Category: Forex Fundamental Analysis

This section will cover educational articles about central banks, economic drivers and fundamental indicators. The aim is to show the prospect trader the economic drivers that influence and move the currency prices. Fundamental drivers are the force that creates prolonged trends. on this section, we will explain most of them starting by interest Rates, GDP, Government debt, Inflation, Unemployment rate, Balance of trade and many others related to labor, mone, business, trade, housing, consumer, taxes and housing.

Categories
Forex Fundamental Analysis

Sentiment as the Key Factor In Decision-Making

Have you ever asked yourself what key factor has the power to substantially and irrevocably impact the trade of currencies? Many have tried to reach this answer and, at the same time, many have failed, dragging the weight of financial losses and blown accounts along. What makes a trader successful in the end? Are we […]

Have you ever asked yourself what key factor has the power to substantially and irrevocably impact the trade of currencies? Many have tried to reach this answer and, at the same time, many have failed, dragging the weight of financial losses and blown accounts along. What makes a trader successful in the end? Are we […]

Have you ever asked yourself what key factor has the power to substantially and irrevocably impact the trade of currencies? Many have tried to reach this answer and, at the same time, many have failed, dragging the weight of financial losses and blown accounts along. What makes a trader successful in the end? Are we to focus on the factors obstructing traders’ passages to growth or the ones facilitating the prospects of earning a profit? We now have access to countless sources offering volumes of educational material, but we still hurdle the same barriers that prevent us from becoming better traders. We have long learned about indicators, charts, and strategies, among other fundamental concepts introduced at the very beginning of our forex trading careers.

Unfortunately, most traders fail to grasp the one idea that has sparked so much controversy within the forex community by now that the focus on the results is often blurred and compromised by the traders’ specific sets of beliefs regarding what is right. The spot forex market enjoys a continuing influx of traders from a number of different markets, boldly attempting to tap into their previously acquired experience and knowledge and apply them onto the world of trading currencies. Combined with the less experienced traders’ rite of passage and poor choice of information sources, the overall failure rate is rather ominous. However, it appears that most losses increasingly deal with the topic of sentiment, which entails a wider set of believers and facts every trader must absolutely strive to understand. Due to the above-mentioned state of the market, it is high time that the debate over sentiment and its impact on traders’ success was dealt with once and for all.

Unlike any other market, the spot forex market is severely monitored and controlled by the big banks, such as Deutsche Bank, JP Morgan Chase, and HSBC, whose power to affect the market can turn a seemingly ideal plan into a bloodbath unless you understand how to approach this issue. While the big banks have the power to detect market activity, they cannot see your specific order. However, should you take the most popular market position, there is a high probability of undergoing some very painful financial losses. While we may not know the extent of tools the big banks’ use to maintain control and insight, every trader can also gather a vast pool of information on market activity by using the IG Client Sentiment Indicator (https://www.dailyfx.com/sentiment) or FXCM SSI (https://twitter.com/fxcm_marketdata?lang=en), which are charts showing where the focus of attention is. Moreover, owing to these two sources, we can tell whether traders are going long or short along with where the price went in the end. Interestingly enough, apart from sharing the same information regarding where the price is going, both banks and traders have a common goal – profit.

So, if you were to ask yourself what action they would take if they noticed great concentration in a specific area of the chart, what do you believe your answer would be? If you imagine that all traders decided to move net long on EUR, what would the big banks do: a) keep EUR long for an extended period of time, bestowing all traders with a nice financial reward; b) immediately take the currency’s price short, forcing the majority to exit their long trades at a loss; or, c) maintain EUR as it is, lure the traders going long even further only to “unexpectedly” take the currency short? Most traders get trapped because the banks will almost always choose the second or the third option and will do that repeatedly and consistently. The moment where most traders get confused is believing that they can outsmart the system, still not recognizing what needs to be done when the banks change the price from long to short here, so they keep dragging themselves deeper and deeper in the mud.

Now that we can see how reliance on sentiment plays out in the field, we need to address the right approach to surpassing this obstacle. First of all, whenever there is a high concentration of activity in one part of the chart, this should be a clear signal for every trader to start feeling alarmed. At this point, we need to forget the human tendency to conform and practice the contrarian approach. What this implies is that each trader should strive to recognize to which direction the majority is heading and refrain from following the mass. The basis of this attitude is neither disobedience nor rebellion, but the understanding that we have two distinctly different methods of trading in this $3—6 trillion market – the right and the wrong way. If all those traders spiraling out of control placed patience, money management, and trading psychology before relying on the wrong sources, the big banks’ impact would certainly not be as negative a factor as it is in these cases. If the big banks ever disappeared, there is a great chance that the nature of this market would entirely change, possibly even becoming similar to the stock market. It is important that traders stop feeling angry about their losses and start taking advantage of the existence of the big banks.

This further entails that concentrating on notions such as order books, expiration dates, etc. is entirely redundant for trading currencies. We may never exactly know how the big banks manage the spot forex market, but what we can do is acknowledge the phenomenon which occurs repetitively and decide what to do about it. It is high time traders stopped wondering why or how things happen and started to ponder what they can do individually to measure control in their own trading. We can accept the inevitability of outside influences, but, at the same time, we should use the information we can gather, notice similarities, and feel comfortable making difficult choices.

When we think about the core of the forex market, we cannot assume the existence of qualitative sameness, where trading currencies, stocks, or commodities are considered to be indistinguishable. In contrast to what some sources may say, terms such as supply and demand, herd mentality, buy low/sell high, and more have no impact on the quality of trading currencies and are, thus, potentially dangerous because of the increased probability of missing the point. The spot forex market essentially revolves around the need to think about the reasons why a particular price moves in a specific direction. Traders’ main task is not to apply a set list of tactics incorporated from other markets, but make sure that they stay off the banks’ radar as successfully as possible. By becoming part of the minority, you will increase wins and decrease losses – which the majority of traders running after reversals, for example, may never experience.

The majority of traders also use common and outdated tools (e.g. Japanese Candlesticks) which offer information visible to everyone, pushing large numbers of traders to react to the same signals and thus immediately drawing the attention of the big banks. What is more, even the choice of currencies can have an effect on the future of a trade. For example, USD is always in demand, making the pairs involving this currency always on the banks’ radar to a greater degree than in other cases, which is why caution is advised especially for beginners. Traders can early on also feel threatened by the news involving regulatory bodies taking action to limit traders’ freedom. Do not get frightened because you see some exorbitant amounts they charge in the media, because once broken down per trader, these amounts approximately turn out to be a day’s work. Overall, do not get distracted by methods which are inapplicable in trading currencies or news for that matter because what you never want to do is be the line moving in a completely opposite direction from where the money is going in the chart.

To become more knowledgeable about the impact of sentiment on trading in the spot market, you should consider exploring the IG Client Sentiment Index for education purposes. The tool has proved to be less useful when the price is consolidating, but the opportunity to see the overall movement will serve as an invaluable lesson. Detecting whether traders are going long or short and where the price is actually going will almost always show you that the currency will more often than not go in the opposite direction, serving as an obvious confirmation of why going with the majority is never a good idea. Unlike with the USD-based pairs where such phenomenon frequently occurs, other currencies may vary in the degree of susceptibility to the big banks’ involvement simply because the number of individuals trading these other currencies is lower.

The first image below, for example, successfully captures how the individuals trading on the EUR/USD currency pair behave, transparently documenting this common occurrence. As you can see at the beginning of the chart, each time traders are impatiently moving from net short to net long, the price will almost always start moving towards the opposite direction. The chart further shows how traders at one point changed their minds for a short while, causing the price to react. Then they decided to go long, after which the price started going short and the two lines once again crossed paths going into entirely opposite directions. The same coordinated behavior is present everywhere in the chart, which should serve as an indication of the need to take a different approach.

Example of how the price rebounds depending on where the majority of traders are going

Sentiment, as we already explained above, is not equally applicable to all currencies. If you are interested in a currency pair which does not involve USD, such as EUR/GBP, you would then need to look for the combination of information you can gather from both the EUR/USD and GBP/USD currency pairs, focusing on where most traders are in these charts. Likewise, client sentiment may be applicable to some markets, such as the spot forex market, but there are certain exceptions. For example, precious metals rarely exhibit any correlation in this regard. If you are trading spot gold against USD, for instance, you should know that the banks certainly have control over the currency, but they have practically no dominance over gold. In this case, it is the price of gold that has a say and determines what will happen to that pair. Therefore, banks cannot truly manipulate the prices the way they would normally do in each and every case.

The involvement of banks becomes even more questionable when we observe some other trades, such as the one involving silver, as shown below. In terms of the stock market, we can find no evidence of sentiment influencing individuals stocks; however, certain indices prove not to be impervious to this phenomenon. While the IG Client Sentiment is practically the most heavily traded index we know, you may still use some smaller versions such as the CAC or the XETRA DAX. Despite the fact that the information will probably not be the same quality as with the most popular sentiment index, you will still be able to find some useful data. Most importantly, even with these less versatile indices, you can generally obtain the information on where the majority of people are unless you are looking into precious metals or crypto markets where you will find no correlation, further raising the question of why such data is even provided on these platforms. Unfortunately, such terrible fundamental mistakes keep happening, but it appears that the vast number of these traders choose not to open their eyes, thus giving the big banks the opportunity to cream off the profit so easily.

Traders must become aware of another essential difference regarding their approach to sentiment. As it appears, many traders keep falling for the same trap, believing that the only important matter in getting off the big banks’ radar is knowing the direction where everyone is heading to and opting to go the opposite way. What is more, they typically wait for the lines to cross or colors to change to make their move, using the IG Client Sentiment as a trend confirmation indicator. Unfortunately, no matter which pair you may choose to trade, using the IG Client Sentiment as a trend confirmation indicator will probably not give you the result you are looking for. Even if you put effort into finding ways how to use this tool more effectively, testing out every possible option, you should know that the knowledge about where the majority of traders are at a certain point in the chart is not the type of information you should be focusing on.

What is truly relevant is the insight into where these individuals are going, and where the mass is headed is where you will see the most appalling scenarios. You could most definitely benefit even more from some other indicators, which could be of more assistance to your trades. However, be mindful of the fact that even if you get a signal to go where the majority is at a particular moment, you should not feel worried. If the majority of traders are going long and your signal is telling you to go long as well, do not give in to the fear, but rest assured knowing that the concentration of traders in one place is not truly what you should be concerned about, but the direction they are taking. If you are wearing yourself down, distrusting the indicators you chose to serve you in your trading, you will very likely miss out on some extremely good opportunities. The best solution to this challenge is building your own algorithm and learning to trust that system.

A lot of sources discuss what constitutes the very essence of trading in the spot forex market. Especially for beginners, the access to sources attaching the same value to sentiment as to technical analysis and fundamental analysis can be utterly detrimental. This, however, does not undermine the impact of sentiment nor does it strive to prove how sentiment is unimportant, being the key driver in this market with the ability to move prices towards specific directions. The biggest problem traders have in dealing with sentiments is the fact there is little we can do about it. Chasing sentiments is simply equal to trying to predict the whims of people hungry for success. We cannot control people’s emotions or use them to foresee where millions of traders are going to go because it is an attempt to control the uncontrollable.

Since the greatest portion of traders keeps chasing the sentiment, your task is to do exactly the opposite. By eliminating sentiment from the equation, you will save yourself from facing scenarios such as the one in the image below. Not all places in this chart indicate the exact phenomenon we discussed today, but from the middle towards the right end, we see several places where most traders made one big move only to see the money go in the opposite direction. Nonetheless, the belief that just because millions of traders are going long at a specific time, we should go short is also an example of a short-sighted approach. We may not have control over people’s sentiments, but we can most definitely strive to learn about indicators, testing different tools, and working towards setting up our own algorithm.

Such knowledge could have helped traders who got caught up in the situation shown in the chart below because just by refocusing on the two lines where the white pointer is, they could have caught the big move and salvaged their trade. In addition to building up knowledge on trading and indicators, traders must bear in mind that indicators are result-oriented tools which are not truly meant to predict the future. Considering the fact that news inevitably gets in the way at some point (e.g. what the past year’s flash crash did to indicators), traders need to adopt skills that can raise them above the level of sentiments and provide some stability in this seemingly unpredictable market.

If you still believe that you can yield the power of sentiments, although generally not advisable, there is one method in which you can attempt to do it. Before using IG Client Sentiment, traders relied on the SSI indicator developed by FXCM, an ex-U.S. company that, unlike now, used to have more presence on MT4. Despite the fact that it does not make its applications available for U.S. customers, FXCM does have extremely useful products showing sentiment that you include in your chart. They also have their own proprietary trading software done in a different code, which you might still be able to use if you can transpose indicators from one language to another. If this is not the case, you may still find an easier solution by following FXCM Market Data on Twitter, which will offer a window into the actual SSI Indicator even if you do not have access to it.

Some of the benefits it provides include the GBP/JPY pair which we cannot find on IG Client Sentiment. This particular twitter feed is excellent at showing you charts that are relevant at that point in time. For example, the cropped image on the left below shows a chart revealing some unexpected activity, which tells us that there is a slight chance that the sentiment is about to reverse. Quite similarly, the AUD/JPY chart next to it with the yellow pointer indicates the crucial moment where any trader trying to catch a reversal would severely endanger their trading accounts and financial stability. Therefore, we must be particularly careful with this tool, whose greatest contribution to the forex community is the ability to use it as a reflection tool. Attempting to use it for prediction purposes, hoping to discover where the price might go, would require the understanding that a set-up algorithm would tell you much better where to go and what to do.

Overall, predicting the whims and the sentiments of millions of traders around the world has never been a good idea, and you must be extremely cautious when dealing with this topic so as not to end up where the majority does. Should you ever notice any extremes with regard to sentiments on the pair you are trading at the time, you are advised to stop and exit the trade. A great example of a situation where closing up was necessary was the 2019 flash crash, when the ratio between short and long traders on the USD/CAD currency pair was 4:1 (i.e. 80% short) because of which we could safely conclude that the price could not have gone much higher. Some experts who traded on this currency pair at the time state that they relied on their experience, leaving the trade just before their indicator was about to exit the trade itself. Nonetheless, until you are certain that you have enough knowledge, the right mindset, and necessary experience, do not let yourself get carried away, potentially endangering not just one trade but your entire forex trading career.

We could not stress enough how volatile relying on sentiments is, but if you really must proceed on such a trade in that manner, make sure that you use all the available resources. Twitter, for example, is a tremendous source of information, and taking notes is an excellent way to both memorize quickly and keep important data in one place. You can explore updates about IG Client Sentiment Index on DailyFXTeam, learn about additional SSI currency pairs on FXCM_MarketData, or discover some invaluable educational materials and market comments on This_IS_VP4X. If you are intent on growing as a forex trader, aim to include technical indicators, money management, and trade psychology into trading, which will essentially help you put a system together that will bring you money in the long run. What most traders, whom you could see in the charts added in this article, did was miss out on invaluable opportunities because they never put any effort into building a proper system.

Once you develop trading skills and reach the professional level, you may not need to use your own money to trade any longer because you will surely be noticed by different companies that will want to invest in you. Before that happens, you should start acknowledging the role of the big banks in this market and, if needed, let go of all strategies used previously in some other markets. Even though the phenomenon we analyzed today does not frequently happen in the precious metals or crypto markets, making use of techniques and indicators specific for the spot forex market will alleviate the external impact and safeguard you from any market instability. Moreover, understand that with forex, there are no shortcuts and that you have set yourself up for a long road of learning and growing.

Luckily, today’s article equipped you with the knowledge some individuals who have been trading for more than five years still do not know. You should now be able to avoid areas in charts that are open to manipulation and preserve your finances, which will be further fortified by not trading reversals or using the same common tools as every other trader does. Finally remember that your only chance to succeed is by getting out of the pool of traders who focus on the sentiments, as it is key in differentiating between emotion-driven and indicator-driven individuals. Building a currency trading career based on emotions, bereft of any technical skills, is not a long-term strategy, and if you are passionate about trading in the spot forex market, eliminating sentiments and devising an algorithm will get you right from where you are to being a professional trader.

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Forex Fundamental Analysis

Impact of ‘Bankruptcies’ News Release On The Forex Assets

Introduction

Introduction

Introduction

A bankruptcy on paper and in reality differ in several meaningful ways. The short and long-term implications both have to be fully taken into the picture before forming an opinion or drawing any inference from the Bankruptcy statistics. Contrary to popular belief, it is not as bad as it sounds and is more frequent for businesses to file for bankruptcy as a means to reset their business to become profitable. Correctly understanding bankruptcy, its implications, and its statistics can help us make better trade decisions in the long run.

What is Bankruptcy?

Bankruptcy is the legal state of an individual or a company that has become insolvent. When an individual or a company is unable to repay its debt, it can file a petition for bankruptcy in the federal court. When individuals lose their income source or when a business takes on continued periods of losses are likely to file bankruptcy.

The bankruptcy process starts when a petition is filed by the debtor or the creditor, although it is more common for the debtors to file for bankruptcy. Successful processing of a bankruptcy petition can benefit the debtor to be discharged of their debts, thus giving them the freedom from the overburdening debts and restart.

When a bankruptcy petition is processed, the assets of the debtor are evaluated, and an appropriate portion may be allotted to repay the creditors. Whether all of the assets are sold off to repay debt or not depends on the types of bankruptcies filed. Many a time, creditors may need to reorganize the debt to allow the debtor to pay off the debt in smaller installments over three to five years.

How can the Bankruptcies numbers be used for analysis?

On paper, all this may seem favorable to the debtor offering immediate relief from the overwhelming debts.  The debtor may not be required to pay at all if the debtor does not have assets or income or at least greatly waive off their debt installments. Successful proceeding of a bankruptcy petition can partially or entirely waive off debts for a chance to save your home or business from going-under.

Such an exemption comes at a cost, though. As mentioned, on paper, it seems like a favorable option for the debtor in a tight spot, but in the long-run, it has far-reaching implications. If a debtor is filing bankruptcy, chances are, their credit score has already gone wrong due to failed payment dues in past months. When the bankruptcy is filed, it will stay on the record of that individual or company for ten years. In this process, the credit rating goes low, and a remark of bankruptcy on record prevents you from being eligible for future credits, loans, mortgages, or even credit cards.

When lending sources are all cut off, then it is challenging for both individuals and businesses to become profitable. Some may even end up borrowing from sources where interest rates are much higher than the standard rates, ending up in deeper trouble than before.

Filing bankruptcy is more frequent for businesses to reorganize their remaining assets and come up with a new strategy to be profitable. All the bankruptcy cases are handled in the federal courts by a bankruptcy judge. They are classified as per the bankruptcy code that details different chapters for different types of bankruptcy case scenarios.

From a macroeconomic perspective, bankruptcy filing gives both the debtors and creditors a fresh start by allowing debtors to be eligible for credit and creditors to recover some portion of the credit. Having such a system that can accommodate failures of individuals and companies is a sign of a fair and inclusive economy that embraces and tolerates both ups and downs of individuals and businesses.

From a purely business and growth perspective, increasing bankruptcy cases is just plain bad for the economy as it indicates businesses are shutting down, and people are losing jobs. Both of those scenarios do no good for the economic growth and contribute negatively to both growth and consumer & business sentiment within the nation. Filing of bankruptcy thrashes the equity market performance of corporations as investors lose confidence in the business.

Recessions, war-times, or times like global pandemic observe an increasing number of bankruptcy cases indicating that the economy is not faring well. Hence, from an economic standpoint, the “fewer the better” would be the goal for a prosperous economy.

Impact on Currency

Filing Bankruptcy is often the last resort for the debtor when all other options are closed. Hence, the bankruptcy statistics are backward-looking or a lagging indicator confirming an ongoing past trend which could have been deduced from the past poor performance. Bankruptcy statistics would then be useful for economic analysts for analysis but does not serve as a useful indicator either for the equity or the currency markets. Hence, bankruptcy figures could be overlooked for other leading macroeconomic indicators for the currency markets.

Economic Reports

The United States Courts provide historical data of the quarterly reports of bankruptcy filings in the country on its official website. The Organization for Economic Co-operation and Development (OECD) also maintains bankruptcy statistics for reporting members. Moody’s analytics also provide personal and corporate bankruptcy filings on their official website.

Sources of Bankruptcy Statistics

The US Courts maintain bankruptcy filings records on its website.

The OECD Bankruptcy statistics are also helpful for quick reference of the OECD member countries.

Global Bankruptcy statistics are available on Trading Economics.

Moody’s analytics also report personal bankruptcies.

How Bankruptcies’Data Release Affects The Price Charts

Estimating the exact impact of bankruptcies on an economy is hard to quantify. Since the bankruptcies data is released quarterly, its impact on the forex market tends to be negligible because the data is backward-looking. The most recent data was released on June 30, 2020, at 8.00 AM ET and can be accessed from the United States Courts website here. The historical bankruptcies’ data in the US can be accessed at the Trading Economics website.

The screengrab below is from the quarterly bankruptcies’ data from Trading Economics.

