized by RSM’s historical highs and lower unemployment levels. When the RSM begins to drop consistently, this can be taken as a sign that the economy is undergoing a recession. The period of recession is characterized by an increase in the rate of unemployment and lower disposable income, which makes households cut back on their consumption and prioritize essential goods and services.

Source: Retail Economics

Conversely, when the economy is at its lowest during recessions or depressions, it is characterized by historical lows RSM and a higher unemployment rate. In this scenario, when the RSM begins to rise steadily, it could be taken as a sign that the economy is undergoing recovery. This period will be marked by improving labor market conditions hence increased demand that drives the RSM higher.

Using the RSM as a leading indicator of recessions and recoveries can help governments and central banks implement fiscal and monetary policies. When the RSM drops and shows signs that the economy could be headed for a recession, expansionary fiscal and monetary policies could be implemented. These policies will help to stimulate the economy and avoid depression.

On the other hand, when the RSM is continually rising at a faster rate, contractionary monetary and fiscal policies could be implemented. These policies are meant to mop up excess liquidity of the money supply and increase borrowing costs, thus avoiding an unsustainable rate of inflation and an overheating economy.

Impact on Currency

There are two main ways in which the RSM data can impact a country’s currency. By showing the economic growth and as an indicator for potential monetary and fiscal policies.

When the RSM has been steadily increasing, forex traders can anticipate that contractionary policies will be implemented to avoid unsustainable economic growth. One of such policies involves interest rate hikes, which make the currency appreciate relative to others. Conversely, expansionary monetary and fiscal policies can be anticipated in the event of a persistent drop in the RSM. Such policies include cutting interest rates, which depreciates the local currency.

The currency can be expected to be relatively stronger when the RSM is increasing. In this case, economic conditions are improving, unemployment levels are dropping, and a general improvement in households’ welfare. On the other hand, a dropping RSM is negative for the currency because it is seen as an indicator of a contracting economy and worsening labor conditions.

Sources of Data

In the UK, the RSM data is collated by the British Retail Consortium and KPMG. The data is published monthly by the British Retail Consortium.

How Retail Sales Monitor Data Release Affects Forex Price Charts

The recent publication of the retail sales monitor data was on October 12, 2020, at 11.00 PM GMT and accessed at Forex Factory.

The screengrab below from Forex Factory; as can be seen, a low impact on the GBP is expected when the RSM data is published.

In September 2020, the BRC increased by 6.1%. This change was greater than the 4.7% change recorded in August 2020 and higher than the analysts’ expectation of a 3.5% change. Theoretically, this positive RSM is expected to have a positive impact on the GBP.

Let’s see how this release impacted the GBP/USD forex charts.

EUR/USD: Before the Retail Sales Monitor Release on October 12, 2020, 
Just Before 11.00 PM GMT

Before the publication of the RSM data, the GBP/USD pair was trading in a neutral pattern. As shown by the 5-minute chart above, the 20-period MA had flattened with candles forming just around it.

EUR/USD: After the Retail Sales Monitor Release on October 12, 2020, 
at 11.00 PM GMT

The pair formed a 5-minute ‘Inverted Hammer’ candle after the RSM data publication. However, the release of the data did not have any noticeable impact on the pair. The GBP/USD pair continued trading in the previously observed neutral trend with the 20-period MA still flattened.

Bottom Line

Most forex traders tend to pay attention to the retail sales data, which is usually scheduled for ten days after the RSM publication. The retail sales data are considered to cover the entire economy hence the low-impact nature of the retail sales monitor as an indicator in the forex market.

Categories
Forex Fundamental Analysis

Analysing The Impact Of ‘Wholesale Trade Sales’ On The Forex Market

Introduction

When it comes to households’ consumption, the retail sales data is usually considered the best leading indicator. Most people rarely have wholesale trade sales in mind. However, the importance of wholesale trade sales data should not be underestimated. Whenever retailers face an increase in demand by consumers, their next stop is to the wholesalers. Furthermore, when retailers anticipate increased demand, they stock up directly from wholesalers. Thus, wholesale trade sales data can be used as a leading indicator of retail sales and the overall demand in the economy.

Understanding  Wholesale Trade Sales

A wholesaler is a business whose core operations strictly involve selling to institutions, governments, or other businesses. A wholesaler rarely deals with the end consumer. Wholesalers usually conduct their businesses from warehouses and do not market their services to households. Their place in the supply chain is to provide retailers and vendors with goods.

As an economic indicator, the wholesale trade sales measures the monetary value of the inventories and sales made by registered wholesalers over a particular period.

How are the Wholesale Trade Sales Measured?

In the US, the Census Bureau conducts a sample survey to determine the national wholesale trade sales and publishes its findings in the ‘Monthly Wholesale Trade: Sales And Inventories’ report. This report contains end-of-month inventories, monthly sales, and inventories-to-sales ratios. These aspects of the reports are segmented by the type f business that the wholesale operates. Some of the wholesalers covered by the report include; jobbers or wholesale merchants, exporters and importers, and distributors of industrial goods. The report excludes agents who market products for mining firms, refineries, and manufacturers.

The samples contained in the monthly report are selected through the strata design, which is defined by the type of business sampled and the annual sales for the businesses. In this report, wholesalers of all sizes are included. It is updated quarterly to capture the changes in the sector.