As can be seen, the total number of bankruptcies in the United States decreased to 22,482 companies in the second quarter of 2020 from 23,114 companies in the first quarter of 2020.

Now, let’s see how this release made an impact on the Forex price charts.

EUR/USD: Before the Quarterly Bankruptcies Data Release on August 2020, 
Just Before 8.00 AM ET

As can be seen in the above 15-minute EUR/USD chart, the pair was trading on a weak downtrend. This trend can be affirmed since the 20- period Moving Average is decreasing in the steepness of its decline with candles forming closer to it.

EUR/USD: After the Quarterly Bankruptcies Data Release on August 2020, 8.00 AM ET

After the release of the bankruptcies data, the pair formed a 15-minute “hammer” candle. This pattern indicates that the USD became weaker against the EUR. This trend is contrary to the expectations since the number of bankruptcies had declined from the previous quarter. The pair adopted a bullish stance with the candles crossing above a now rising 20-period Moving Average.

Now let’s see how this news release impacted other major currency pairs.

GBP/USD: Before the Quarterly Bankruptcies Data Release on August 2020, 
Just Before 8.00 AM ET

The GBP/USD pair showed a similar weakening downtrend trend as observed with the EUR/USD pair before the release of the bankruptcies data. The 15-minute candles can be seen, forming closer to the 20- period Moving Average, whose downward steepness is decreasing.

GBP/USD: After the Quarterly Bankruptcies Data Release on August 2020, 8.00 AM ET

After the news release, the pair formed a 15-minute bearish “Doji star” candle. Similar to the EUR/USD pair, GBP/USD  adopted a bullish stance with the candles crossing above a now rising 20-period Moving Average.

AUD/USD: Before the Quarterly Bankruptcies Data Release on August 2020, 
Just Before 8.00 AM ET

AUD/USD: After the Quarterly Bankruptcies Data Release on August 2020, 8.00 AM ET

Unlike the downtrends observed with the EUR/USD and the GBP/USD pairs, the AUD/USD traded within a subdued neutral trend before the bankruptcies data release. The 15-minute candles were forming around an already flattened 20-period MA. After the data release, the pair formed a 15-minute bullish “Doji star” candle. It later traded in the same bullish pattern as observed in the other pairs.

Bottom Line

In the current age of the coronavirus pandemic, data on bankruptcies provide a vital indicator of the economic conditions. However, in the forex market, these data do not carry much significance, as shown by the above analyses.

Categories
Forex Fundamental Analysis

Understanding The Importance Of ‘Small Business Sentiment’ In The Forex Market

Introduction

Introduction

Introduction

Small Businesses and self-employed account for a large portion of the private sector. Small and medium scale businesses’ success and failure impact a large section of the country’s population. Critical economic indicators like employment rate, consumer spending, GDP are all directly affected by the performance of small scale businesses. By paying attention to small business sentiment indices, the severity of economic conditions can be assessed more accurately, helping us to form more informed investment decisions.

What is Small Business Sentiment?

Small Business

The definitions of a small business differ across corporations, regions, and countries. The Australian Bureau of Statistics (ABS) defines a small business as an independent and privately owned, managed by an individual or a small group of people, and have less than 20 employees. A business having 20-199 employees is termed a medium scale business.

Small Businesses are generally diverse, but broadly they can be segregated into a few broad categories, though. One of those sectors includes providing services to other businesses and households that can include professionals like plumbers, home doctors, electricians, etc. Another sector includes retail outlets like grocery, bars, saloons, etc. Finally, another sector that these businesses can be categorized into is the niche service and goods providers in the manufacturing, construction, and agricultural sectors.

Given the diversity, a large number of activities are taken up by these businesses. In many areas where large businesses cannot reach out due to lack of business viability, these small ones plug the gap. For instance, a remote area having a population of about 50-100 people would not be suitable for a supermarket; instead, a small private grocery shop would do the trick.

Small Business Sentiment indices try to measure the general sentiment towards the business outlook in the current and coming months. Since the sentiment is abstract, the numbers are not precisely quantifiable and differ from person to person. Still, the sentiment indices are calculated as an average of a selected sample of small businesses every month or quarter. Higher and more positive numbers indicate a positive outlook towards business prospects and indicate the economy is likely to grow and prosper. On the other hand, low and negative numbers indicate a weak business prospect, and the economy is likely to slow down.

How can the Small Business Sentiment numbers be used for analysis?

In the case of Australia, that has over two million businesses that come under the category of small businesses, which is over 95% of the entire business sector. The large and established business sectors contribute to the remaining 5%. Since the failure rate of small businesses is quite high in any economy compared to the business giants, focusing on it gives us more accurate and economy sensitive data.

While big corporations generally have their profits nearly constant with mild swings during all business cycles, the small businesses are more sensitive, and their P/L (Profit/Loss) swings quite wildly over business cycles. Small businesses are more vulnerable and take a bigger hit from economic shocks resulting in closures or filing bankruptcy. In contrast, larger businesses are more resilient and can weather economic storms.

The small businesses contribute to a large share of employment; in Australia, it accounted for 43% of total employment. Small businesses are also generally the source of innovations where the smaller size of the organization gives room for the more creative expression of employees. For instance, in the video gaming industry, some of the most innovative gameplay mechanics have come from indie studios (small remote studios) that have had humble beginnings.

Overall the small-business sentiment gives more economy-sensitive data, where the direct impact and severity of economic conditions can be easily measured. The footprint of large businesses in terms of global or nationwide presence masks the underlying weaker economic growth in particular areas. For instance, an international giant like Sony may have had poor sales in the music industry, which are not reflected in its final sales figures if they had a good sale in the electronics department.

The high failure rate of small businesses can broadly impact the employment rate, consumer spending. The large scale failure of small businesses can be in general attributed to weak economic conditions, less consumer demand, high dollar value, lack of additional or tolerant policy from the Government to support small and medium businesses.

Impact on Currency

As the currency markets deal with macroeconomic indicators, small business sentiment indicators are overlooked for the broader and more inclusive business sentiment indicators like AIG MI (Australia Industry Group Manufacturing Index). The small business sentiment is useful for a more in-depth analysis of small regional companies and is useful for equity traders focusing on small company stocks. It is also useful for the Government officials to understand and draw out any support policies to maintain employment rate, and avoid bankruptcy to small-scale businesses.

It is also worth noting that not all countries maintain sentiment indices for small businesses, which makes analysis and comparison difficult for currency traders. Currency traders generally look for economic conditions across multiple countries to decide on investing in a currency; in that case, small business indices are not useful. Overall, it is a low-impact leading economic indicator that the currency markets generally overlook due to other alternative macroeconomic leading indicators.

Economic Reports

In Australia, the National Australian Bank publishes monthly and quarterly reports on the performance of small-business and their prospects on its official website. A detailed report on how different sectors are faring during current economic conditions and probable business directions are all listed out in the reports.

The National Federation of Independent Business (NFIB) Small Business Optimism Index is famous in the United States for reporting monthly small business sentiment on its official website.

Sources of Small Business Sentiment Indices

We can find the Small Business Sentiment indices for Australia on NAB. We can find consolidated reports of Small Business Sentiment for available countries on Trading Economics along with NFIB statistics.

How Small Business Sentiment Data Release Affects The Price Charts?

As mentioned earlier, the National Australian Bank (NAB) is the primary source of business sentiment in Australia. The bank publishes monthly, and quarterly NAB Business Sentiment reports. The most recent report was released on August 11, 2020, at 1.30 AM GMT and can be accessed at Investing.com here. A more in-depth review of the monthly business survey in Australia can be accessed at the National Australian Bank website.

The screengrab below is of the NAB Business Confidence from Investing.com. On the right, is a legend that indicates the level of impact the Fundamental Indicator has on the AUD.

As can be seen, low impact is expected on the AUD upon the release of the NAB Business Confidence report. The screengrab below shows the most recent changes in business confidence in Australia. In July 2020, the index improved from -8 to 0, showing that business sentiment in Australia improved during the survey period. Therefore, it is expected that the AUD will be stronger compared to other currencies.

Now, let’s see how this release made an impact on the Forex price charts.

AUD/USD: Before NAB BC Release on August 11, 2020, Just Before 1.30 AM GMT

As can be seen on the above 15-minute chart, the AUD/USD pair was trading on a neutral pattern before the NAB Business Confidence report release. This trend is evidenced by candles forming on a flattening 20-period Moving Average, indicating that traders were waiting for the news release.

AUD/USD: After NAB BC Release on August 11, 2020, 1.30 AM GMT

After the news release, the pair formed a 15-minute bullish candle. As expected, the AUD adopted a bullish stance and continued trading in steady uptrend afterward with a sharply rising 20-period Moving Average.

Now let’s see how this news release impacted other major currency pairs.

AUD/JPY: Before NAB BC Release on August 11, 2020, Just Before 1.30 AM GMT

Before the news release, the AUD/JPY pair was shifting its trading trend from neutral to an uptrend. Bullish candles are forming above the 20-period Moving Average.

AUD/JPY: After NAB BC Release on August 11, 2020, 1.30 AM GMT

Similar to the AUD/USD pair, the AUD/JPY pair formed a bullish 15-minute candle after the news release. The pair later continued trading in a steady uptrend.

AUD/CAD: Before NAB BC Release on August 11, 2020, Just Before 1.30  AM GMT

AUD/CAD: After NAB BC Release on August 11, 2020, 1.30 AM GMT

The AUD/CAD pair was trading in a similar neutral pattern as the AUD/USD pair before the news release. This trend is shown by candles forming on and around a flat 20-period Moving Average. After the news release, the pair formed a bullish 15-minute candle and adopted a bullish uptrend, as observed in the previous pairs.

Bottom Line

Theoretically, the small business sentiment is a low-impact indicator. However, in the age of Coronavirus afflicted economies, it has become a useful leading indicator of economic health and potential recovery. This phenomenon is what propelled the NAB Business Confidence indicator to have the observed significant impact on the AUD.

Categories
Forex Fundamental Analysis

What Is ‘Interbank Rate’ and What Impact Does It Have On The Forex Market?

Introduction

Introduction

Introduction

The Interbank rate is an essential tool used by the central authorities to control the money flow within the economy. Changes in the interbank rate can add or withdraw money from the system overall, which can stimulate growth or slow down the economy, respectively. The Interbank rate drives interest rates for bank loans, which are the significant sources of capital for businesses and the general public. The understanding of the Interbank rate is crucial for our analysis.

What is the Interbank Rate?

The interbank rate is the percentage rate at which the United States banks lend each other money. A country’s Central bank dictates the banking practices for the banks within the nation. For the United States, it is the Federal Reserve which decides the interest rates and the banking practices. The central banks, in general, demand 10% of their total deposits be held as reserves to maintain liquidity and meet withdrawal needs.

Based on the interbank rate, banks having excess cash can lend money to the banks, which are falling short of capital to meet their immediate requirements or to maintain their minimum reserves.

What is the Interbank Rate – Second Definition?

The interbank rate also refers to the rate at which banks exchange currencies in the global forex market. The forex market consists of an interbank market, which is a significant part of the forex market system overall. This interbank market consists of big players. Most of those are banks, large financial institutions, investment banks, and mutual funds corporations and do not include retail forex institutions or traders.

The interbank rate numbers are what you see when you search in Google the currency exchange rate for a particular pair, but this is not the rate at which you can trade a pair. This rate is only available for the interbank market participants who are usually big financial corporations trading in millions and billions. The price you see is a jacked-up price of the interbank rate in your platform. Your rate is the sum of interbank rate and the spread which your platform charges for trade as profit.

The minimum transaction in the interbank market is in millions; hence the retail traders will not be able to afford the interbank rate. The interbank market participants trade currencies to manage their exchange rate and control interest rate risk.

Although, you can neither control nor trade at the interbank rate, important for traders to be aware of the interbank rate to avoid getting scammed by Forex brokers who main charge way above the interbank rate. The decentralized system of Forex allows for self-regulation, and hence the interbank rates hand the actual exchange rates available to traders are competitive and self-correcting. However, novice traders who are not aware of this might lose money by paying an excessive spread to brokers.

Economic Reports

Federal Reserve determines the interbank rate, and the average of all the interbank rates in all the lending transactions between the banks in the United States is called the Fed Funds Rate.

The interbank credit system is applicable for a short period, usually ranging from overnight to a maximum of a week. Hence, the interbank rate is also called the Fed Funds Rate.

The Federal Reserve announces the Fed Funds Rate based on a variety of factors like inflation, GDP growth, recession, monetary policy, etc. On the 1st of every month, the Fed Funds Rate is released.

How can the Interbank Rate be Used for Analysis?

The Fed Funds Rate drives money in and out of the economy. The Fed Funds Rate drives the interest rate on bank loans that is available to the public and businesses.

A higher Fed Funds Rate would mean that loans are now expensive than before. To take a loan now would mean paying more interest rate. Hence the general public is discouraged from taking loans indirectly. On the other hand, now it would be more profitable to save as they receive a higher interest rate on their deposits. Both these factors can change the general public sentiment on money spending. A high-interest rate environment withdraws money from the economy, thereby slowing down economic activity as people are less willing to spend.

Conversely, a low interbank rate encourages banks to give loans at a cheaper rate, and hence more businesses and people will be able to afford loans; this will ultimately lead to the injection of money into the system overall. When more money is available to a company or an individual, the natural tendency is to increase spending, businesses may use for expansion plans. All of this will stimulate economic growth and result in printing higher levels of GDP.

Impact on Currency

Traders and investors can use the Fed Funds Rate as part of their analysis. Since Central authorities use the fed funds rate to manage the economy and money supply, a historical correlation of interest rates with GDP growth rates can help us to determine the direction of the economy and the value of its currency.  It is a proportional indicator meaning higher interbank rates relate to currency appreciating phenomenon and vice versa.

Higher Interbank rates result in banks paying out higher interest rates for deposits, which can also attract foreign investors to purchase domestic currency to make a deposit and earn better returns on their investment.  Therefore, an increase in capital flowing into the economy and decreased local currency circulation in the rest of the world, thereby increasing its demand and worth.

A low interbank rate results in increased money flow into the system, which can be inflationary, thereby depreciating the purchasing power of its currency. Conversely, a higher interbank rate results in decreased money circulation in the system, which will be deflationary for the economy, and the reduced demand for goods and services will increase the purchasing power of the currency as people would tend to save than spend.

Even though the interbank rate changes do not immediately get reflected in the macroeconomic numbers like GDP and currency value, it is a slow indicator in that sense that it takes a particular time (weeks to few months) to show its effect in actuality. It is also important to know that the authorities use the interbank rate as a response or corrective measure to the current economic situation.

It is more of a gate check for inflation or deflation. It is more of an effect to a cause and not a cause in itself. It is a passive indicator in comparison to other indicators. It reflects more the past and current economic activities than upcoming financial situations. The initial temporary volatility in the currency after the news release is typical, but the long term effect reflects after a certain number of weeks only.

Sources of Interbank Rates

We can find out the Fed Funds Rate from the official website of the Federal Reserve System of the United States: Federal Reserve System | Selected Interest Rates. We can also find a historical graphical representation of the effective fed fund rate changes in the St. Louis FRED website. For reference – Fed Fund Rate

Impact of Interbank Rate News Announcement   

The ultimate goal of any fundamental analysis is usually to determine if there will be a hike or a cut in the interest rates. As mentioned earlier, the interbank rate can also be referred to as the Federal funds rate. In the US, the Federal Reserve releases the interbank rate is determined by the FOMC which meets eight times in a year to set this rate

Below is a screengrab of the Federal Funds Rate from Forex Factory. On the right, we can see a legend that indicates the level of impact the Fundamental Indicator has on the corresponding currency.

The snapshot below shows the latest release of the Federal Funds Rate on July 29, 2020, at 1.00 PM ET. In the latest release, the FOMC recommended that the rate remains within the target of 0% and 0.25%. This range was within the analysts’ expectations.

It is worth noting that this year, the Federal Reserve has conducted two emergency rate cuts to combat the Coronavirus inflicted economic shocks. The first emergency rate cut was on March 3, 2020, at 10.00 AM ET, as shown by the screenshot below. The Federal funds rate was reduced to a target range of 1.00% to 1.25% from the previous range of 1.50% to 1.75%.

At another unscheduled emergency meeting on March 15, 2020, at 4.00 PM ET, the FOMC cut the federal funds rate by 1.00% to a target range of 0.00% to 0.25%.

Now, let’s see how this news release made an impact on the Forex price charts.

EUR/USD: Before Interbank Rate release on July 29, 2020, Just Before 1.00 PM ET

As shown on the above 15-minute chart of the EUR/USD, the pair was on a progressing uptrend between 7.45 AM and 12.45 PM ET. This uptrend as evidenced by the subsequent bullish candles forming above the 20-period Moving Average.

EUR/USD: After Interbank Rate release on July 29, 2020, 1.00 PM ET

After the FOMC release of the Federal funds rate, there is a renewed volatility in the market. The initial market reaction was negative for USD since the FOMC kept the rate unchanged. The rate release did not result in a shift in the trend since most traders anticipate it and price in their expectations in the market.

Let’s quickly see how this new release has impacted some of the other major Forex currency pairs.

GBP/USD: Before Interbank Rate release on July 29, 2020, Just Before 1.00 PM ET

GBP/USD: After Interbank Rate release on July 29, 2020, 1.00 PM ET

The GBP/USD pair shows similar trends, as observed with the EUR/USD. There is a steady uptrend hours before the interbank rate release. Market volatility is present after the news release but not significant enough to alter the prevailing trend.

USD/CAD: Before Interbank Rate release on July 29, 2020, Just Before 1.00 PM ET

USD/CAD: After Interbank Rate release on July 29, 2020, 1.00 PM ET

For the USD/CAD pair, a weak uptrend is observed, with candles forming just around the 20-period Moving Average. After the interbank rate release, the pair shows the same weakness for the USD as observed with the EUR/USD and the GBP/USD.

Bottom Line

The interbank rate is a high-impact fundamental indicator in the forex market. The FOMC Statement, however, dampens its impact since it is focused on the future. It is therefore advisable for traders to avoid opening significant positions before this news release. Furthermore, reading the FOMC statement will help to gauge whether the Fed is hawkish or dovish about the future.

Categories
Forex Fundamental Analysis

How The ‘Corruption Rank’ Data Impacts A Nation’s Currency

Introduction

Introduction

Introduction

Corruption can very well be defined as seeking private gain through abuse of power that one has been entrusted. The biting effects of corruptions include:

  • Erosion of confidence in the monetary and economic system;
  • Hampering economic development;
  • Increase in current account deficits; and
  • Encouraging the growth of shadow economies

So, how does this affect a country’s currency valuation? Well, through GDP, of course! This correlation is explained in detail later on in this article.

Understanding Corruption Rank

Corruption rank is the ranking of countries worldwide based on how the countries’ public sector has been corrupted. It measures the extent of corruption by politicians and other public officials. Due to its nature of illegality and secrecy, there is no single indicator that directly measures the levels and extent of corruption in each country. The best measure of corruption rank is the Corruption Perceptions Index (CPI) published by Transparency International.

The CPI is used to rate the countries based on perceived levels of corruption on a sliding scale from 0 to 100. A score of 0 is considered the most corrupt. A country with a score of 100 is considered to be clean of corruption. The CPI is constructed based on the opinions of business executives, public policy experts, financial journalists, and risk analysts globally.

The CPI is a result of 13 rigorous assessments and surveys on wide-ranging issues on corruption collated by several reputable institutions around the world, including the World Bank and African Development Bank. These assessments and surveys are conducted in the two years preceding the publication. They incorporate a combination of qualitative and quantitative analysis which captures the manifestations of corruption, including:

  • Misuse of public resources;
  • Effectiveness of the prosecution of corruption cases by the judiciary;
  • The extent of bribery by firms and individuals to secure contracts, avoid taxations and payment of duties;
  • Bureaucratic loopholes that foster corruption; and
  • The effectiveness of anti-corruption measures implemented by the government

How Corruption Rank Impacts the Economy

To better understand how the corruption rank of a country influences its currency, we first must understand how corruption impacts a country’s economy.

Corruption inherently impacts the economy negatively. A specific study by the World Bank shows that the GDP per capita in countries with low CPI is about 60% less than for countries with a higher CPI. The negative effects of corruption are:

Overreliance on debt

Corruption results in a significant leakage in the budget. A country is thus forced to rely on debt, usually denominated in foreign currency. The interest payment leads to a higher share of revenue allocated to repayment in the short term instead of economic investments. This higher share of foreign borrowing also results in the local currency crisis.

Inefficiencies in the allocation of resources

Through bribery, the allocation of tenders is usually awarded to individuals and firms who are not qualified. As a result, most public projects are not completed, and the benefits to the economy foregone.

Creation of a shadow economy

Corruption facilitates the growth of several firms that avoid official registrations. As a result, the economy experiences a deficit in terms of taxation, import, and export duties payable. Consequently resulting in low GDP.

The exit of investors

Corruption leads to investors pulling their businesses out. This exit leads to reduced economic activities and accompanied by job losses.

A lower share of foreign direct investment (FDI)

Foreign investors often shun countries with rampant corruption since they seek a fair operating environment. Donor agencies such as IMF and World Bank also reduce their total outflows into such countries. Therefore, the recipient countries’ economy fails to benefit from such investments, which would have a multiplier effect within the economy. Also, because FDI is usually denominated in foreign currency, it usually boosts the recipient countries’ currency strength.

Reduced innovation

Corrupt countries offer very little protection in terms of patents and copyright protection. The lack of legal protection framework results in massive exportation of technology from such countries, thus denying the local economies the growth benefits.

Increase in current account deficits

Corruption creates a disincentive to invest in the local manufacturing and production industries. Apart from the drop in job creations, this leads to overreliance on importation to fill the local demand.

There is a direct inverse relationship between corruption levels in a country and its currency. The inverse correlation is because countries with higher perceptions of corruption have poor economic performance, while those with lower perceptions of corruption have better economic performance.

Consequently, a change in the corruption ranking is often accompanied by a corresponding change in the country’s GDP. In 2019, Sweden dropped in ranking from position 3 to position 4; this was coincided by a 6.37% drop in its annual GDP. During the same period, Malaysia ranked position 51 from 61, a period which coincided with a 1.68% annual GDP growth.

Source: ResearchGate 

How Corruption Rank Impacts a Currency

Although it is a rarely observed indicator, forex market investors should keep an eye on the annual release of the corruption rank. Because the corruption rank is based on two years’ worth of data, it is evident that the corruption rank signifies the underlying fundamental changes in a country’s economy.

High levels of corruption typically tend to be accompanied by a deteriorating economy. It is a known fact that the strength and fluctuation of a country’s currency are tied to its economic performance. Therefore, this is accompanied by a reduction in the valuation of the currency in the forex market.

Any improvements in the rank could forebode that the economy has been performing better, which will be accompanied by a significant appreciation in the country’s currency. Conversely, a drop in the corruption rankings signifies a deterioration in the economic conditions, which will result in the long-term changes in the currency’s value.

Sources of Data

The corruption perceptions index and the corruption rank are released annually by Transparency international. The corruption perceptions index can be accessed here and the corruption rank here.

How Corruption Rank Release Affects The Forex Price Charts

The corruption rank published annually by Transparency International rarely moves the forex market. It is, however vital for the forex traders to keep an eye out for CPI rank. As we have already discussed in this article, the CPI provides crucial information about the conditions of the underlying fundamentals of a country’s economy. The corruption rank is released annually following a two-year assessment and analysis. The latest CPI data for 2019 ranking 198 countries was released on January 23, 2020. A highlight of the release can be found on the Transparency International’s website.

Below is a snapshot of the top and bottom performers. The legend indicates the level of corruption in the country.

In 209, the US fell in rankings by one position, from 22 to 23 out of the 198 countries that were ranked. The screengrab below shows this position.

EUR/USD: Before Corruption Rank release on January 23, 2020

On the above chart, we have plotted a 20-period Moving Average on the EUR/USD chart. As can be seen, the pair had been on a consistent downtrend on the four-hour candlestick pattern. This downtrend is evident since the candlesticks are trending below the 20-period Moving Average. This similar downtrend on the four-hour candlestick chart can be observed on GBP/USD and NZD/USD, as shown by the charts below.

AUD/USD: Before Corruption Rank release on January 23, 2020

NZD/USD: Before Corruption Rank release January 23, 2020

For long-term traders, the pattern offers a great opportunity to go short on the above pairs, since the prevailing downtrends would favor them. Let’s now see how the price responded to the release of the corruption rank by Transparency International.

EUR/USD: After Corruption Rank release on January 23, 2020

After the release of the corruption rank, a persistent downtrend in the EUR/USD pair can still be observed. As shown on the daily chart above, the EUR/USD pair had a bullish candle on January 23, 2020. This strength is even though the US dropped in the corruption rank. Its CPI score dropped from 71 in 2018 to a score of 69 in 2019.

However, against the AUD, the USD can be observed to have weakened momentarily. The pair later regained its bullish trends. It is worth noting that the momentary strength in the AUD is because Australia performed better in the corruption ranking by climbing one position, as shown by the snapshot below.

The chart below shows the daily price action of the AUD/USD pair after the news release.

AUD/USD: After Corruption Rank release on January 23, 2020

The USD weakened against the NZD after the release of the corruption ranking. This weakness can be attributed to the fact that New Zealand ranked first with a score of 87. This ranking is shown by the screengrab below.

As can be seen on the daily chart below, USD weakened against the NZD after the news release.

NZD/USD: After Corruption Rank release on January 23, 2020

Corruption rank can be seen to have some mild effects on the price action of the selected pairs, but not enough to alter to the trend observed before its release. Although most forex traders rarely observe it due to the annual nature of its release, corruption rank provides vital information about the underlying fundamentals of an economy. All the best!

Categories
Forex Fundamental Analysis

What Should You Know About ‘Job Vacancies’ as a Macro Economic Indicator

Introduction

Introduction

Introduction

Job vacancies are a fundamental macroeconomic indicator. This article defines in detail what job vacancies are and further shows how the job vacancies affect the economy of a given country, and consequently, its currency.

What are Job Vacancies

Job vacancies are the number of new gainful employment positions that are created within an economy at a given point in time. In order to establish the number of job vacancies, surveys are usually done on employers about their businesses, recruitment, and job openings.

Job vacancies are considered if: there is a specific open position with work available for it; the job could commence within 30 days of advertisement whether or not a suitable candidate is hired, and the employers are actively recruiting workers for that particular job.

Purpose of Job Vacancies Statistics

The job vacancies statistics are meant to provide information about the level and structure of labor demand. The job vacancies statistics indicate the unfulfilled demand for labor and the desirable skills that are sought by the employers within an economy. As such, the job vacancies statistics provide the central banks and governments with an opportunity to analyze the trends in the labor market. The statistics can also be used to assess the structural analysis of the economy in terms of business cycles.

Job Vacancies as an Economic Indicator

Employers within an economy are continually looking to hire new workers to fill positions in their organizations. As such, job vacancies are a leading macroeconomic indicator of unemployment and employment rates. Thus, the more the job vacancies are available, the more the number of people who stand a chance to be gainfully employed and thus, leading to a reduction in the unemployment rate.

Conversely, fewer job vacancies imply that fewer people seeking employment get to be gainfully employed hence low employment rate in the economy. Thus, higher job vacancies signify an expanding economy while a reduction in the job vacancies implies that the economy is contracting or heading for a full-employment level. In this case, higher job vacancies result in appreciating the strength of a country’s currency while lower than expected job vacancies result in a drop in the currency value.

The statistics on job vacancies can also be used in the analysis of business cycles. The number of job vacancies is expected to be on a constant increase during periods of expansion because businesses are hiring more workers due to increased economic activities. At peak periods, the number of job vacancies is marginally decreased and remain plateaued since most businesses have achieved optimal operations. During the periods of contraction, the number of job vacancies is expected to be on a constant decrease due to a rapid reduction in the economic activity within a country, hence lower GDP output.

Thus, the statistics on job vacancies can be accurately used to predict the periods of economic boom and recessions. During the global economic crisis, the number of job vacancies in the US decreased from 4.4 mn in the 1st quarter of 2008 to 2.45 million in the fourth quarter of 2019, a period of recession. In the recovery period, the number of job vacancies increased from 2.72 million in the first quarter of 2010 to 4.92 million in the fourth quarter of 2014.

How Job Vacancies Affect the Economy

By itself, job vacancies signify the level of economic activity within an economy. A higher and increasing number of job vacancies signify that the economic activities within a country are increasing hence the need for more workers. Similarly, a constant reduction in the number of job vacancies available implies that the economic activities in a country are cooling down, hence the need for fewer workers. More so, a reduction or plateauing in the number of job vacancies available could imply that the economy is heading for full employment.

Graph: 2019 January to December Scatter plot of US Job Vacancies and Real GDP.

Source: OECD Statistics and US BEA

As seen from the above scatter plot, from January 2019 to December 2019, there was a direct positive correlation between the change in the job vacancies in the US and the change in real GDP.

Job Vacancies and Impact on the Currency

As already discussed, job vacancies serve as a leading indicator for employment and unemployment levels. An increasing number of job vacancies implies that unemployment levels are bound to fall drastically. A steep fall in the unemployment rate, which is accompanied by a full rate of employment will result in higher inflation. The higher inflation is because the employers are competing to hire workers hence pushing up the wages at a faster rate. Increased rates of inflation will trigger the government and central banks to employ contractionary monetary policies aimed at keeping the inflation rate in check.

When the central banks increase the interest rate, it is aimed at reducing the rate of inflation by making borrowing expensive while encouraging the culture of savings. Thus, for forex market traders, they can anticipate a hike in the interest rate levels when there is a consistent increase in the number of job vacancies. The higher interest rate has the effect of increasing a country’s currency valuation.

Conversely, a constant reduction in the number of job vacancies, which comes after a period of a sustained increase in the total number of job vacancies, implies that an overheated economy is cooling down. An overheated economy is characterized by a prolonged period of positive economic development and higher levels of inflation brought about by increased wealth generation.

Thus, after the government has employed contractionary policies following the overheating of an economy, it can consequently be expected that this period will be accompanied by asset bubbles and an increase in the prices of assets. Higher wages means that most employers may not be able to hire more workers and let go of some of the existing employees, resulting in a sustained period of lower job vacancies.

The economy can be said to have plateaued and headed for a recession. For forex traders, a falling number of job vacancies could signify an impending dovish monetary policy meant to stimulate the economy and prevent excessive deflation. The dovish policies have a negative effect on a country’s currency.

How Job Vacancies News Release Affects The Price Charts

Although considered a low impact indicator, forex traders need to understand how job vacancies release impacts the price action. In the US, the job vacancies report is published by the Bureau of Labor Statistics by conducting Job Openings and Labor Turnover Survey (JOLTS).

JOLTS gives data on job openings, hires, and separations. The JOLTS report is released monthly about 40 days after the month ends. The latest, expected, and all historical figures are published on the Forex Factory website. The most recent release one can be found here. Job vacancies are advertised positions yet to be filled by the final business day of the month. A more in-depth review of the JOLTS numbers can be found at the Bureau of Labor Statistics website.

Below is a screengrab of the Forex Factory website. On the right, we can see a legend that indicates the level of impact the Fundamental Indicator has on the corresponding currency.

The snapshot below shows the change in the JOLTS numbers. In the latest release, the number of job openings increased on a month on month between May and June 2020 from 5.37 million to 5.89 million. The increase was more than the 5.30 million forecasted by analysts.

Now, let’s understand how this news release impacted the Forex price charts.

EUR/USD: Before JOLTS release August 10, 2020

As seen on the chart above, we have plotted a 20-period moving average on the EUR/USD chart, which shows that the pair is on a strong downtrend. The steady downtrend is also evident from the fact that the candlesticks are just below the Moving Average. On the 15 minute timeframe before the release, between 1100 and 1330 GMT, the market is on a constant uptrend. This uptrend can also be observed in AUD/USD and NZD/USD pairs, as shown by the charts below.

AUD/USD: Before JOLTS release August 10, 2020

NZD/USD: Before JOLTS release August 10, 2020

It is evident that in such a period, going “long” in the market offers the best opportunity to take advantage of this short-term uptrend. However, since the general market trend is downward, we highly recommend following this trend.

EUR/USD: After JOLTS release August 10, 2020, 1400 GMT

After the release of the better than expected JOLTS numbers, there is a consistent downtrend on the EUR/USD. The mere increase in the number of job openings triggered the USD strength against other currency pairs. It is worth noting that the release of the JOLTS numbers was strong enough to reverse the immediate uptrend seen immediately before the release.

The same reversal to a downtrend after news release can be observed for the AUD/USD and NZD/USD pairs as well. This trend is shown in the charts below.

AUD/USD: After JOLTS release August 10, 2020, 1400 GMT

NZD/USD: After JOLTS release August 10, 2020, 1400 GMT

The positive job vacancies news had a significant impact on the strength of USD against other currencies. This strength is because the better than expected job openings signify that the US economy is on a recovery path following the effects of the Coronavirus pandemic.

Categories
Forex Fundamental Analysis

Flash Crash Precautions for Technical Traders

After the recent publication of a book called Flash Crash, the concept of the same name once again stirred the attention of traders across different markets. This controversial literary record of Navinder Singh Sarao’s very public 2015 arrest after having previously amassed staggering $70 million buying and selling futures from his London home points to […]

After the recent publication of a book called Flash Crash, the concept of the same name once again stirred the attention of traders across different markets. This controversial literary record of Navinder Singh Sarao’s very public 2015 arrest after having previously amassed staggering $70 million buying and selling futures from his London home points to […]

After the recent publication of a book called Flash Crash, the concept of the same name once again stirred the attention of traders across different markets. This controversial literary record of Navinder Singh Sarao’s very public 2015 arrest after having previously amassed staggering $70 million buying and selling futures from his London home points to the existence of fragilities in markets. As opposed to regular pricing fluctuations, a flash crash entails an extremely volatile and sudden plunge of the pricing of a security traded on the open market before quickly recovering. With more and more instances of such swift declines, we can see the aftermath of these dramatic volatilities in the markets of stocks, futures, currencies, and cryptocurrencies as well. Whether it results from programming code errors, specifically designed algorithms, and fraudulent behavior, or some other drivers, flash crash plays an important role in assessing risk levels for traders worldwide.

The currency market underwent a major flash crash on January 3, 2019, which took place on the AUD/JPY pair. Since these two currencies are some of the world’s most important exchange rates, their 2019 dynamic was so unbelievable that it drew the attention of the media and traders across the world. With AUD becoming very weak and JPY gaining strength, the currency pair fell the unbelievable 7% in a matter of three minutes. Considering the fact that that the prices plummeting to this extent is exceptionally rare even in a week’s time, one could naturally assume that some major crisis, such as bombing or death of a president, was responsible for such violent move in the currency market. As a flash crash is rather believed to be a deliberate act of market attack to obtain profit instantaneously, the previous assumption falls short.

Some sources discussed how extensive the damage of these volatile activities in an illiquid market had on the Australian economy. With China being on holiday during the week of the event and the U.S. market closing, a drop in liquidity occurred. One of the biggest American companies, Apple, expressed concern regarding the impact which the slowdown in China could have on its fourth-quarter revenues, immediately shifting investors’ focus on the havoc these circumstances could wreak on the global economy. Along with several currency levels being extremely low against the yen at the time came burning questions concerning market liquidity, algorithms, and overall market functioning, which reasonably caused deep concern among traders around the globe and not only in the currency market but other markets as well.

Despite the media frenzy over the global economy, some sources pointed out that liquidity had little effect on anything but the currency market. In fact, the images below portray some major discrepancies between the evidently severe states of the AUD/JPY pair and the stock market performance during the 2019 flash crash. The proportion of these differences then aroused curiosity about the reasons why the prices rebounded immediately after the decline. Some financial reports on this event reflect on the stability AUD/JPY enjoyed over the course of 2018, which may point to the possibility of some major banks and/or institutions getting involved. Interestingly enough, right about the time of the 2019 flash crash, 89% of AUD/JPY traders were going long. As this was a virtually unforeseen ratio of 9:1, it was almost a perfect opportunity for big banks to step in do what they always do – redirect the prices and cream off the profit. Even if the Japanese government decided to move JPY up or down, this process would happen gradually, as opposed to what the currency market witnessed in 2019.

As the AUD/JPY pair closed down approximately 83 pips on the day of the event only to bounce right back up to the levels at the end of 2018, we need to draw some deeper lessons. We can attribute the magnitude of this catastrophe to the media and the big banks, but essentially if you do not analyze risk, timing, and strategy, among others, you are inevitably putting yourself in much greater risk. Most traders whose accounts were completely destroyed as a result of the 2019 AUD/JPY volatility, drowned themselves with emotion-based trading, greedily going after a bounce. Although the 2019 currency market flash crash was not the first occurrence of this phenomenon, the individuals practicing the indicator-heavy approach to trading, especially the ones beginning to build their accounts, experienced a shock as well. Those traders who managed to get out understood how relevant technical analyses and understanding indicators are for surviving the market’s instability.

Brexit and the 2015 EUR/CHF crash both exemplify how such events can influence the creation of a really large candle closing at an entirely different point from where it started. The 2019 flash crash too revealed some unusual facts, where the open and close on the AUD/JPY currency pair were only 83 pips apart, yet with a noticeable high and low. While most indicators typically focus solely on the open and close, ignoring additional information regarding the highs and lows, ATR would be the only tool that could give out relevant signals. At such times, ATR would read much higher than usual, and as flash crashes rarely happen, you would know that the information you were getting was telling you to take a certain action. In case you are using a volume indicator, some of the more average versions might be able to catch the highs and the lows, in contrast to the better versions whose quality stems from its ability to filter out any such activity.

Whether you are using the ATR alone or together with the volume indicator, you should consider the settings which tell how the indicators are measuring data. For example, with the ATR, the settings typically indicate the number 14, which stands for 14 candles, which for daily traders implies that the data is recorded 14 trading days back. Due to the impact of events such as the flash crash, you will not be able to get an accurate reading for another two weeks. Nonetheless, despite the equation being susceptible to these sudden changes, you can still proceed with the trading on the affected currency pair if you take the reading from the day before the event took place. Therefore, in the following 14 days, you will not be including the indicator’s reading, but relying on the one fixed number you found on that particular day.

Even though events such as Brexit and the 2015 EUR/CHF crash are not very common, they still occur every few years, which is why every trader should know how to prepare for the unexpected. As we explained above, the out-of-the-ordinary candle created at those times will inevitably affect your indicators, regardless of how well-devised an algorithm you use. Whichever currency pair undergoes these massive influences, your only task is to stay put and refrain from taking any action. If any currency was under impact because of some external factors, such as GBP after Brexit in 2016, you would not be trading that currency until all indicators went back to normal. What this further implies is that you may need to check the settings to see how far back your indicator is going to record data and patiently sit out for that period of time. Moreover, any attempt to adjust and set up your indicators will prove to be until those big candles are filtered out of the system. Luckily enough, there are approximately seven other major currencies you can trade and keep your account active.

Apart from the 2019’s flash crash, we can trace several other such events happening in the past few years: ETH in 2017, GBP in 2016, and Singapore Exchange in 2013. Although they do not occur very often, once they do, though, no market is exempt from such an unexpected price plunge and rebound. What is so volatile about flash crashes is that, despite what sets them off, they deeply and profoundly affect the market. We may not have enough insight into the intentions of the major players, but we must take into consideration the amount of impact they can have on the direction of prices and the overall market conditions. Nevertheless, regardless of the current climate, every trader now knows the two strategies they can use at such times. If you are a trader of currencies, you will either rely on the data recorded one day before such an event to proceed with a trade on the affected currency or decide to sit out until further notice. Whatever you do decide, however, do not let yourself run after some transient highs searching for some instant gratification.

Categories
Forex Fundamental Analysis

Everything About ‘Social Security Rate’ – An Important Fundamental Forex Driver

Introduction

Introduction

Introduction

During the recent Coronavirus pandemic, the whole debate about social security has taken CenterStage. At a point in life, we all grow old. Since not everyone will go through life-saving for retirement, our main worry then would be; how to pay bills on time, how to provide for our families should we lose out jobs or become incapable of working.

Social security attempts to anticipate all this and offer practical solutions. So why should forex traders care about the social security rate? This article seeks to understand what impact of social security rate has on a country’s currency. To establish this, we first need to understand what it is and what it entails.

What is Social Security?

Social security has been given several definitions. In the UK, it is considered to be any form of monetary assistance from the government towards individuals who have inadequate or no income. In the US, social security is a federal program that is meant to provide retirees, the poor and the disabled with income and health insurance.

Thus, social security is the guarantee that a government gives to its vulnerable citizens that in the event they are exposed to a specific future risk, they will be looked after. The social security program, therefore, uses public resources to provide economic support for private citizens.

What is Social Security Rate?

This rate is the percentage of earnings that is charged on both the workers and their employers. It is used to fund the social security program.

How it is Calculated

Various countries have different mechanisms of arriving at the social security rate for both the employed and self-employed.

In the US, the social security rate is 15.3%. It is a combination of a 12.4% social security tax and Medicare tax of 2.9%. In 2020, the 12.4% social security tax is applied on everyone for all income up to $137,700; any amount earned beyond this threshold is exempt from the social security tax. The social security tax is deducted on an individual’s payroll through payroll withholding by the employer. This rate is split in half between the employee and the employer.

Therefore, an individual contributes 6.2% for social security and 1.45% of their earnings while the employer matches the other half. The employer then remits the withheld amount together with their contribution to the IRS. For those that are self-employed, since they are the employee and the employer at the same time, they have to pay both halves of the social security tax. In the UK, the social security rate is 14%. A comprehensive list of current and previous social security rates for every country can be found on the Trading Economics website.