Since the sampling method is used to create the final monthly report, the estimates on the inventories and sales are arrived at by the summation of the collected, weighted data. These estimates are then seasonally adjusted and benchmarked to the annual surveys. Note that the report is susceptible to sampling and non-sampling errors.

Using Wholesale Trade Sales for Analysis

The wholesale trade sales data can be used as a leading indicator of retail sales and consumer spending, estimated to drive up to 70% of the GDP.

Source: St. Louis FRED

The wholesale sector is an integral intermediary in the distribution of goods to the final consumer. Therefore, an increase in sales can be seen as an increase in demand by households. As an economic indicator, this increase could signal that the welfare of households is improving and they have more disposable income hence the increase in demand. The increased disposable income could result from increased employment levels in the economy or higher wages received by households. In either scenario, more money is circulating in the economy. It shows that the economy is expanding.

On the other hand, if the wholesale sales are continually decreasing, it could be considered a sign of depressed demand in the economy. The decrease in demand might be resulting from the lower circulation of money in the economy. An increase in unemployment levels or a decrease in household wages can be attributed to the depressed demand. In this instance, it shows that the economy is contracting.

Suppliers and manufacturers can also use wholesale sales data to determine their level of output to match the demand, hence avoid distorting the equilibrium prices. When wholesale trade sales are increasing, the manufacturers and producers will increase their output to match the level of demand in the economy. When the sales are increasing more than the inventories, producers, and manufacturers will have to scale up their production. Increasing production entails hiring more labor hence a decrease in the unemployment levels. This instance shows that the overall economy is expanding.

Conversely, when inventories are increasing more than the wholesale sales, it indicates that demand is falling. The producers and manufacturers will be forced to scale down their operations to avoid having excess supply than demand, which will distort the market prices. As a result, jobs will be lost in the economy making households worse off. Furthermore, corporate profits will b expected to take a hit.

Impact on Currency

Economic growth and the rate of inflation are the two ways wholesale trade sales data can impact the forex market.

An increase in wholesale sales shows that there is an increase in aggregate demand. In this case, the economy is poised to perform well in the coming months, with discretionary sectors flourishing. The increased demand drives the economic growth towards expansion, which might be accompanied by increased demand-driven inflation. Therefore, in the forex market, a sustained increase in wholesale trade sales can be seen as a potential trigger of contractionary monetary and fiscal policies. These policies are implemented to ensure that economic growth is within sustainable levels and the rate of inflation stays below the target rate. As a result, the currency appreciates relative to others.

Conversely, a continuous decline of the wholesale trade sales will lead to the depreciation of the currency. In the forex market, falling wholesale trade sales show a decline in the aggregate demand, which might result in deflation and, eventually, a stagnating economy. To prevent this from happening, governments and central banks might adopt expansionary fiscal and monetary policies. Although these policies are meant to stimulate the economy, they result in the depreciation of the currency.

Sources of Wholesale Trade Sales Data

The US Census Bureau publishes the monthly ‘Wholesale Trade: Sales And Inventories’ report. St. Louis FRED publishes a comprehensive historical coverage of wholesale trade sales in the US.

Source: St. Louis FRED

How Wholesale Trade Sales Data Release Affects The Forex Price Charts?

The US Census Bureau published the latest monthly ‘Wholesale Trade: Sales And Inventories’ report on October 9, 2020, at 10.00 AM EST. This released can be accessed at Investing.com. As shown by the screengrab below, low volatility is expected upon releasing the wholesale trade sales data.

In August 2020, wholesale trade sales grew by 1.4%. This growth was lower than the 4.8% growth recorded in July 2020 and lower than analysts’ expectation of a 2.0% growth.

Theoretically, this lower-than-expected growth should be negative for the USD.

Let’s see how this release impacted the EUR/USD forex charts.

EUR/USD: Before the Wholesale Trade Sales Data Release on October 9, 2020, 
Just Before 10.00 AM ET

The pair can be seen to be trading in a steady uptrend before the news release. The 20-period MA is steeply rising with candles forming above it.

EUR/USD: After the Wholesale Trade Sales Data Release on October 9, 2020, 
at 10.00 AM ET

After the news release, the EUR/USD pair formed a 15-minute bullish candle, as expected. This candle showed that the USD weakened against the EUR immediately, the worse than expected wholesale trade sales data was released. Subsequently, the pair continued trading in a renewed uptrend.

Bottom Line

Although the wholesale trade sales data is regarded as a low-impact economic indicator, it is significant in the current economy. The data can be used to show the rate of economic recovery after the coronavirus induced recession.

Categories
Forex Fundamental Analysis

Everything About ‘Business Investment’ Fundamental Forex Driver

Introduction

The economy is intricately woven. Although consumption accounts for about 70% of the GDP, this consumption wouldn’t be met if the supply was cut short. The point here is – all aspects of the economy are intertwined. Therefore, a change in one aspect of the economy is bound to influence the others significantly. In this article, we will see how investments by businesses influence the economy and how it impacts the forex market.

Understanding Business Investment

In the most basic sense, business investment is defined as spending money to acquire assets, start a business, or expand a business with the anticipation of making profits.

As an economic indicator, Business Investment’ represents the change in capital expenditure in the private sector. This expenditure is an inflation-adjusted value.