Purpose of the Social Security

Conventional taxes are meant to be a revenue source for government expenditure or meant to be punitive. The social security tax is meant to a safety net for the contributors should they fall on hard times. It also functions as an economic guarantee for the most vulnerable in society. The chart below shows the dependency on social security benefits by various household income class in the US.

Source: AARP

Some of the benefits of the social security program include:

Retirement benefits

This offers workers and their dependents a replacement income for when they choose to retire. The earliest retirement age is 62 years. For one to be eligible for retirement benefits, they need to have worked for a minimum stipulated period. This period differs depending on the country. In the US, it is for ten years. The amount of money received largely depends on one’s lifetime earnings and the cost of living.

Disability benefits

Also known as disability insurance, the Social Security and Supplemental Security Income disability is meant to provide an income for the disabled. For one to be eligible, they need to have worked for a minimum number of years, depending on the age when the disability occurred.

Medical cover

This is the health insurance coverage that covers part of medical bills for ageing workers, people with permanent health conditions and those with disability.

Survivors benefits

This is meant to help those who are bereaved to cope

Social Security Rate and the Economy

The social security program differs in every country. However, in every economy, such programs are meant to provide stability to the households by providing a replacement stream of income, hence avoiding poverty. In the US alone, close to 56 million people are recipients of social security benefits.

Source: International Labour Organization

As shown in the chart above, higher expenditure in terms of social security corresponds to a higher GDP per capita. While some might argue that a higher social security rate reduces the amount of disposable income, the multiplier effect generated by the resultant social security benefits outweighs any short term loss.

It is worth noting that the families and individual who receive these benefits use the income to purchase goods and services. In 2019, it was estimated that the social security program injected over $1 trillion into the economy. Therefore, the presence of social security helps to maintain demand in the economy in times of crises and some cases, increase the demand.

The benefits of the social security program have a powerful multiplier effect within the economy. The businesses that receive this income from the consumers use it to increase production and hire more employees. These expansions, in turn, generate more revenue for the government to use in national expenditure while the earnings by the employees serve to create more consumption and increased savings.

How Social Security Rate Impacts Currency

As we have already established above, a higher social security rate creates a multiplier effect that generates more revenue within the economy. The strength of a country’s currency is a reflection of its economy. The growth in the national economy, therefore, corresponds to the appreciation in the value of the currency.

Conversely, lowering the social security rate will reduce the multiplier effect within the economy, which leads to shrinking of the national economic growth. For forex traders, lowering the social security rate could be a foreboding of a looming reduction in the national GDP growth, prompting expansionary monetary and fiscal policies. Therefore, in the long run, a low social security rate leads to the weakening of a country’s currency against other pairs.

How Social Security Rate News Release Affects The Forex Price Charts

Forex traders rarely pay any attention to the release of the new social security rates. This inattentiveness is because as an economic indicator, the social security rate is a low impact indicator. However, it is essential nonetheless to know how the news release of the social security rate affects the price action of different pairs.

In the UK, the national government through the Department for Work and Pensions sets the social security rate and is reviewed annually. A breakdown of the UK social security rate can be found HM Revue and Customs website. It should be noted that for the past 25 years, the US government has not changed the social security rate, as can be seen here. Below is a screengrab from the Trading Economics’ website on the UK and US social security rates.

UK social security rate

US social security rate

In the latest release on April 6, 2020, around 1100 GMT, the UK government revised the social security rate upwards from 12% to 14%. Now, let’s see how this news release made an impact on the Forex price charts.

GBP/USD: Before social security rate release April 6, 2020

We plotted a 20-period Moving Average on a one-hour GBP/USD chart. As can be seen on the chart above, the pair is in recovery with the candles crossing over the 20-period Moving Average and subsequently forming above it.

For the GBP/NZD and GBP/AUD pairs, the market is in a general downtrend before the announcement of the hike in the social security rate. This trend is evidenced by the subsequent candles forming below the 20-period Moving Average, as shown in the charts below.

GBP/NZD: Before social security rate release April 6, 2020,

GBP/AUD: Before social security rate release April 6, 2020

For forex traders, going long on the GBP/USD wile short on the GBP/NZD and GBP/AUD pairs would have been an excellent trading opportunity since the prevailing market trends would favour them.

Let us now see if the release of the new social security rates changed the market trend for these pairs.

GBP/USD: After social security rate release April 6, 2020

In theory, raising the social security rate should be positive for the GBP. Bust, as can be seen in the GBP/USD one-hour chart, the news release, did not have any impact on the pair to change the market trend significantly. The lack of impact can be observed for the GBP/NZD and the GBP/AUD pairs as shown by the charts below.

GBP/NZD: After social security rate release April 6, 2020

GBP/AUD: After social security rate release April 6, 2020,

Whereas the social security rate plays a significantly important role in the overall economy and the GDP, it is apparent that its impact in the forex market is negligible.

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Forex Daily Topic Forex Fundamental Analysis

Understanding The Impact of ‘Sales Tax Rate’ News Release On The Forex Market

Introduction

Introduction

Introduction

The sales tax rate usually comes as an afterthought to many. But for forex traders, understanding how the rarely-talked about sales tax rate could prove useful in the long-run. This article defines what sales tax rate is and further shows how they impact a country’s economic development and, by extension, its currency.

Understanding the Sales Tax Rate

A sales tax rate is the percentage of the total cost of the goods or services being sold. Sales tax is a consumption tax that is imposed by governments or local authorities on the sale of goods and services. The sales tax rate is calculated as a percentage then added on the cost. These taxes are usually collected at the retail point of sale on behalf of the imposing authority.

As structured, any business that is offering goods or services is liable for the payment of the sales tax in a given jurisdiction. Depending on the laws, this occurs is they have a physical location within the jurisdiction, an official employee, or an affiliate.

How Sales Tax Work?

The sales tax is collected at the end of the supply chain, only after resale to the consumer has occurred. Since consumers are the ones paying the tax, businesses receive a resale certificate to show that the sales tax is not yet due. The purpose of this certificate to the resellers is to ensure that no sales tax is paid on purchases of items to be resold.

The administration for the sales tax is triggered by whether or not a particular business has a presence within the tax jurisdiction. To be eligible to collect sales tax from its customers, the business has to apply for a sales tax permit from the relevant authorities.

Depending on the jurisdiction, the goods and services that are eligible for a sales tax vary. Groceries and medications are exempt from sales tax, as are goods and services purchased by nonprofit organizations.

Sales Tax Rate as an Economic Indicator

The sales tax rate can serve as a leading indicator for the shifts in demand and supply within the economy. Higher sales tax rates reduce the purchasing power and, with it, the aggregate demand and aggregate supply. The lowered demand and supply within the economy result in reduced economic activities, which could have an unintended ripple effect throughout the economy. With lowered demand and supply, unemployment as a result of job cuts in the affected sectors is another unintended consequence of a higher sales tax rate.

On the other hand, lowering sales tax increases the purchasing power of consumers, which in turn increases the aggregate demand and aggregate supply. These increases lead to job creation in various sectors and boost a flourishing economy. With a lower sales tax rate, the GDP growth within the country is guaranteed to bring about a strengthening currency as a result of improved economic conditions.

How the Sales Tax Rate Affects the Economy

In general, the sales tax rate has a negative correlation with the GDP. This negative relationship is shown in the scatterplot graph below of the US state sales tax rate against the GDP.

Source: Georgia Tech Library

At its core, sales tax is a revenue stream for the government. Thus, it can be said that a higher sales tax rate increases government revenues. The increase in government revenues increases government expenditure, hence higher GDP. In this scenario, a conflict arises. This conflicts because sales tax is an extra cost passed on to the consumer.

Thus, in general, the sales tax rate reduces the purchasing power of the consumers.  The reduced purchasing power leads to lesser sales taxes collected by the government, hence lower GDP. As a result of the diminished purchasing power, the consumers will spend less, resulting in a reduction in the aggregate demand within the economy. This reduction in demand leads to a reduction in the economic output hence lower GDP.

On the other hand, a lower sales tax rate returns some of the purchasing power to the consumers. They will spend more of their disposable income hence increasing the aggregate demand and supply within the economy. The increase in demand and supply increase the economic output. Furthermore, spending more implies that the government is bound to collect more revenue in the form of the applicable sales tax. An increase in revenue will increase the government expenditure within the economy, thus increasing the GDP.

How Sales Tax Rate Impacts Currency

The strength of any currency is usually seen as a direct reflection of its economic performance. As already discussed, the sales tax rate is considered to be leading indicators of aggregate demand and aggregate supply within an economy, and by extension, the unemployment levels. An increase in the sales tax rate will result in a drop in the aggregate demand and aggregate supply. This drop leads to increased unemployment levels and consequently reduced GDP. Long term currency traders can take their cue from an increased sales tax rate as an impending loss of strength in the country’s currency.

This loss in the currency’s strength can be brought by the expectations that, in the long run, central banks and the government will employ the use of expansionary fiscal and monetary policies to stimulate a stagnating economy. These policies harm the currency.

On the other hand, lowering the sales tax rate signifies that in the long run, the economy will be stimulated to grow. This growth is brought about by increased demand and supply. For forex traders, a country that is lowering the sales tax rate or entirely removing the sales tax can expect its currency to strengthen. The currency strength is because the traders can anticipate that in the long run, the government and the central banks may be forced to employ deflationary monetary and fiscal policies to avoid an overheating economy. These contractionary policies are good for the country’s currency.

Therefore, it can be expected that an increase in sales tax corresponds to a weakened currency against other pairs while a decrease in the sales tax rate corresponds to the strengthening of the currency.

How Sales Tax Rate News Release Affects The Forex Price Charts

The sales tax rate is not an indicator forex traders consider when placing their trades because it is a low-impact leading indicator. However, it is useful for forex traders to know just how much the impact of this low-level indicator is on the price charts.

In the US, the national government does now impose the sales tax. However, the various local governments set their own local sales tax rates. The detailed list of the US states and the sales tax rate applicable in each state can be found on the Sales Tax Institute website. The data on annual GDP growth can be accessed from the World Bank website. A forecast of the sales tax rate through to 2020 can be found on the Trading Economics website.

Below is a screengrab of the Sales Tax Institute showing the most recent changes sales tax rate in Washington.

In the latest release, Washington state lowered the sales tax rate applicable from 8.0 % to 6.5% in an attempt to alleviate the strain on consumers as a result of the Coronavirus pandemic.

Now, let’s see how this news release made an impact on the Forex price charts.

EUR/USD: Before Washington Sales tax rate release July 1, 2020

As can be seen in the chart above, we have plotted a 20-period Moving Average on a one-hour EUR/USD chart. From the chart, the pair is one a steady uptrend, represented by the candlesticks forming above the Moving Average. Before the news release at 1730GMT, the pair can be seen to be on a recovering uptrend. This uptrend can also be observed in the AUD/USD pair, as shown by the chart below.

AUD/USD: Before Washington Sales tax rate release July 1, 2020

For the NZ/USD, the pair is on a steady downtrend for hours preceding the news release. This trend is shown in the chart below.

NZD/USD: Before Washington Sales tax rate release July 1, 2020

For long-term forex traders, the pattern offers an excellent opportunity to go long on the EUR/USD and AUD/USD pairs while short on NZD/USD, since the prevailing market trends would favor them. Let us now see how the price action responded to the release of the sales tax rate in Washington State.

EUR/USD: After the sales tax rate release July 1, 2020

Lowering the sales tax rate should have a strengthening effect on the USD. However, as shown in the chart above, the news release of the sales tax rate had no impact on the EUR/USD since the uptrend continued with the same magnitude as before. The same trend can be observed on the AUD/USD and NZD/USD pairs since the previous trends were no reversed. This trend is shown in the charts below.

NZD/USD: After the sales tax rate release July 1, 2020

AUD/USD: After the sales tax rate release July 1, 2020

It is evident from the after-news charts that the release of the sales tax rate does not have any impact on the price action. Although it is has a significant impact on the GDP, it is a low-level economic indicator in the forex market. Cheers!

Categories
Forex Fundamental Analysis

What Is Business Confidence & How Does Its News Release Impact The Forex Market?

Introduction Business Confidence is the most important leading indicator for economic growth that is closely watched by traders, investors, economists, and even policymakers. Business Confidence survey provides the take of the business sector on their near-term prospects that helps us understand what the oncoming quarterly conditions will be.  Business Confidence Indexes are crucial for fundamental […]

Introduction Business Confidence is the most important leading indicator for economic growth that is closely watched by traders, investors, economists, and even policymakers. Business Confidence survey provides the take of the business sector on their near-term prospects that helps us understand what the oncoming quarterly conditions will be.  Business Confidence Indexes are crucial for fundamental […]

Introduction

Business Confidence is the most important leading indicator for economic growth that is closely watched by traders, investors, economists, and even policymakers. Business Confidence survey provides the take of the business sector on their near-term prospects that helps us understand what the oncoming quarterly conditions will be.  Business Confidence Indexes are crucial for fundamental analysis.

What is Business Confidence?

The economy can be broadly categorized as the private and public sectors. The public sector involves all the government and central bank-related offices and industries. The private sector is composed of two main participants: Businesses and Consumers. In the United States, Businesses make up 34% of the private sector. The business sector is again broadly divided based on output as the Manufacturing Industry and Services Industry. The Manufacturing Sector is primarily related to industries that manufacture and sell physical goods. The Services Sector deals with the Services that are essentially non-physical and are challenging to quantify.

The Manufacturing Sector makes up 20% of the GDP, and the remainder 80% is attributed to the Services Sector. Since the business industry is the real economic wealth of the nation, it is the primary source of the Gross Domestic Product. Hence, Business Confidence Indexes can give us an excellent assessment of the upcoming economic trends in the Industry.

Business Confidence Indexes are based on surveys taken from some of the largest industries in both the manufacturing and services sector, asking them about their current business conditions and their outlook about business activity in the coming 2-3 months.

In the US, the publishing of the Manufacturing Purchasing Manager’s Index is done by the institute of supply management every month. It is a survey of about 400 largest manufacturers in the United States of America. It also publishes a Non-Manufacturing Index, which is the same index associated with the Services Industry.

Note

The approach may vary amongst the surveying companies. For example, the National Australia Bank Business Confidence Index is computed on a net balance basis.  In it, the surveyed companies are asked whether there is a positive or negative outlook. Their question would be per se, “Excluding normal seasonal changes, how do you expect business conditions of your industry to change in the next three months?”. The result is calculated as positive, less negative responses, which is the net balance.

How can Business Confidence numbers be used for analysis?

The question that is generally asked in the study is related to MOM changes in the Business Activity, New Orders, Production, Employment, Deliveries, and Inventories with equal weightage.

The Manufacturing PMI and Services NMI ratings lie within the range of 0-100. A score above 50 implies an expansion in the economic activity, and a score below 50 implies contraction. Although across the globe, different survey companies follow different metrics, like the NAB Business Confidence Index follows a zero-based scale, where a score above zero indicates positive sentiment and less than indicates a bearish sentiment.

Business Confidence or Business Sentiment is analogous to Consumer Sentiment, except that the figures are more fact-oriented, as it takes into account the business inventory count, estimates, current production levels, etc. It is asking the business owners about their outlook on the economic prospects in the short-term.

Business Confidence Surveys are very important for policymakers also. They use these statistics to intervene by fiscal and monetary policy reforms to combat deflationary threats, if any.

Impact on Currency

Historically, in the United States, PMI and NMI have predicted GDP growth with 85% accuracy 12-months ahead of time, as illustrated in the below ISM PMI plot against quarterly Real GDP growth. The correlation of business confidence with economic growth is strong, and hence, it is an important leading economic indicator.

Market volatility is sensitive to Business Confidence Indexes. Significant moves in the index cause volatility in the market. It is a high impact leading indicator. High business confidence translates to improving economic prospects, which will translate to higher GDP prints and currency appreciation.

Business Confidence Announcement – Impact due to news release

Till now, we have comprehended the Business Confidence economic indicator. It is essentially used to monitor output growth and to anticipate turning points in economic activity. Numbers above 100 suggests increased confidence in near future business performance, and numbers below 100 indicate pessimism towards future performance. Therefore, investors give a reasonable amount of importance to the data while analyzing a currency.

In today’s lesson, we will look at the NAB Business Confidence Index that is a key measure of Busines Confidence in Australia, published monthly and quarterly by National Australia Bank (NAB). The survey is that is carried out covers hundreds of Australian companies and few banks which measures business conditions in the country. A positive reading can be interpreted as good for the currency and equities, while a negative reading can be interpreted as a warning sign to the government, which leads to a build-up of bearish positions in the currency.

AUD/USD | Before the announcement

We shall start with the USD/JPY pair to observe the change in volatility due to the news release. The above price chart shows the state of the market before the news announcement, where we see the market is in a strong downtrend and the price currently is at the lowest point. We need to wait for a price retracement to the ‘resistance’ to take a ‘sell’ position in the currency pair. Until then, we will see what impact the news makes on the chart.

AUD/USD | After the announcement

After the news announcement, the price moves lower and volatility increases to the downside. The Business Confidence reading was better than last time, but it was good enough to drive the price higher. Therefore, traders sold Australian dollars soon after the release and weakened the currency. In order to take a ‘sell’ trade, as mentioned earlier, we need a price retracement before we can join the trend.

AUD/NZD | Before the announcement

AUD/NZD | After the announcement

The above images represent the AUD/NZD currency pair, where we notice a resilient move to the downside a few minutes before the news announcement. Currently, the price is at a point from where the market had reversed earlier to the upside. Thus, this could serve as a strong ‘support’ area from where we can again expect buying pressure. Depending on the change in volatility due to the news release, we will take an appropriate position.

After the news announcement, the price sharply drops, and we witness a big fall in the market. We can ascertain that the market was a much better Business Confidence reading, which is why traders went ‘short’ in the currency. However, this was immediately retracted by a bullish candle that recovered all the losses.

EUR/AUD | Before the announcement

EUR/AUD | After the announcement

The above images belong to the EUR/AUD currency pair. We can see that before the news release, the market is in a strong uptrend signifying the great amount of weakness in the Australian dollar since it is positioned at the right-hand side of the currency. Since it is an uptrend, we will look to buy the currency pair after the price retraces a ‘support’ or ‘demand’ area.

After the news release, the market continues to move higher, and the ‘news candle’ closes with some bullishness. We observe a similar impact of the Business Confidence numbers announcement on this pair as well, which initially weakens the currency but finally strengthens it. All the best!

Categories
Forex Fundamental Analysis

GDP from Construction – Exploring The Fundamental Forex Driver

Introduction

Introduction

Introduction

Construction is the very first phase of an expected economic growth, which is more evident in the developing economies compared to the developed economies. New buildings, infrastructures, renovations are an indication of an expanding economy. GDP from construction is an important economic indicator to assess financial health and future economic expansion trends.

Construction

It is a part of the Secondary (Industry) Sector of an economy.  Construction refers to building and infrastructure works in all areas. The Construction Sector includes all physical making of infrastructures like bridges, transportation systems (roads, railways), dams, irrigation systems, naval ports, airports, pipelines, apartments, buildings, houses, commercial buildings, corporate structures, etc.

How can the GDP from Construction numbers be used for analysis?

The Construction Industry’s Economic Output is a significant economic indicator that is closely watched by both the private and public sectors. It is especially crucial for developing economies like China, as it is their main contributor to GDP. The GDP from Construction figures assist Central Authorities in policy reforms & economic-decisions.

Growth is essentially a process of invention of new things and discarding the old inefficient ones. Construction, in this sense, is nothing but that. It involves the erection of new buildings, renovations, expansions of the infrastructures that are currently existing. Increased GDP from Construction involves more people getting employed, better wages in the sector, and the extra demand for raw materials, etc. Hence we can say that the act of construction itself has a ripple effect on the economy.

Secondly, the GDP from the construction of corporate infrastructures or commercial structures implies that the constructed structures will be used for further economic activities. For example, a company doubling its company size is planning to double its staff and correspondingly the business that it generates. Hence, GDP from Construction figures improvement is indicative of an improvement in many other sectors.

All these improvements correlated with GDP overall also stimulate consumer confidence and encourages consumer spending, which further stimulates the economy and boosts growth. The Secondary Sector is composed of Industrial Output and Construction Output. For most countries, Industrial Output will be the dominant contributor to the GDP from the Secondary Sector.

We analyze GDP from Construction to understand the associated implications that more economic growth will be followed. For example, the construction of new power plants, or manufacturing industries, would show higher GDP from Construction this year. But the subsequent years, we will see higher GDP due to the newly added Industrial Outputs.

Hence, GDP from Construction figures can be used to assess future economic growth. Everything that is constructed is most likely to bring revenue through its usage in the future. Hence, GDP from Construction improvements can be a leading indicator for further improvements in GDP down the line.

The global Construction Industry makes up 13% of the World GDP, which is more than the Agriculture sector, which is about 7% of the World GDP. It means, overall, the global economy is improving at a rapid pace, with the Industrialization of many economies. It is forecasted to grow to 15% in 2020. China, India, and Japan are flourishing in this era with rapid Industrialization and achieving high GDP Growth Rates ranging from 5-20% in recent years.

GDP from construction can be used by investors to know which countries are transitioning from Developing Economies to Developed Economies. As GDP from Construction increases, it would be followed by GDP growth through increased Industrialization. Further down the line, the economies would transition to the services Sector as their main contributor to GDP.

Impact on Currency

The GDP from Construction is not a high impact indicator when compared to measures like GDP and GDP Growth Rates. GDP from construction does not portray the entire picture of the economy. However, it can be an essential tool for the Central Authorities to keep track of Construction Sector performance and its relative implications over the economy.

What construction is occurring can also serve as an indication of the economy type going to be built over the coming years. But, for the international currency markets, it does not serve as a useful indicator. It is a proportional and lagging indicator. Higher GDP from Construction is great for the economy and its corresponding currency, and vice-versa.

Sources of GDP from Construction

For the US, the corresponding reports are available here – GDP -BEA, GDP by Industry – BEA, and Construction – GDP. World Bank also maintains the Construction and Industrial Sector as a percentage of GDP on its official website, which can be found here – Industrial Sector (including construction) – World % of GDP. GDP from construction can also be found here – GDP Construction – World – Trading Economics.

GDP from Construction Announcement – Impact due to news release

The construction sector is one of the fastest-growing sectors today that has a great impact on the economy of any nation. Construction is one crucial sector that contributes to the economic growth of a country. The government and other regulatory authorities have always shown interest in this segment by investing significantly in various parts of the sector. Naturally, it will contribute to the GDP of a country and influence the reading released quarterly and monthly. When talking about the fundamental analysis of a currency or stock, investors make investment decisions based on the GDP and not on contributions made by individual sectors.

Now let’s analyze the impact of GDP on different pairs and witness the change in volatility due to the news release. For this purpose, we have gathered the latest GDP data of Japan, where the below image shows the fourth quarter’s GDP data released in March.

AUD/JPY | Before the announcement

We will first look at the AUD/JPY currency pair to observe the impact of GDP announcement on the Japanese Yen. In the above picture, we see the market has crashed lower due to some other news release, and currently, the price is at its lowest point. This means there is a great amount of selling pressure in the market, or sellers are dominant. In such a market situation, it is advised not to carry any position in the market before the news release.

AUD/JPY | After the announcement

After the news announcement, the price sharply moves higher and closes as a long bullish candle. This means traders sold Japanese Yen soon after the news release as it was below expectations and lower than the previous quarter. The volatility did increase to the upside for a while, but it did not sustain as the Japanese Yen was showing a lot of strength. One should trade after the market shows signs of trend continuation or reversal and not just based on the GDP data.

GBP/JPY | Before the announcement

GBP/JPY | After the announcement

The above images represent the GBP/JPY currency pair, where we see that the market has strongly moved lower as indicated by two big bearish candles before the news announcement. This means the Japanese Yen has gotten strong recently due to some other fundamental reason, and we cannot ascertain if this will continue or not. As volatility is very high, one should not take a position in the currency before the news release.

After the news announcement, volatility spikes to the upside, and the ‘news candle’ closes with a great amount of bullishness. Even though the price moves higher by a lot, it did not go above the moving average. The market has reacted adversely to the news announcement as the GDP was lower than last time and also below what was forecasted. If the price does cross moving average, this means the downtrend is still intact.

NZD/JPY | Before the announcement

NZD/JPY | After the announcement

The above pictures are that of the NZD/JPY currency pair, where we see a major crash in the market before the news announcement, which is visible in the first image. This pair also shows similar characteristics as in the above currency pairs, where the Japanese Yen has strengthened greatly. Ideally, we should be looking to sell the currency pair after a suitable price retracement.

After the news announcement, the market goes higher so much that it almost retraces the previous bearish candle, resulting in some weakness in the Japanese Yen. As the GDP data was weak, it brought disappointment in the market where traders sold the Japanese Yen and bought the base currency. Cheers!

Categories
Forex Fundamental Analysis

What Is ‘GDP from Mining’ and What Should You Know About This Economic Indicator?

Introduction

Introduction

Introduction

The tracking of GDP from Mining can give us many economic conclusions. GDP from Mining’s importance comes from the fact that the final output of Mining Production is the primary input for many industries. Therefore, it is the core part of the business activity related to many industries.

Fluctuations in the GDP from Mining data will eventually translate to all the industries that are dependent on Mined resources for their production process. This effect can be many-fold, and hence it is a vital economic indicator for investors, economists, and government authorities.

Mining Production

It refers to the entire process of searching for, extraction, beneficiation (purification), and processing of naturally occurring minerals from the Earth. Minerals that are typically mined can be Coal, metals like Copper, Iron, Zinc, or industrial minerals like limestone, potash, and other crushed rocks.

Coal is considered as one of the primary sources of energy across the world. Metals like Iron, Bauxite, and Copper have a wide range of usage in various industries. Limestone and other rocks are being used in cement industries, which contribute a lot to the construction and related industries.

How can the GDP from Mining numbers be used for analysis?

The developing economies are primarily achieving their growth through exports of essential commodities like Food, Minerals, etc. For example, Australia primarily exports Iron Ore and Coal, due to which the economic growth and currency value are tightly linked to the Mining of these natural resources. When the GDP from Mining starts to recede, currency devaluation and slowing economic growth are inevitable.

Developed economies are more resilient to changes in GDP from Mining, as their growth is tied to multiple sectors and are not heavily dependent on any individual sector. The availability of modern technology and skilled labor contribute to the GDP from Mining figures positively. Mining is a labor-intensive task. Hence, it is obvious that Mining lies at the heart of all industrial activities. A decrease in GDP from Mining can adversely affect all the dependent industries, and correspondingly the effects will pass onto unemployment, layoffs, wages, economic slowdown, etc.

Impact on Currency

The GDP from Mining is a low impact indicator, as the Mining Production reports are published monthly by the Federal Reserve in the United States that are leading indicators. It is a proportional and lagging indicator. Hence, changes in GDP from Mining would have already been priced into the market through monthly Mining Production reports.

Also, GDP from Mining numbers does not give us a complete picture of the economy. However, it can be an important tool for the Central Authorities to keep track of the performance of the Mining Sector and its implications for the economy. As established, the Mining Sector is a significant contributor, due to many industries dependent on its output.

Hence, changes in this sector widely affect the overall economic health, and all the dependent industries therein. In general, Higher GDP from Mining is good for the economy and its currency, and vice-versa.

Sources of GDP from Mining

For the US, the BEA reports are available here – GDP -BEA & GDP by Industry – BEA. For the world data below, two are useful references – Mineral Rents  – World % of GDP & GDP from Mining – Trading Economics. The monthly Mining Production statistics can be found on the official website of the Federal Reserve for the United States, which can be found here – G7 Industrial Production and Capacity Utilization

GDP from Mining Announcement – Impact due to news release

Mining is an extremely important economic activity in any country. The benefits of Mining have been widely promoted by the industry and institutions such as the World Bank. In several low and middle-income countries rich in non-fuel resources, Mining makes significant contributions to the national economic development as measured by the Mining Contribution Index (MCI-Wr).

The contribution of Mining and Minerals to GDP reached a maximum at the peak of the mining boom in 2011. Now, the figures indicate a decline in the Mining’s contribution but are still considerably higher than before. This is one of the reasons why it not a major determinant of economic growth. Thus, investors do not give importance to the mining data when it comes to investing in an economy.

In today’s lesson, we will try to examine the impact of GDP on various currency pairs and see the volatility change due to the news release. The below snapshot shows the previous, predicted, and actual GDP data of Switzerland released in the month of March. As this is the quarter on quarter GDP data, we can expect moderate to high volatility in the currency during the announcement.

GBP/CHF | Before the announcement

Let’s review the GBP/CHF currency pair to observe the impact of the news release. We see that the market has made a ‘descending triangle‘ candlestick pattern before the news announcement, which essentially is a trend continuation pattern. Depending on the impact of the news release, we will take a suitable position in the currency pair.

GBP/CHF | After the announcement:

After the news announcement, we see a sudden surge in the price indicating bullishness in the currency. The bullish ‘news candle’ suggests a negative reaction to the GDP data as it was on expected lines with no major increase or decrease. The market appears to have broken above the ‘descending triangle’ pattern, which is why we should need to wait for clear signs from the market with respect to the direction it is heading.  

CAD/CHF | Before the announcement

CAD/CHF | After the announcement

The above images represent the CAD/CHF currency pair, where we see that the market seems to be in a downward channel before the news announcement with the price at the bottom of the channel. Since the impact of GDP is high, there is a high chance that the news release could result in a break down if the data comes out to be weak for the economy. Therefore we need to wait for confirmation from the market before we can take a trade.

After the news release, the price moves higher and volatility increases on the upside. Since the GDP data was pretty much equal to the forecasted number, it did not result in bullishness in the currency, and it ultimately weakened the currency for a while. One who takes a ‘buy’ trade should take profits at the top of the channel and not wait for too long. 

AUD/CHF | Before the announcement

AUD/CHF | After the announcement

The above charts belong to the AUD/CHF currency pair, where we see that before the news announcement, the market is moving within a ‘range.’ This means the price is not moving in any single direction, which can make trading a bit challenging in such an environment. The news release can effectively move the market in any direction, which is why we need to wait for the announcement to happen in order to get clarity.

After the news release, the price moves lower, but this gets immediately bought, and the ‘news candle’ closes with a wick on the bottom. We witness buying pressure in the market soon after the news release. we to be cautious before taking a ‘long’ position since the price is at the top of the ‘range.’ All the best!

Categories
Forex Fundamental Analysis

Understanding ‘GDP from Services’ As A Macro Economic Indicator

Introduction

Introduction

Introduction

The different proportion of contribution to GDP from the three sectors (primary, secondary, tertiary) can tell us a lot about the economic development stage a country is at the moment. GDP from Services can help us gauge the transition of countries from developing to developed status efficiently. Hence, it is useful for Central Authorities and business people to understand the growth of the Service Sector.

What is GDP from Services? 

Service Sector

It refers to the production of intangible goods, services to be exact, that are not goods. Services are intangible, non-quantifiable, and formless. The result of service may or may not produce a physical good. For example, a construction service would give the client a building, whereas a lawnmowing service would not. It is the largest sector in the global economy and bears high significance in advanced economies.

How can the GDP from Services numbers be used for analysis?

The three different sectors of an economy are associated with different activities. The primary sector is mainly associated with dealing with agriculture, farming. It answers the basic needs. The secondary sector deals with industrialization, where livelihood, employment are answered through the production of goods.

The tertiary sector comes into picture when the basic needs like food, employment, security are taken care of. The tertiary sector consists mainly of services. Countries that have Service Sector as their main contributor to GDP are generally considered the more advanced economies. Indeed, the underdeveloped nations will primarily struggle for food and water, where Agriculture would be the primary need to feed the population.

The industrialization growth will be associated with low-cost wage labors working in factories for mass production to compete in the global market. Whereas, the service sector will be associated with high-cost services generally to provide “good-to-have” commodities.

For example, a vegetable is cheaper than an industrial product. Likewise, an industry product would be cheaper than a service sector like antivirus software. The cost of a 1kg of potato is about 2.50 US dollars, whereas 1kg of potato chips from a company like lays would cost 10 US dollars, whereas a Netflix subscription (service) would cost around 10-15 dollars a month.

It is a general trend where a software employee (service sector) gets paid more than a factory worker (industrial sector). A factory worker generally gets paid more than a farmer (agricultural sector). It is easily observed the wealth generated from the Service Sector far outpaces that of the Industrial Sector and essentially the Agricultural Sector.

In general, countries start to grow from underdeveloped to developing nations through industrialization. China and Japan would be good examples of industrialization-led growth. Once a country has firmly established its primary and secondary sectors, it can reach the status of a developed economy through the service sector only. India and China would be good examples of developing economies, increasing their service sector to generate higher wealth.

Hence, GDP from Service is essential to assess the status of a country transitioning from an emerging or developing economy status to a developed economy. As the contribution of Service Sector to GDP increases, it implies that more percentage of people are engaged in higher revenue-generating activities, and have crossed the stages of addressing basic survival needs.

It is also essential to understand that GDP from Service can increase only when the country is firmly established and stable in the primary and secondary sectors. Because when primary and secondary needs are not answered, people will first engage in meeting primary needs and not providing services.

The developed economies have substantial contributions to GDP from Service Sector. For example, the United States and the United Kingdom, have about 80% of their GDP contributed from the Service Sector. Developing economies like India and China have over 50% of their GDP from Service Sector. Underdeveloped nations like Uganda have only 24% of the Service Sector.

Impact on Currency

Leading indicators like Services PMI or NMI already forecast the GDP from Service, which would mean the increases from GDP from Services is already priced into the market. It is a proportional and lagging indicator.

Also, GDP from Services does not paint the full picture of the economy. Still, it can be an essential tool for the Central Authorities to keep track of Service Sector performance and its relative implications to the economy. As established, the Service Sector is a significant contributor to the GDP in developing and developed economies.

Hence, Service Sector GDP improvements bring more prosperity to a nation than an equivalent improvement in Agriculture or Industrial GDP. Service Sector GDP increase brings wealth to a nation and improves the standard of living of its people better than any other sector. A country can become a developed nation only when its Service Sector GDP increases to 70-80% of its GDP.

In general, Higher GDP from Services is good for the economy and its currency, and vice-versa.

Sources of GDP from Services

For the United States, the BEA reports are available here – GDP -BEA & GDP by Industry – BEA. World Bank also maintains the Service Sector’s contribution as a percentage of GDP on its official website – Service Sector – World % of GDP & GDP from Services – Trading Economics.

GDP from Services Announcement – Impact due to the news release

In the previous section of the article, we saw the contribution made by the service sector to the GDP, and it’s importance in the growth of the economy. But when it comes to fundamental analysis of a currency, the service sector’s contribution alone is not of great importance to investors as it represents only a small portion of the whole GDP.

Therefore, traders and investors look at a broader figure, which is essentially the GDP itself, and take a currency position based on the GDP of a country. So an increase or decrease in the contribution of ‘Services’ to GDP does not have any impact on the currency.

Now, let’s analyze the impact of GDP on different currency pairs and observe the change in volatility due to the news release. The below image shows the latest quarter on quarter GDP data of New Zealand released in March.

NZD/JPY - Before the announcement

We will start with the NZD/JPY currency pair to examine the impact of GDP on the New Zealand dollar. The above chart shows the state of the market before the news announcement, where we see that the price was in a downtrend with the least number of retracements. Depending on the impact of the news release, we will position ourselves accordingly in the market. However, we should be looking to take a ‘short’ trade since the major trend of the market is down.

NZD/JPY - After the announcement

After the news announcement, the market moves lower by a little where the price closes, forming a bearish ‘news candle.’ The GDP data in the fourth quarter was lower than last time, which drove the price below the moving average. However, it did not cause a major crash in the market where the volatility slightly increased to the downside soon after the news release. One should wait for a price retracement before a ‘short’ trade.

NZD/CAD - Before the announcement

NZD/CAD - After the announcement:

The above images represent the NZD/CAD currency pair where we see in the first image the price violently moved lower, and few minutes before the news release, it has reversed from the ‘lows.’ Until the reversal is confirmed, we should be looking to sell the currency pair since the down move is very strong. Since a major news event is due, one should wait for its release and take a position based on the change in volatility.

After the news announcement, volatility expands on the downside, and the ‘news candle’ closes, forming a trend continuation pattern. The market reacted negatively to the GDP data since there was a decrease in the GDP by 0.3% in the fourth quarter. This can be taken as an opportunity for joining the downtrend where one can take a ‘short’ position with a stop loss above the ‘news candle.’

EUR/NZD - Before the announcement

EUR/NZD - After the announcement

The above images are that of the EUR/NZD currency pair, where the market is in an uptrend, and the price is currently at its highest point. The chart signifies weakness in the New Zealand dollar before the news announcement with no signs of strength. Technically, we will be looking to buy the currency pair after a pullback to a key technical level.

After the news announcement, the price moves higher and volatility expands on the upside, thereby further weakening the New Zealand dollar since it is on the right-hand side of the pair. At this point, one should be cautious by not taking a ‘long’ position as it would imply chasing the market. Cheers!

Categories
Forex Fundamental Analysis

Everything About GDP From Transport & Its Impact On The Forex Price Charts

Introduction

Introduction

Introduction

The Transportation Industry’s contribution to GDP is both direct and indirect. The real contribution of Transportation to overall economic growth goes beyond what the GDP can measure. Hence, Understanding the Role of Transportation in economic activity and its underlying importance that is both visible and subtle is essential for our overall fundamental analysis.

What is GDP from Transport?

Transportation

Transportation includes the types of services that are provided through operating vehicles, moving goods, or people over public transport systems like roads, railways, waterways, airways, etc.

The supply side of the Transportation system is called the Transportation Industry. It is also essential to note that the Standard Industrial Classification (SIC) and North American Industrial Classification System (NAIC) both consider Transportation as a separate industry. They do so through a standard set of definitions and criteria. Hence, not all Transportation services come under the Transportation Industry.

The Transportation services’ contribution to GDP can be measured in the following ways:

Final Demand: It is calculated by adding all the expenditures by households, private firms, and the government on Transportation related goods and services.

Value Added: It is calculated as the GDP contribution by the Transportation services overall. Transportation Value Added is a gauge of the transportation sector’s contribution to GDP. It is based on the difference between transportation services sold value and the goods and services used to produce Transportation.

The Bureau of Economic Analysis (BEA) takes industry value added to be a measure of an industry’s contribution to GDP.

From measurement viewpoint, three types of transportation operations can be distinguished:

  • For-hire operations: It includes those services conducted by transportation industries on a fee basis. A trucking company’s trucking operations is an instance of for-hire operations. 
  • In-house operations: also called, own-account operations, is conducted by non-transportation industries for their use. For instance, the Coca-cola company may transport its beverages to its local warehouse for storage through its trucks. 
  • Final user operations: Final users include the general population (end consumers) and the government who purchase transportation services like cars, trucks for their use.

Transportation Satellite Accounts: The Satellite industry segregates data by focusing on types of economic activity. Hence, the TSAs depict the contribution of for-hire, in-house, and household transportation services as they all form part of the Transportation Industry.

How can the GDP from Transport numbers be used for analysis?

The Transportation-related Final Demand metric is useful to compare the expenditures incurred on other industries like healthcare or housing. For sector-wise, growth analysis, investors can use this to gauge, which industries are experiencing increasing demand that can help them to invest accordingly.

On the other hand, it is not an accurate metric to measure the Transportation needed to support and sustain economic activity. For instance, if the investment into Transportation infrastructure is underfunded, then correspondingly, it will underestimate the final demand due to low economic output. The Transportation industry’s contribution in the year 2019 and 2018 has stayed around 3.2% of GDP as per BEA.

The value-added contribution of Transportation Industry to GDP is, however, understated for the following two reasons:

  • It only includes the contribution of for-hire transportation services. Many industries use transportation services for their use. In-house services do not contribute to GDP.
  • The extent to which industries depend on Transportation is not depicted in these figures. Mobility and interconnectivity between industries, states, and countries are critical factors in business growth in today’s interconnected international markets.

Accessibility to resources, end consumers are all enabled through Transportation and are heavily impacted with poor transportation infrastructure. The US Department of Transportation – Bureau of Transportation Statistics accounts for the TSA reports, and they, by far, depict the contribution of the Transportation industry better than other measures published.

Impact on Currency

GDP from transport does not paint the full picture of the economy but tells us the direct contribution of the Transport industry to the overall GDP. Still, for the International Markets, it does not serve as a useful indicator. It is a proportional and lagging indicator. Higher GDP from Transport is good for the economy and its corresponding currency, and vice-versa.

Sources of GDP from Transport

For the United States, the BEA reports are available here – GDP -BEA

We can use the GDP by Industry to get the transport’s contribution to GDP here –

GDP by Industry – BEA & Transportation Statistics –Annual Report – BTS

Transportation’s contribution to GDP for the world can be found here –

GDP from Transportation – Trading Economics

GDP from Transport Announcement – Impact due to news release

The main role of transport is to provide access to different locations to individuals and businesses. Transport facilitates a wider range of social and economic transactions than would otherwise be possible. Transport is an important sector in its own weight. Transport infrastructure and transport operations together account for more than 5% of the country’s GDP. In developed countries, further investment in that infrastructure will not only result in economic growth but also improve the quality of life, lower costs to access resources and markets, and improve safety.

Therefore, the transport sector is an important sector of the economy that many long-term benefits associated with it. Fundamentally speaking, investors would not invest based on a currency based on the contribution made by the transport sector alone, as its direct influence on the GDP is less. The transport industry indirectly helps in boosting the GDP by assisting in all business activities.

In today’s article, we will observe the impact of GDP on various currency pairs and observe the change in volatility because of its news announcement. For illustration, we have collected the latest GDP data of Switzerland, which was released in March. The below image shows that the GDP in the fourth quarter was slightly better than expectations and higher than the previous quarter.

USD/CHF | Before the announcement

Let us start with the USD/JPY currency pair in order to analyze the impact of GDP on the Swiss Franc. In the above Forex price chart, we see that the overall trend of the market is down where recently the price is moving in a ‘range.’ After the occurrence of a trend continuation pattern, a ‘sell’ trade can be taken with less risk. Conservative traders should wait for news releases and trade after the volatility settles down.

USD/CHF | After the announcement

After the news announcement, the price marginally increases that takes the market higher by just a few pips. We can argue that the GDP data had the least impact on the currency pair and did not induce any volatility in the market. As the data was as expected, it did not turn the market downside, and it moves as usual.

EUR/CHF | Before the announcement

EUR/CHF | After the announcement

The above images represent the EUR/CHF currency pair, it is clear that before the news release, the market is in an uptrend, and few minutes before the release, the price has been moving within a ‘range.’ This means the news event could either result in a continuation of the trend or a reversal of the trend.

Hence it is recommended to wait for the news announcement to watch the impact it makes on the price chart. After the news announcement, there is a slight increase in volatility to the downside after the close of news candle resulting in strengthening of the Swiss Franc. However, the ‘news candle’ itself appears to be impact-less, where there is hardly any change in price during the announcement.

NZD/CHF | Before the announcement

NZD/CHF | After the announcement

The above images are related to the NZD/CHF currency pair, where we see that the market is moving sideways before the news announcement. Just before the release, the price is close to the bottom of the ‘range.’ As the impact of these numbers is less, aggressive traders can take ‘long’ positions when technically the location is supporting for a ‘buy.’

After the news announcement, the market moves higher, and there is an increase in volatility to the upside. Since the GDP was not extremely bullish or bearish, the market did not react violently to the news release. Therefore, in such times we need to look at the charts from a technical angle. All the best!

Categories
Forex Fundamental Analysis

Exploring The ‘GDP From Utilities’ Forex Fundamental Indicator & Its Impact On The Market

Introduction

Introduction

Introduction

The Utility sector is the safe-haven sector for investors during economic slowdowns. The volatility of the Utility Sector is very low compared to any other market, be it currency, stocks, or any other financial market. Understanding the nuances involved with the GDP from the Utility Sector can help us identify money flow patterns during slowdowns and growth periods.

What is GDP from Utilities?

Utility Sector

As per the Bureau of Economic Analysis Department of Commerce: The Utility Sector comprises of industries that provide the following utilities: electricity, natural gas, water, and steam supply, sewage removal. Hence, the Utilities Sector deals with the most necessary commodities for the functioning of modern-day society. It deals with the most indispensable resources.

Functioning of societies without electric power is impossible.

One research even shows if electricity was not available for two weeks, 50% of survey members stated they could not survive. Water, Sewage systems, natural gas are all pillars for conducting our social life. Hence, these basic amenities produce profits; they are part of public service and hence are heavily regulated.

Within the sector itself, specific activities associated with utilities also vary. Electric power includes generation, transmission, and distribution. So some companies may only focus themselves on the sub-categories within the Utility sector.

Water supply includes treatment and distribution. Steam supply includes provision and distribution. Sewage removal consists of the collection, treatment, waste disposal through sewer systems, and sewage treatment facilities.

How can the GDP from Utility numbers be used for analysis?

Utilities generally give its investors stable and consistent dividends. It is relatively less volatile compared to other equity markets. During times of recession, the non-essential goods and services sectors take the worst hit while Utility Sector the least. As utilities are a necessity, their performance is consistent in the long run.

Typically investors buy utilities as long-term holdings for their dividend income and portfolio stability. During recessions, where the Central Authorities cut interest rates to stimulate the economy, investors flock to Utility stocks as a more secure alternative. When economic growth is restored, investors may find better alternatives than utility sectors.

Since this sector is heavily regulated, raising rates to increase revenue for the companies. The infrastructure required to run utility services are expensive and require high capital to maintain and upgrade over time. Hence, Utility providing companies have debts in their balance sheets, taken for maintenance and continuity. Hence, these industries are susceptible to interest rate fluctuations, as interests on their debts vary accordingly.

Consumers also have an impact on the Utility sector. Since many states let consumers choose their utility provider, the competition forces companies to keep competitive prices, that overall decreases their profits. Long-term power purchase agreements or water supply contracts can also incur dent on profits for companies when utility generation costs increase over time.

It is also crucial to know the growth of the Utility Sector is also a function of population and industrialization. Developing economies observe a rise in new factories, and industries would require higher utility services. The contrast in the sector’s economic size would be apparent while contrasting underdeveloped and developed economies.

Capitalization of utility services can lead to monopoly or resource control to private industries to their advantage for profits. Overall, we also must consider that utility services are to be accessible to all classes of people. Hence, regulation by the government is essential to keep it affordable for the lower sections of society.

The regulation also ensures that sustainable development is kept as a priority over profits. As the generation of electricity from fossil fuels like coal, and water supply from underground water, both of which are exhaustible. Therefore, revenue-wise, Utility Sector is not a significant contributor. In the United States, it contributed about 1.6% of value to GDP for the year 2018 and 2019.

Impact on Currency

The GDP from Utilities is a low impact indicator compared to the Broader measures like GDP Growth Rates and Real GDP. GDP from Utilities does not paint the full picture of the economy but tells us the direct contribution of the Utility Sector to the overall GDP. It is useful for long-term investors as a safe-haven during economic slowdowns.

Still, for the International Currency Markets, it does not serve as a useful indicator. It is a proportional and lagging indicator. Higher GDP from Utilities will impact the economy and its currency positively. Contrarily, low GDP from utilities will have a negative impact.

Sources of GDP from Utilities

GDP from Utilities Announcement – Impact due to news release

The Utility sector is an important part of any country as it consists of essential products that are consumed by people daily. Water, gas, electricity are some of the products of the Utility sector. Naturally, they play a vital role in economic and social development. Governments are responsible for ensuring access to service under an accountable regulatory framework.

Utilities are one of the key stakeholders in the economic development team. This industry is also important because all business requires these essential services to operate. Therefore, its contribution to the GDP is increasing year by year. When it comes to fundamental analysis of the currency, investors consider the nominal GDP as an indicator of the economy’s growth.

In today’s example, we will examine the impact of GDP on the value of a currency and see the change in volatility because of its news release. The below image shows the first-quarter GDP data of Hong Kong, where we see a big drop in the value from the previous quarter. Let us find out the reaction of the market to this data.

USD/HKD | Before the announcement

Let us first examine the USD/HKD currency pair to analyze the impact of GDP on the Hong Kong dollar. In the above price chart, it is clear that the market is moving within a ‘range’ where the overall trend is up. Before the news announcement, the price is at the bottom of the ‘range,’ which means there is a high chance of buyers getting active from this point. Aggressive traders can ‘long’ positions as the market is expecting weak GDP data for the first quarter.

USD/HKD | After the announcement

After the news announcement, the price rises by a few pips, and the market moves higher by little. As the GDP data was very bad, the rose higher, which resulted in the weakening of the currency. But this did not bring the kind of weakness and bearishness expected, as the GDP had dropped by more than 5%. This means the new release had the least impact on the currency pair.

EUR/HKD | Before the announcement

EUR/HKD | After the announcement

The above images represent the EUR/HKD currency pair, where we see that before the news announcement, the price has broken out of the small ‘range’ that was formed few hours before the news release. Until the breakout is confirmed, one should not consider buying the currency pair as the news announcement could lower the price and make this a false breakout.

After the news announcement, the market moves lower and volatility increases to the downside, resulting in the Hong Kong dollar’s strengthening. We witness an opposite reaction from the market in this currency pair, where the currency gains strength after the news release. This means the market has already priced in weak GDP data and reacted positively to the GDP data. We recommend using technical indicators to confirm the breakout and then take ‘long’ positions.

AUD/HKD | Before the announcement

AUD/HKD | After the announcement

The above images are that of AUD/HKD dollar, where we see that before the market is moving within a ‘range’ before the news announcement where the price is currently in the middle of the ‘range.’ Another thing we notice is that the overall trend of the market is up, which means we need to be cautious before taking a ‘sell’ trade in the currency pair.

After the news announcement, we see that the price marginally moves higher and closes with a slight amount of bullishness. This means the GDP did not impact the currency pair adversely and minimal effect on the pair. One could take a ‘short’ trade after price moves below the moving average.

Categories
Forex Fundamental Analysis

What Does ‘Exports by Category’ Data Indicate About A Nation’s Economy?

Introduction Export is an essential component of a country’s balance of trade. International trade is the heart of the FOREX market that constitutes the fundamental moves in currency pairs. The imbalance in various country’s balance of trade is offset by equal and opposite volatility in currencies. Hence, understanding the macroeconomic dynamics of trade relations, compositions, […]

Introduction Export is an essential component of a country’s balance of trade. International trade is the heart of the FOREX market that constitutes the fundamental moves in currency pairs. The imbalance in various country’s balance of trade is offset by equal and opposite volatility in currencies. Hence, understanding the macroeconomic dynamics of trade relations, compositions, […]

Introduction

Export is an essential component of a country’s balance of trade. International trade is the heart of the FOREX market that constitutes the fundamental moves in currency pairs. The imbalance in various country’s balance of trade is offset by equal and opposite volatility in currencies. Hence, understanding the macroeconomic dynamics of trade relations, compositions, and how they are tied to currency values can deepen our fundamental analysis.

What are Exports by Category?

Export: It is the sale of domestically produced goods or services to the foreign market. If goods manufactured within the nation are sold to customers outside the country’s borders, it is referred to as an export. On the other hand, imports are the purchase of foreign goods or services by a country. Generally, a country exports a particular commodity because it either efficiently manufactures or is more capable than the importing country.

A country like Canada, which has abundant oil reserves, can export to countries like China, which has a massive demand for its industrial economy. Similarly, China may export electronics to other countries like the United States, as they have a competitive edge in that domain. Exports bring domestic currency into the country in exchange for produced goods and services. Imports bring in goods and services into the country and send out the domestic currency. Hence, countries must maintain a “balance” in its international trade to keep currencies in an equilibrium.

How can the Exports by Category numbers be used for analysis?

If a country’s exports exceed its imports, it is said to have a trade surplus or a positive balance of trade. On the contrary, if a country’s imports exceed its exports, it is said to have a trade deficit or negative balance of trade. Imports signify consumption, and exports signify production. In a perfect world, the trade balance would be zero, meaning a country would produce equal to what it consumes. In reality, the balances are skewed and change from time to time.

When a country exports, it accumulates wealth. Many developing economies like China have increasingly depended on exports for their economic growth. By investing heavily in optimizing its industries and resources, many developing economies could export goods at a lower price to developed economies. A trade surplus (exports exceeding imports) is generally seen as beneficial to the economy. Prolonged periods of trade surplus, drains the international market of that country’s currency, thereby increasing its valuation against other currencies.

When a currency valuation appreciates imports become cheaper as more goods can be procured per unit of currency. In general, a trade surplus is seen as beneficial, but it may not always be the case. For instance, a country might increase its imports of construction materials to develop its cities and state infrastructure. During this time, it may have a trade deficit, but later once the work is done, its exports may improve beyond its previous highs and pay off for the years it maintained a deficit.

Countries export and import in millions and billions of dollars. When a country exports goods, it does so in large quantities, and the corresponding transaction would also be significant. Such transactions amongst countries with different currencies need to be exchanged. Such exchanges in the international FOREX market occurring for fundamental reasons sets off the equilibrium.

By the natural market forces through demand and supply, currencies will come to a new equilibrium. The movement in currency values through such fundamental moves is accompanied by speculative transactions from investors and traders worldwide. Approximately 20% of all FOREX transactions occur for pure fundamental reasons while remaining occurs for speculative purposes.

Understanding the portfolio of exports a country has can help us get a fundamental idea about the underlying goods and service exports that influence currency moves. For instance, Australia depends heavily on Iron Ore exports (approximately 20%). The Iron exported is sold mainly to China and Japan. If business activity in China reduced because of some reason, a decrease in demand would reduce exports for Australia, followed by a corresponding drop in AUD currency value.

The below image depicts how AUD value against USD follows Iron Ore prices. Hence, countries that depend on fewer exports experience higher volatility than countries with a more diverse portfolio of export and imports.

Impact on Currency

The ‘Exports by Category’ is not an economic indicator but is an essential statistic to understand the country’s trade relations. The composition of exports of a country does not vary significantly every month as exports and imports are based on trade agreements and business contracts that generally last years at a stretch. Exports by Category can be used to identify which goods and services are potential influencers for currency volatility. Hence, overall it is an essential requisite for fundamental analysis but not an economic indicator.

Economic Reports

For the United States, the Census Bureau tracks all the import and export statistics on its official website. The international trades categorized based on trade partners and Categories of goods and services are also available.

Sources of Exports by Category

The Census Bureau’s International Trade Data, the Export & Import by Trade Partner, Foreign Trade has all the necessary details. Consolidated reports of Exports by Category for most countries is available on Trading Economics.

Exports by Category News Release – Impact on the Currency Market

We know that Exports is an important fundamental driver of an economy, that can significantly impact a nation’s currency. Digging deep into Exports, we can widen the heading into Exports by Category and Exports by country. In other words, the result of the two is reflected in the Exports data.

Exports by Category, not being an economic indicator, barely has any impact on the currency of an economy. Moreover, the data is based on trade contracts, due to which the numbers do not change often. Nonetheless, let us combine the Export by Category and Exports data to study the volatility change in the currency market.

Exports Report – USD

Exports by Category – United States

According to the reports, the US’s exports dropped by USD 6.6 billion from the previous month, reading USD 144.5 billion in May 2020. Looking at the Exports by Category data, all the top five categories saw a decline in Exports.

EURUSD – Before the Announcement

Below is the price chart of EURUSD on the 4H timeframe. Before the release of the Exports by Category (Exports), we see that the market is consolidating, and there is no clear trend as such. However, the market is slightly leaving lower highs and lower lows, indicating EUR weakness and USD strength.

EURUSD – After the Announcement

On the day of the news release, it is seen that the price showed bullishness in the beginning. However, it got rejected by the sellers by the end of the day.

In the following days, we can see that the market broke out from the consolidation and began to trend north, implying USD weakness and EUR strength. There certainly would be several factors to it, but one of the accountable factors can be the disappointing numbers projected by the Exports.

USDJPY – Before the Announcement

Prior to the release, we can see clearly that the USDJPY market was crashing down. However, it saw bullishness in the last week of June.

USDJPY – After the Announcement

The USDJPY price saw feeble volatility on the day the news was released. In hindsight, the market dropped and continued the predominant downtrend. This indicates that the USDJPY has negatively affected post the Exports by Category numbers.

GBPUSD – Before the Announcement

Before the report on Exports by Category, the GBPUSD market was in an evident downtrend, as represented by the trendline.

GBPUSD – After the Announcement

A day before the numbers were reported, the price aggressively broke above the trendline, indicating a reversal.

When the news released, the price tried going higher but was pushed right back down by the sellers. However, subsequently, the market did change direction and began to trend north.

Thus, it can be concluded that the market did not have an immediate effect on the prices but did have an expected outcome in the short-term. Cheers!

Categories
Forex Fundamental Analysis

‘Imports by Country’ – How Crucial Is It To Know About This Fundamental Forex Driver?

Introduction Currency values are critical for international trade and vice-versa. The exchange rates are directly influenced by changes in import and export composition, quantity, and prices. The volatility of a currency is directly associated with the country’s import and export relations with other countries. Understanding how international trade affects currencies in the forex market is […]

Introduction Currency values are critical for international trade and vice-versa. The exchange rates are directly influenced by changes in import and export composition, quantity, and prices. The volatility of a currency is directly associated with the country’s import and export relations with other countries. Understanding how international trade affects currencies in the forex market is […]

Introduction

Currency values are critical for international trade and vice-versa. The exchange rates are directly influenced by changes in import and export composition, quantity, and prices. The volatility of a currency is directly associated with the country’s import and export relations with other countries. Understanding how international trade affects currencies in the forex market is paramount for fundamental analysis.

What are Imports by Country?

A country’s trade balance (net exports and imports) is critical for currency valuation. The Balance of Trade refers to the required balance to exist between the total monetary value of a nation’s exports and imports. It is key to currency valuation. When a country exports, domestic currency comes into the country in exchange for the sale of products. When a country imports, the currency goes out in exchange for purchasing goods outside the country. Hence, a balance of exports and imports to maintain a healthy economy.

It is often necessary to understand a nation’s export and import composition to grasp its ties with other countries. Countries’ dependency on goods and services from other nations induces leverage and power for the exporting countries. For example, the United States imports 20% of all its goods from China. If China were to cut-off all its exports to the United States, that would dramatically impact the United States economy and its currency. Hence, the categorization of imports based on country and goods gives us an idea of the underlying relationships between currencies.

United States Imports by Country 

Source: Trading Economics
How can the Imports by Country numbers be used for analysis?

Today’s global world is one that is tightly interconnected and has complex links amongst countries. Understanding trade composition helps us in identifying where to look for volatility. For instance, the United States only imports about 2% of its products from India. If, for some reason, the import prices changed from India in either direction or completely stopped, it would not impact the trade balance significantly.

Hence, categorization based on countries helps us understand the dependencies a particular country has. Heavy dependence on a limited set of countries, especially for primary resources like energy and food, is not suitable for the economy. During times of a natural disaster in the exporting country will affect the dependent countries also.

A country that solely depends on its trade relations with fewer countries is likely to see more volatility in currency valuation. The more diverse the portfolio of a country in terms of its international trade partners, the more robust the currency is. Hence, currencies like the AUD, CAD are more volatile currencies because their exports are heavily dependent on fewer markets, unlike the EUR and USD.

Imports and Exports by country and category of products are equally essential to understand a nation’s currency volatility. For instance, Australia’s heavy dependency on coal and iron ore exports to china and japan induces volatility in AUD currency in correlation with coal and iron ore prices.

The Imports by country is not an economic indicator but is a prerequisite for understanding macroeconomic analysis of currency pairs. Currency valuations are primarily affected by trade relations a country has. It is not frequent for a country to change its import composition by country often, but it has a significant impact on the currency when it does.

Imports form only one half of the equation. Overall to understand the macroeconomic dynamics, both exports and imports have to be taken into account. Also, currency value change has a direct effect on imports and exports. When the Domestic currency appreciates imports are cheaper and profit margin increases for importing companies but hurts exporters as they receive fewer dollars than before. When the domestic currency depreciates, imports get hurt while exporters benefit. Some countries competitively peg their currency lower during export and higher during import. This phenomenon is sometimes referred to as “currency wars.”

Changes in import and export composition as a result of trade agreements or tariffs imposed has a more direct impact on companies that constitute the import and export goods and services. Hence, stock prices of companies are more sensitive to import and export data.

Impact on Currency

Imports categorized based on countries is for segregation and analysis purposes only. It is not an economic indicator in itself. Still, it is essential to understand the existing trade partners of a country to know which currencies are being exchanged for what goods. Imports and Exports both make up the balance of trade, which helps to analyze currency valuation.

Hence, Imports categorized by country are although useful, changes in the composition are necessary for a macroeconomic picture but does not induce volatility in itself. Any change in composition would have already been announced in news reports that would be priced into the market. It is useful at the starting point for establishing currency analysis, but it is neither an economic indicator nor induces any volatility in currencies.

Economic Reports

For the United States, The Census Bureau tracks and consolidates import and export composition on its official website. It releases monthly data ranking countries with which it had exports and imports. It details all the goods and services that are exported or imported from the partner countries.

Sources of Imports by Country

Census Bureau’s Trade highlights reports are available here. We can find a consolidated listing of “Imports by country” of most countries on Trading Economics.

Imports by Country News Release – Impact on Price Charts

Imports by Country is an important piece in analyzing the “Trade” and “Imports” fundamental indicators. It alone is not an economic indicator but is one of the components that make up a fundamental indicator. Precisely, the balance of trade is the economic driver that references the data obtained from Imports and Exports. Extending further, the data from Imports is acquired from factors like Imports by Country and Imports by Category.

Imports by Country alone does not pump up the volatility of the market. Also, the report is released during the release of the Imports data.

Imports Report – Untied States

United States Imports by Country

The USA is the second-largest importer in the world. The imports of the USA are China, the European Union, Euro Area, Canada, Mexico. For the May data, the overall imports dropped from $200.9 billion to $199.1 billion. Imports from China and Canada increased the previous month, but the rest saw a slight decline.

NZDUSD – Before the Announcement

In the below chart of NZDUSD, on the 4H time frame, we can see that the market is in an uptrend. It made a high to 0.65815. Since then, the price has been retracing.

NZDUSD – After the Announcement

On the day of the report announcement, the NZD showed strength, while USD showed weakness. However, the volatility and volume remained average. In the following days, the bullishness remained intact. In fact, after consolidating for a while at the resistance, the price made a new high. Thus, we can conclude that the Imports by Country indirectly did affect the USD price.

AUDUSD – Before the Announcement

From the price chart of AUDUSD, we can see that the price action is similar to that of NZDUSD. Before the announcement of the news, the market was in a strong uptrend.  After making a high to 0.69845, the prices have been pulling back down.

AUDUSD – After the Announcement

During the announcement of the news, the market volatility was unchanged. However, in the subsequent sessions, the market reacted negatively on USD, and the price touched the recent high and even made a higher high. The market perhaps did react as expected to the new, but in the later weeks.

USDCHF – Before the Announcement

Before the announcement of the news, the market was in a pullback phase of a downtrend.

USDCHF – After the Announcement

On the announcement day, the volatility of the market was feeble. The price pushed to the downside but with low volume that is typically seen during the announcement of major news events.

In the following trading days, the predominant downtrend continued where the price made a new low from 0.93828. This down move could be due to several factors; however, there could be a slight effect on the Imports by Country report. Cheers!

Categories
Forex Fundamental Analysis

Does The ‘Import Prices’ News Announcements Impact The Forex Price Charts?

Introduction Import and exports make up a country’s trade balance that primarily drives currency value and economic growth. The two-way feedback between imports and exchange rates is critical to understand and how the trade balance affects currency value. Understanding changes in import prices can help us deepen our understanding of macroeconomic fundamentals of every country. […]

Introduction Import and exports make up a country’s trade balance that primarily drives currency value and economic growth. The two-way feedback between imports and exchange rates is critical to understand and how the trade balance affects currency value. Understanding changes in import prices can help us deepen our understanding of macroeconomic fundamentals of every country. […]

Introduction

Import and exports make up a country’s trade balance that primarily drives currency value and economic growth. The two-way feedback between imports and exchange rates is critical to understand and how the trade balance affects currency value. Understanding changes in import prices can help us deepen our understanding of macroeconomic fundamentals of every country.

What is Import Prices?

Import prices are the cost at which foreign goods are purchased in the international market. Import prices are measured through import price indexes. Import price indexes measure the change in prices paid for goods imported to the domestic country. The import price index figures for a reference period relate to the prices of goods that have come into the country during the period.

Import prices are essential to a country’s trade balance. A country’s trade balance is the difference between its total exports and imports and is an economy’s major composition.

How can the Import Prices numbers be used for analysis?

The international market always tends to stay in an equilibrium of currencies. When a country’s currency is flooded into the forex market, its relative value falls against other currencies. On the contrary, when a particular currency leaves the international market and goes into the country, the deficit increases its value against other currencies. Hence, excess reduces value, and scarcity increases value.

In this sense, when a country imports goods and services, it does so by paying out or sending out its domestic currency into the international market. When a country exports a good or service, it sends out the product in return for dollars coming into the country. Hence, overall the total worth of exports and imports should be balanced to maintain the currency’s current value.

When a country imports more than it exports, it faces a trade deficit, and as a result, its currency value falls relative to other currencies. When imports exceed exports, it means the country is a net consumer of goods and services in the global economy. It is negatively contributing to global economic growth. When a country exports more than it imports, it faces a trade surplus, and as a result, its currency rises relative to others. When a country is a net exporter or provider, it is contributing positively to global economic growth.

In general, countries prefer to maintain a trade surplus, but may intentionally maintain a trade deficit by importing, to increase their exports and overall economic growth in the future. Countries in today’s modern world have increasingly become dependent on international trade for both imports and exports.

Countries that do not have a competitive edge in specific sectors prefer to import goods and services from other corners of the world where they may be more efficiently produced and are cheaper. Businesses rely on importing raw materials or intermediate goods for producing finished goods and services, or even consumption.

A strong currency will favor imports as more goods can be procured for a unit of currency. Prolonged deficits (imports exceeding exports) devaluate the currency, which is not suitable for the economy. Hence, countries’ central authorities closely monitor the import and export price changes to draw out policies or reforms if needed to ensure a trade balance. In a crude sense, a country’s exports are its income, and imports are its expense. Increasing imports and declining exports ultimately drive a country into a debt trap.

Import prices are useful for negotiating future trade contracts, tracing global price trends for certain goods and services, predicting future prices, and domestic inflation. It is also used to deflate trade statistics published by the government. Import price also helps the central authorities to decide which and how much of a fiscal or monetary lever is to be used to manage exchange rates.

Import prices are especially valued in the bond markets because of its direct impact. As importing prices become too high, it deteriorates the importing company’s profit margin, ultimately decreasing corresponding bond prices. Hence, bond prices decrease when import prices substantially increase. On the other hand, when import prices decrease, the profit margin for companies increases, and correspondingly the bond prices also rise, seeing the increased margin.

Impact on Currency

The currency markets are always focused on macroeconomic indicators and do not focus on indicators that focus on specific parts of the economy. However, import prices affect trade balance, bond markets, and even stock markets. The overall net import and export figures and trade balance reports constitute more precedence than the individual import prices report for the currency markets. Hence, it is a low-impact indicator in the currency markets and can be overlooked for other macroeconomic indicators.

On an absolute basis, significant increases in import prices for prolonged periods, deteriorate currency, and economic growth. In practice, multiple forces act for and against such figures, and import prices alone are insufficient to determine currency’s future direction.

Economic Reports

In the United States, the Bureau of Labor Statistics publishes monthly import prices as part of its “Import/Export Indexes (MXP).” It is released every month around the second week for the previous month on its official website.

Sources of Import Prices

The Bureau of Labor Statistics Import/Export Indexes (MXP) is primarily used. It is also categorized into subtables by End-Use, NAICS (North American Industry Classification System), Harmonized System, and Origin. Consolidated Import prices for most countries is available on Trading Economics. The World Bank also maintains international trade data in terms of import value and export value indexes.

Import Prices – Effect on Price Charts

Import Prices is an important element in understanding the trade balance of an economy. However, it alone cannot affect the economic condition of a nation. It is combined with the Export Prices, and the difference between the two is what makes it vital.

Coming to the currency market, the Import Prices report mildly affects the volatility of a currency. If immediate volatility on the time of release is not observed, it could be reflected in the short term.

Import Prices Report

The below report represents the Import Prices of the US for the month of June. According to the data released on July 15, the Import Prices increased by 1.4% month-on-month, after a decline of 0.8% the previous month. Also, it beat the forecasted value of positive 1.0%.

Historical Impact Prices Report

Impact Level

The US Import Prices released by the US Department of Labor has a moderate impact on the currency market (USD).

USDJPY – Before the Announcement

Below is the price chart of USDJPY on the 15mins time frame. Before the report was released, the market was in a strong downtrend representing USD weakness.

USDJPY – Before the Announcement

When the news was released during the open if the New York session, the trading volume considerably increased, and the price continued to move south. However, later in the session, the prices reversed in favor of USD. This indicates that the market did have an impact on the report.

USDCHF – Before the Announcement

Before the news announcement, the volatility of the market was feeble. The price which was inclined down initially, but had begun to move switch direction during the release of the news.

USDCHF – After the Announcement

When the Import Prices news report was announced, the volatility was moderate in the beginning but reduced later in the day. The price which was showing bullishness prior to the news continued with the same sentiment. Thus, traders can follow their strategy without any hesitation as the news barely induce high volatility.

AUDUSD – Before the Announcement

Before the announcement of the report, the market was in an evident uptrend making higher highs.

AUDUSD – After the Announcement

Right when the report was announced and the North American session began, the market reversed direction from an uptrend to a downtrend. However, the price failed to make a higher high. The volatility increased significantly, which can be seen from the volume indicator.

The Import Prices is an essential indicator in as it is a factor of calculation for fundamental drivers. As we saw, even though this indicator did not really bring in volatility in the market, it indirectly does significantly affect the currency prices when combined with other drivers. Cheers!

Categories
Forex Fundamental Analysis

Imports by Category – Comprehending This Forex Fundamental Driver!

Introduction Understanding the portfolio of an economy’s exports and imports can help us track down the fundamental moves in currencies. Tracking imports and exports can help speculators ride the fundamental wave of currency value change in their favor. Imports and Exports are critical components of a nation’s trade balance. The deeper our understanding of these […]

Introduction Understanding the portfolio of an economy’s exports and imports can help us track down the fundamental moves in currencies. Tracking imports and exports can help speculators ride the fundamental wave of currency value change in their favor. Imports and Exports are critical components of a nation’s trade balance. The deeper our understanding of these […]

Introduction

Understanding the portfolio of an economy’s exports and imports can help us track down the fundamental moves in currencies. Tracking imports and exports can help speculators ride the fundamental wave of currency value change in their favor. Imports and Exports are critical components of a nation’s trade balance. The deeper our understanding of these dynamics, the better will be our understanding of macroeconomic trends.

What are Imports by Category?

Imports: They are the goods or services purchased that were produced outside the domestic country. Imports are purchased goods or services from foreign markets. Imports are required for many reasons and inherently constitute a nation’s trade balance. In importing, foreign goods or services come into the country while domestic currency goes out into the international market. A country in general imports when it is more efficiently produced or is cheaper in other countries. It may also import when the nation is unable to produce or meet the required demand.

A country will have numerous corporations that would have requirements for foreign goods or services, and hence the country’s valuation of imports would be in millions and billions. Hence, while importing millions and billions of domestic currency goes into foreign markets where currencies are exchanged for various reasons. Suppose a country wants to import goods or services from another country. It generally pays it in the exporting country’s currency. Hence, during export, currency comes into the country, and products go out, and during imports, the currency goes out, and products come in.

How can the Imports by Category numbers be used for analysis?

When a country’s imports exceed its exports, it is said to have a negative trade balance or trade deficit. Based on the geographical location, technological and business setups, different nations will have a competitive edge in different sectors. For instance, countries like Venezuela, Canada, or Middle Eastern countries are naturally sitting on abundant oil reserves. Hence, it will export oil to countries that do not have such reserves.

Companies may often require raw materials that are more cheaply available from other countries. For instance, companies in the United States might import electronic goods from China, which is cheaper. Hence, such companies may put up bulk order imports and trade takes place. Hence, what a country needs it may import and what it produces it can export.

The international market is decentralized and operates through free-market forces that keep economies in natural equilibrium. Currency exchanges can take place for genuine business transactions or speculative purposes also. When exchanges occur for purely business reasons, we call them fundamental moves in the currency pairs. These fundamental moves give currency their volatility along with speculation from investors.

Understanding a country’s Imports by the Category of products can help us track the fundamental moves. When significant transactions related to import or export takes place, it induces volatility into the currencies. During a considerable import, the international market is flooded with importing the country’s currency, and due to supply exceeding demand, the currency value falls.

On the other hand, when a country exports a massive volume of goods, the corresponding transaction would withdraw a large sum of that country’s currency out of the international market. When demand exceeds the supply, the currency value appreciates. Scarcity appreciates value and oversupply reduces value. Hence, a country must maintain a “balance” in its trades, i.e., the monetary value of all its imports and exports should ideally cancel off. In reality, it is not so, and this imbalance in different country’s trade balance gives currencies the volatility which traders are always looking to capture.

Understanding the economy’s portfolio of imports can help policymakers also in identifying exceeding dependencies in other countries. Too much reliance on foreign countries for goods or services is not suitable for the economy. The more a country is dependent on other countries, especially for basic needs like energy and food, the less it has control over its economic growth and currency valuation.

Countries that depend on fewer categories of imports and exports have more concentrated risk in terms of currency volatility. Countries like AUD and NZD show more volatility in general than currencies like USD and EUR because of the diverse portfolio of exports and imports of the latter currencies.

Impact on Currency

Imports by Category of goods or services is not an economic indicator, but it is necessary to facilitate an understanding of international trade balance amongst currencies. It directly does not impact any currency volatility but is a requisite to base trade analysis amongst currency pairs. Changes in imports by Category does not frequently change as most trade agreements are made for multiple years on end. Any changes in trade composition in terms of Category will be priced through leading economic indicators and news releases.

Economic Reports

In the United States, the Census Bureau tracks the import and export data categorized by trade partners and products. The lists are ranked based on trade volume, deficits, and surpluses, etc. Monthly and year-to-date data are two types listed for all its trade partners.

Sources of Imports by Category

We can find the Census Bureau data on its Top Trading Partners. We can find the percentage of statistics consolidated for most countries for imports by Category on Trading Economics.

Imports by Category News Release – Effect on the Price Charts

Both Exports and Imports are fundamental indicators that vaguely impact the forex market. The Imports report is calculated by considering the Imports by Category and Imports by Country. Reliable results are obtained when they are combined. Thus, to analyze the impact of Imports by Category, we shall be taking into account the Imports number as well.

Level of Impact

The Imports by Category report released by the Australian Bureau of Statistic has minimum to negligible impact on the value of the Australian dollar.

Imports data – AUD

The Imports report published on July 02, 2020, stood negative 6%, beating the previous number -10%. Even though the numbers are not up to the mark, they have recovered to a great extent from the previous month’s readings.

From the below chart ranging from 2016 to 2020, the Australian Imports hit a new low to -10% for the May report. However, it shot up 4% higher the following month.

Imports – Australia

Below is the Imports by Category for the top five categories in imports. We can see that four out of five categories saw a drop from the previous report.

AUDUSD – Before the Announcement

Focusing on the left side of the chart, we can see that the market is in an uptrend and is currently consolidating.

AUDUSD – After the Announcement

On the day of the report release, the impact in the volatility of the currency was insignificant. However, later through the month, the Australian dollar got stronger and continued its uptrend. This indicates that, despite the disappointing number overall, the AUD saw strength as the number beat the previous month report by a significant margin.

AUDCAD – Before the Announcement

Before the news released, the market was in a range for an entire month.

AUDCAD – After the Announcement

On the day of the announcement, the market tried to inch above the top of the range but failed. However, in the subsequent trading sessions, volatility picked up, and the price made a higher high. Hence, we can, to an extent, conclude that the AUD had a positive impact on the Imports by Category numbers.

AUDJPY – Before the Announcement

In the below chart of AUD/JPY on the 4H time frame, we can see that the market is in a strong uptrend. It made a high to around 77.000. The prices were in a pullback phase, the whole month of June.

AUDJPY – After the Announcement

On the day of the report announcement, the market barely had any impact in terms of volatility. That said, in the following weeks, the price rallied up to the previous high of 77.000, indicating AUD strength.

Therefore, we can conclude that the Australian dollar had a feeble effect during the news release day but did have a positive impact on the report in the subsequent trading sessions. Cheers!

Categories
Forex Fundamental Analysis

What Should You Know About ‘Export Prices’ & Its Relative Impact On The Forex Market

Introduction

Introduction

Introduction

Exports and Imports are vital components of a country’s Trade Balance that directly affects currency value. Careful balancing of export and import prices is necessary for maintaining currency value. Understanding how export prices affect the overall trades, domestic businesses, and ultimately currency value can help us build a more accurate fundamental analysis.

What are Export Prices?

Export prices are the selling price on the products and services to be sold in the international market. It is the price of goods and services that are domestically produced and sold to foreign countries. Hence, it is the prices fixed on goods and services which is intended for sale by the exporter in the overseas market.

In the United States, the Export prices are measured as part of the “U.S. Import and Export Price Index.” Export price and Import price both together form a sort of “net” price that helps us understand whether we are exporting more and gaining, or importing more and losing.

How can the Export Prices numbers be used for analysis?

In today’s modern world, many nations have opened themselves up for international trade. It is quite common for foreign brands to compete with local brands in many countries. Globalization has led to rapid growth for the global economy. Exports and Imports are two essential elements of a country’s trade balance. Imbalance in trade creates a deficit or surplus that directly affects the country’s currency.

Increased exports and reduced imports mean more goods and services go out of the country, and currency comes in. When currency comes in, the foreign demand for currency increases, and thereby currency value goes up. If exports bring more currency into the country than imports send out, the country experiences a trade surplus, which is good for the economy and currency.

Increased import over export indicates more dollars are spent and go out in importing products and services than dollars coming in for the goods sent out. When the international market is flooded with a currency due to increased imports, its currency value falls against other currencies. In such a situation, a country is said to have a trade deficit. Export prices can rise for the following reasons:

Increased production cost

As the manufacturing or cost of the raw materials increases, it eats away the company’s profit margin. To avoid this, companies may translate these increased production costs to the end consumer by pricing their goods higher.

As companies not only have to compete with fellow local businesses, they need to compete with companies from other countries. An increase in prices through production cost inflation may put the country at a disadvantage and lose sales in the international market. Hence, even though export prices increased, the sales volume will decrease negating the effect. It generally does not work in favor of the country and its currency.

Increased demand

As demand for a particular good or service increases, the company may raise its prices to compensate for the limited supply. Price increase as a result of increased demand is always beneficial for the company, country, and currency. Export and import prices are used for many purposes, and some of which are:

  • Based on changes in export and import prices, we can predict future prices and domestic inflation.
  • We can evaluate currency values and exchange rates based on overall exports and imports for a given pair of countries.
  • It can be used as a reference for setting up other trade agreements and price levels.
  • It can also be used for identifying global price trends for any specific product or service.
  • They can be used to deflate or devaluate trade statistics.

Export prices are specifically more critical for developing economies, as through exports, they primarily achieve their growth. Export-led growth has benefitted developing economies to create wealth and developed countries to get goods at much lower prices in the international market.

Change in currency value also affects export and import prices. Weak domestic currency brings in more currency during exports while making it harder to import as they become relatively more expensive. A strong currency hurts exporters while it favors imports as more goods can be purchased per unit of currency.

Hence, we observe countries undergo “trade wars.” Trade war means countries intentionally devalue their currencies during exports and peg it higher during imports in their favor. Such tactics are regularly used by China, and seeing these other countries also do the same. Competitively devaluating or valuating domestic currency higher to make trades favorable to their countries is referred to as a Trade war. Hence, any increase in export price should solely happen through an increase in demand, as that is the only way the economy benefits in the long run.

Impact on Currency

Export prices alone do not provide us with a complete picture of a country’s trade balance. The overall export minus import price is what determines the overall currency value. Hence, for currency markets, the export prices alone do not provide the necessary insight. Therefore, it is a low impact indicator. But on an absolute basis, an increase in export prices is good for the economy and the currency and vice-versa.

Economic Reports

In the United States, the Bureau of Labor Statistics (BLS) publishes monthly export prices as part of its “Import/Export Price Indexes” at 8:30 AM around the middle of the month. It is reported in percentage changes compared to the previous month and is also reported by categorizing based on end-use.

Sources of Export Prices

We can find the Export Price as part of the Import/Export Price Indexes and end-use versions. We can find consolidated statistics on export prices for most countries on Trading Economics.

Export Prices – Impact Due To News Release

Export prices is an important fundamental indicator in analyzing other economic drivers. When it is combined with the Import Prices, the trade balance is obtained, which plays a vital role in the foreign exchange market. The trade balance is also a fundamental indicator that heavily impacts the currency of a country. Thus, traders always keep an eye on the release of the trade balance report.

Coming to Export Prices, it alone does not induce much volatility relative to that of the trade balance. However, since the trade balance is dependent on the Export Prices and Import Prices, traders do keep a watch on these data releases to get insights on the overall output of the trade balance.

Export Prices Report

Before is the latest report on Export Prices, which came out to be 1.4%. The Export Prices were expected to rise by 0.8%, but the actual number beat the forecast.

USDCAD – Before the Announcement

Before the announcement of the Export Prices data for the month of June, we can see that the market was in a fresh downtrend making news lows every step of the way.

USDCAD – After the Announcement

The news was published during the open of the New York session. It is seen that, right on the announcement of the data, the USD prices collapsed against the Canadian dollar. With the release of the report and the open of the New New York market, the market volatility was boosted.

In this case, we see that the market followed the direction of the overall trend. Thus, traders can take advantage of the volatility due to news and market open and trade based on their analysis. However, they should ensure that the report is within the normal range and not an outlier. During abnormal values, a trader may better off stay away from the related currency, and its pairs.

NZDUSD – Before the Announcement

A day before the release of the Export Prices report, the market was in an uptrend, signifying NZD strength and USD weakness.

NZDUSD – After the Announcement

Once the news was out, the volatility of the market remained the same, despite the open of the US market. This clearly implies that NZDUSD was stayed non-impacted with the Export Prices report. However, in the subsequent day, the market reversed its direction from an uptrend to a downtrend.

GBPUSD – Before the Announcement

On the day of the announcement of the data, the market was in a strong bullish movement. And the time of release, the price was trading right at the supply area.

GBPUSD – After the Announcement

Once the board released the report, the price aggressively turned around and shot south. The reason for the down move can be accounted for the supply region, while the increased volatility could be due to the news and the open of the North American markets. Cheers!

Categories
Forex Fundamental Analysis

Everything About ‘Harmonized Consumer Prices’ Macro Economic Indicator

Introduction Harmonized Index of Consumer Prices (HICP) is the go-to indicator for monitoring inflation statistics in the European Union (EU). Inflation reports are vital for the currency markets, as inflation directly erodes currency value. Hence, domestically and internationally, inflation statistics play equally critical roles in currency valuations. Understanding HICP is mandatory for building fundamental analysis […]

Introduction Harmonized Index of Consumer Prices (HICP) is the go-to indicator for monitoring inflation statistics in the European Union (EU). Inflation reports are vital for the currency markets, as inflation directly erodes currency value. Hence, domestically and internationally, inflation statistics play equally critical roles in currency valuations. Understanding HICP is mandatory for building fundamental analysis […]

Introduction

Harmonized Index of Consumer Prices (HICP) is the go-to indicator for monitoring inflation statistics in the European Union (EU). Inflation reports are vital for the currency markets, as inflation directly erodes currency value. Hence, domestically and internationally, inflation statistics play equally critical roles in currency valuations. Understanding HICP is mandatory for building fundamental analysis related to the European Union countries.

What are Harmonized Consumer Prices?

Harmonized Index of Consumer Prices (HICP)

It is a list of the final price paid by European end-consumer for a basket of commonly used goods and services. Like the United States has the Consumer Price Index (CPI) as a means of regularly measuring inflation levels month over month, the European Union (EU) has HICP. The average change in the price of the selected goods and services gives us a clear idea about the inflation rates in the EU.

The HICP differs from United States CPI because it takes inflation data from each member nation of the European Central Bank (ECB). It is also a weighted index, meaning that goods are given a specific weightage based on demand, or how essential and frequently used by the consumers. The consumer goods basket is derived from data of both rural and urban areas of each member nation.

How can the Harmonized CP numbers be used for analysis?

The Harmonized Index of Consumer Prices (HICP) is measured and given by each of the European Union (EU) member states. European Union is a political and economic union of 27 states located primarily in Europe. It is given out to measure inflation and help the European Central Bank (ECB) to form monetary policies accordingly if required. Every member country’s HICP measures the shifts over time in the prices of the basket of selected goods and services purchased, used, or paid for by households of that nation.

The “commonly used goods and services” include coffee, meat, tobacco, fruits, household appliances, electricity, clothing, pharmaceuticals, cars, and other commonly used products. It is also worth mentioning that the index excludes owner-occupied housing costs.

The HICP is also used for the Monetary Union Index of Consumer Prices (MUICP), an aggregate measure of consumer inflation for all countries of the eurozone. The eurozone represents all countries of the European Union that have incorporated the Eurodollar as their national currency. The primary aim of HICP is to maintain price stability. It defines the stable inflation rate in the euro area as below two percent annually.

Amongst HICP and MUICP, the HICP is a broader measure of inflation, but for trading, traders would prefer MUICP as it tells about the inflation concerning the European Dollar (EUR). The MUICP is calculated by selecting HICP from the eurozone countries only. All the member nations use the same methodology to calculate their respective HICP, enabling them to compare with each other and easily calculate the MUICP directly.

The selected goods and services are updated annually to account for the changes in consumer spending patterns. Each country’s weightage represents its consumption expenditure share in the entire euro area.

Inflation is the fuel that drives the economy. It is a double-edged sword, too much inflation erodes currency value, and citizens become poorer, and too low causes deflation, which slows the economy making money “costly.” A low and steady inflation rate is the only solution to keep the economy growing for capitalist economies.

When inflation rates fall below the long-term averages, the central authorities may use fiscal (government actions, ex: tax cuts) or monetary levers (central bank actions, ex: lower interest rates) to counter deflation and induce inflation. When the inflation rate is above the long-term rate, it is called hyperinflation, and central authorities may intervene and tighten the belt to deflate the economy. They can raise interest rates, increase taxes to deflate the economy to normal levels.

Inflation statistics like the HICP are coincident indicators as they tell us about the current price inflation. They are affected by leading indicators and policymaker’s responses. The HICP is closely watched by economists, central authorities, consumers, and even traders. In the currency markets, relative inflation can help us predict which currency’s value is eroding relatively faster. Inflation also affects the GDP of the country, which is a primary macroeconomic indicator for currency trading.

Impact on Currency

Currency markets emphasize on leading indicators over coincident indicators to always stay a step ahead of market trends. Coincident indicators confirm the trends rather than predict. Due to this, the impact of the HICP indicator in the market is low. For currency traders, MUICP and currency-specific aggregates are more useful than aggregate metrics like HICP to check inflation. Hence, overall, HICP is a low impact coincident indicator that can be overlooked for more country-specific inflation statistics.

Economic Reports

HICP data is published by Eurostat every month. It is the statistical office of the European Union. A brief estimate for the euro is published at the end of the month, followed by the detailed version containing indices of all member states approximately two weeks later. On the Eurostat page, we can find monthly, annual data, a detailed listing of country weights, item weights, prices, etc.

Sources of Harmonized Consumer Prices

We can know more about HICP in detail from the European Central Bank’s official website and the official data on the Eurostat page. We can find the consolidated monthly reports of HICP on Trading Economics.

Harmonized Consumer Prices – Effect on Price Charts

The Harmonized Index of Consumer Prices (HICP) is a coincident indicator. In essence, this indicator does not predict the future price action of currency but is coincident with it. Typically, metrics such as MUICP and other price reports induce volatility in the market. But HICP alone does not increase the volatility of the market.

Impact

The data is exclusive to the European Union and is released by the Federal Statistical Office. The impact of HICP on the currency market is negligible.

Harmonized Consumer Prices Report June

Below is the report of HICP for the month of June released in July. As per the data, the HICP increased from 108.47 to 108.58.

EURUSD – Before the Announcement

Before the announcement of the report, the market was in an uptrend making higher highs and higher lows.

EURUSD – After the Announcement

On the day of the announcement of the report, the prices retraced in the first half of the day and shot north aggressively and made a new higher high during the New York session. On the volumes side, there was feeble volatility in the Asian and European sessions, while it increased with the open of the US markets. That said, the increase in the volatility was not abnormal, which is typically seen during the release of major economic reports.

EURAUD – Before the Announcement

Before the report was released, the market was moving in an inclined channel showing EUR strength.

EURAUD – After the Announcement

After the report came out, the price break through the channeling market and began to trend. By the end of the day, the EURAUD price was up 0.65% from the previous day. This bullishness could perhaps be from the incident HICP report. However, the subsequent day, the market lost all its gains.

EURNZD – Before the Announcement

Prior to the announcement of the report, the market which was consolidating had begun to show mild bullishness.

EURNZD – After the Announcement

On the day the news was announced, the price continued to rise higher and higher for the entire day. In fact, EURNZD outperformed both EURUSD and EURAUD. There would be several factors that could’ve inflated the price, but a moderate effect could be through the positive HICP news. On the volatility side, there was no aggressive rise in volatility. However, the volume significantly increased during the North American session.

Thus, traders can analyze the technical factors of the market and open positions without any hesitation from the HICP report. That said, conservative traders may wait for the reports to be released, and then enter if the report is in favor of their speculated direction.

Categories
Forex Fundamental Analysis

The Impact of ‘Youth Unemployment Rate’ News Release On The Forex Price Charts

Introduction Youth unemployment is toxic to economic growth. It has long and short-term impacts on the economy that are concerning. With economies struggling to achieve growth and being vulnerable to the economic crisis, youth unemployment has become a more significant threat to growth than ever. Understanding the root causes and possible solutions to youth unemployment […]

Introduction Youth unemployment is toxic to economic growth. It has long and short-term impacts on the economy that are concerning. With economies struggling to achieve growth and being vulnerable to the economic crisis, youth unemployment has become a more significant threat to growth than ever. Understanding the root causes and possible solutions to youth unemployment […]

Introduction

Youth unemployment is toxic to economic growth. It has long and short-term impacts on the economy that are concerning. With economies struggling to achieve growth and being vulnerable to the economic crisis, youth unemployment has become a more significant threat to growth than ever. Understanding the root causes and possible solutions to youth unemployment can help secure our future economic growth.

What is Youth Unemployment Rate?

Youth Unemployment Rate is the percentage share of the young labor force that is jobless. While the upper and lower limit of age categorizing youth varies across regions, the United Nations categorize people between the age of 15-24. Some countries extend the upper limit to the mid-thirties also.

Youth unemployment is a situation where young people who are actively seeking, willing, and able to work are unable to find a job. Youth unemployment rates generally tend to be higher than the adult rates in all countries across the world. Youth makes up roughly 17% of the world population, and more than 85% of them live in developing countries.

How can the Youth Unemployment Rate date be used for analysis?

Youth Unemployment is caused by many factors, the primary among them being:

Skill Gap

The first and primary root cause of youth unemployment is the gap between the traditional education system and current market skill requirements. The current knowledge acquired through graduation, or any degree is not tailored to the disruptive technological society. With technologies changing so rapidly, the education systems should also be updated to take these changing times into account and provide relevant knowledge.

Employment Regulations

With so many laws protecting employees through labor acts and minimum wage policies, companies are pickier in hiring. Also, companies do not want to invest their earnings into new youth training for months and then reap benefits. Hence, companies are offering part-time jobs or contract hiring work that youth has no choice but to take. During economic downturns, employment protection plans protect employees and leave the contract workers vulnerable. Hence, during economic downturns and downsizing, youths are the first to be laid off.

Public Assistance

Many countries provide income support and assistance initiatives to youth until economic conditions improve. While such programs are good or bad for the youth remains debatable, some say it creates dependence on such programs. Keeping the youth unemployed even longer through such programs will further throw them off the career track.

The effects of youth unemployment are worse than we imagine them to be!
Lost Generation

Unemployed youth are often referred to as the lost generation. They are called so not only for the productivity lost but also for the direct and indirect impact it has on the youth and their families. As the saying goes, “a good start is half-race won,” similarly, a lousy start is also half-race lost. Youth unemployment has said to affect earnings for twenty years.

The hierarchical structure of corporations and late employment of youth puts them on the back seat in the career race, making it very hard for them to catch up with their peers in terms of earnings, position, and skill. Since they have not been able to build up their knowledge and skill during the period of unemployment, there is a substantial decrease in lifetime earnings.

Mental Risk

If a job is hard to find for youth, they often lower their job requirements. More often, they compromise and do jobs that they do not like, and it has an impact on their happiness, job satisfaction, and mental health. It is also reported that unemployed youth are more isolated from the community.

Political unrest

In modern times, political tensions and anti-social behaviors have been attributed to long periods of youth unemployment. The youth who do not have any productive work to engage in are succumbing to such anti-social activities and hooliganisms more, lately.

Increased Public Spending

As more and more youth remain unemployed, benefits payment increase to accommodate the youth. Hence, more of the tax revenues are spent on providing support. Decreased spending inhibits the government from allocating funds where it is needed to assist economic growth.

Decreased Innovation

As youth remains unemployed, the divergent and out-of-box ideas are missed out in the companies. Youth brings energy, dynamism, fresh perspectives onto the table with each passing generation. As innovation decreases, companies die out, thus affecting the economy in the long-run.

Incarceration

An idle mind is the devil’s workshop. If more youth remains unemployed, vulnerability to incarcerating activities increases, youth suicides also rise when unemployment is rampant in youth.

Impact on Currency

The Youth unemployment rate is an economic factor that affects the long-term progress of the economy more severely than the short-term. As seen, it has multi-layered negative impacts in terms of earnings on the youth and also on their families.

For the currency markets, the unemployment rate factors in the youth unemployment rate. Hence, youth unemployment is a low-impact coincident indicator that is more useful for the central authorities to make policy-based decisions.

Economic Reports

In the United States, the Bureau of Labor Statistics (BLS) publishes employment and unemployment statistics in their employment situation report every month. The report classifies it further based on age, sex, industry, etc. It is released on the first Friday at 8:30 AM Eastern Standard Time.

Sources of Youth Unemployment Rate

The United States Bureau of Labor Statistics publishes monthly employment and unemployment reports on its official website. Youth unemployment monthly and annual reports are available. The Organization for Economic Cooperation and Development (OECD) also maintains youth unemployment data on its official website.

Consolidated reports of youth unemployment rates across the world can be found in Trading Economics. World Bank also maintains records of Youth Unemployment Rates.

Youth Unemployment Rate – Impact Due To News Release

Youth Unemployment refers to unemployed persons looking for a job but cannot find the age range defined by the United Nations. This age group currently stands between 15-24 years. Youth unemployment rates tend to higher than the adult rates in almost every country. Forex traders look at general unemployment figures, which are the sum of unemployed persons across all ages and take a currency position based on the numbers. They do not consider the individual components of unemployment data as it does not provide a complete picture.

We will be analyzing be the latest youth unemployment figures of Australia and witness the change in volatility due to the news release. Looking at the below graph, we can say that youth unemployment increased in May by 2% compared to April. Even though the data is not very encouraging, let us determine the market’s reaction to this data.

AUD/USD | Before The Announcement

The above image shows the 15-minute timeframe AUD/USD chart before June 18, 2020. No trends have been established and shows no significant volatility.

AUD/USD | After The Announcement

The above image shows the highlighted candle that represents the news announcement. As the youth unemployment rate came in unfavorable to AUD, there is a significant bearish movement in the pair. The bearish move has happened because of the simultaneous release of the employment change and aggregate unemployment rate reports alongside.  Both the reports underperformed, driving the AUD value further down. The unemployment rate is a high impact indicator and has magnified the effects of youth unemployment figures.

AUD/EUR | Before The Announcement

The above image shows the 15-minute timeframe of AUD/EUR pair where AUD gained momentum till June 18 but only to fall back to its previous normal by 11:00 AM.

AUD/EUR | After The Announcement

The above image highlights the news candle, where we can see the biggest bear candle with the longest down wick throughout the range. The bearish pressures from unemployment rates and employment change have helped put the selling pressure on AUD against EUR.

AUD/JPY | Before The Announcement

The above image is a 15-minute timeframe AUD/JPY chart. No potential trends have started till 11:00 AM of June 18, 2020.

AUD/JPY | After The Announcement

The above image highlights the news candle showing the combined effect of the youth unemployment rate, unemployment rate, and employment change. All three reports did not favor AUD, leading in the biggest bear candle with a long wick showing high sell pressure on AUD against JPY.

Final Words

The charts could be very misleading for novice traders to make them think that the youth unemployment rate has induced such volatility. Unemployment rates and employment changes are closely watched statistics and major indicators. It is essential to understand that all the volatility for AUD against major currencies was induced through the two major indicators and not the youth-unemployment rate.

Even if the youth-unemployment rate had come in favor of AUD, it would have been overshadowed by the bearish sentiment induced from unemployment rates and employment change reports. Hence, the youth unemployment rate is a low-impact indicator that is overlooked for the broader indicators, as mentioned.

Categories
Forex Fundamental Analysis

What Can We Infer From A Country’s Central Bank Balance Sheet?

Introduction

Introduction

Introduction

Banks Balance Sheets are useful to ascertain the financial performance of the banks; this is correlated as an economic indicator when the bank in question is the Central Bank of the nation, for example, The Federal Reserve Bank of the United States. A Bank’s Balance Sheet can help us analyze its financial activities in terms of how much money has gone in and out of the banks and in what form, which can have different consequences on the economy. Hence, Analyzing a Bank’s Balance Sheet is useful for investors and also for our fundamental analysis.

What is Bank’s Balance Sheet?

A Bank’s Balance Sheet is a comprehensive summary of its total assets and liabilities. Assets here refer to financial instruments that BRING-IN revenue and liabilities refer to those for which the Banks need to pay off.  In simpler words, assets are what the bank “OWNS” and liabilities are what a company “OWES.”

Banking is a highly leveraged business. Banks make a profit solely out of the interest they receive on the lent out loans and the interest they pay out on the money deposited into their banks. Depositors would typically be general populations opening a savings account for their income and business firms having current accounts usually to maintain and run their holdings.

A Bank’s Balance Sheet has two important categories that divide the entire data, i.e., Assets and Liabilities. For the common man, liability would be a home loan which takes away a portion of his income and an asset would be the home itself on which he may or may not receive rent.

Assets | The assets of a bank can be the following
Reserves

Banks are to follow mandates as dictated by the Central Banks to maintain a certain amount of their total deposits as reserves, which cannot be used to lend out loans in order to maintain solvency during critical times. This mandate also makes sure banks maintain enough cash to meet the withdrawal demands daily at all times.

Loans

For the common man, a loan would be a liability, but for a bank, it is an asset as it brings in revenue in the form of interest. Banks can give credit to the general public, business firms, or even government through bonds. A loan is one of the primary sources of a bank’s income, and the proportion of loans to deposits can make or break a bank when they do not balance out.

Excess loans and fewer deposits can result in insufficient funds to meet withdrawal needs, and excess deposits can eat away the profit margin as the fewer loans do not generate enough revenue to balance out deposit rate amounts.

Cash

The liquid money that the banks maintain to run everyday operations and to show healthy solvency is the most precious of all assets as they can be traded without any loss of value directly without any lag.

Securities

Banks often purchase securities like the Treasury Bonds for which they receive interests regularly, which adds to their total assets.

Fixed Assets

Banks of decent size and scale often diversify their assets by purchasing fixed assets like real estate or gold deposits, which appreciate over time and match up with inflation and act as alternate forms of their other assets.

Balances at Central Banks

Banks are also required to maintain a certain proportion of balances in Central Banks.

Liabilities | The liabilities of a bank could be the following
Deposits

Money deposited by customers who can be people or business organizations.

Money owed to Other Banks

Banks lend each other money in the interbank market when they are either excess or short of their reserves.

Money owed to Bondholders

People owning bonds of banks receive money from the bank, and this generally includes shares and dividends that banks need to pay out as per bond agreement.

Owner’s Equity

Money that belongs to people who invested during the start of the company and helped it run.

Why Bank’s Balance Sheet?

In our context, we need to see the Central Bank’s Balance Sheet, which tells us what open market operations are being conducted by them, which can give us clues about the money circulation conditions in the economy. Since Money Supply metrics like M0, M1, M2 all originate at the Central Bank of a country, their actions and mandates can have a ripple effect in the entire banking system of the nation.

Hence, Central Banks are at the very heart of the Money Supply of a country. With their operations, they can pull out money from the economy or push new money into the system to ensure a smooth run of the economy.

How can the Balance Sheet numbers be used for analysis?

Central Bank activities have a direct influence on inflation and deflation. The Federal Bank in the United States for the past few years has been an active purchaser of bonds as part of the Quantitative Easing Programme, and this has led to a low-interest-rate environment and inflationary conditions. When the Fed releases money into the system on such large scales, it allows banks to lend more money to people and thereby to stimulate the economy. Withdrawal of money by selling their bonds could result in deflationary conditions likewise.

Besides this, what bonds the Fed purchasing is also important, as they have been continuously buying the government bonds to transfer government debt onto themselves, to help the government-run and be able to pay their interest bills in this low-interest-rate environment.

Impact on Currency

The Central Bank’s Balance sheet as a percentage of GDP is just another form of Government debt to GDP ratio, with the only difference being here the debt is owed to the Central Bank. When the debt of government goes beyond 80%, here the only viable choice is to maintain this inflationary condition and low-interest-rate environment.

A decreasing percentage of balance to GDP indicates a growing economy and strengthening of the currency, and an increasing proportion of the same shows an oncoming recessionary period, which is depreciating for the economy.

Economic Reports

In the United States, the Fed’s Balance Sheets are released on Thursday at 4:30 PM every week. Their balance sheet is included in the Federal Reserve’s H.4.1 statistical release titled, “Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks,” available on the official website.

There are also quarterly reports available for the same, measured as a percentage of GDP in the St. Louis FRED website, which is also a useful tool to monitor the bank’s activity.

Sources of Bank’s Balance Sheets

Below are the official Fed’s Balance Sheet reports – Fed Bal Sheet

Pictorial representation of the same is available in a comprehensive manner in the official website of FRED – FRED – Bal Sheet

Factors affecting Reserve Balances weekly reports can be found here – Thursday Fed Report

The news announcement of this fundamental Forex driver doesn’t have a great impact on the price charts. But we can look at the numbers of Government Debt to GDP ratio as mentioned above to trade the market. Cheers!

Categories
Forex Fundamental Analysis

What Is ‘Employment Change’ & How Can This Data Be Used For Our Analysis?

Introduction

Introduction

Introduction

Employment statistics are closely watched by the market because of their direct effect on consumer spending. Consumer spending makes up over two-thirds of the country’s GDP for many countries. Hence, understanding Employment Change, its place in the reports, and its impact on market volatility are crucial for building reliable fundamental analysis.

What is Employment Change?

Employment

It is the state of having a paid job. A person is considered employed if it does any work for pay or profit. People who are eligible for employment are between the age of 15 and 64 and are called the working-age population.

Employment Change

Unlike most reports which are reported in percentage or ratios to understand the statistics better, the Employment Change reports the nominal change. Employment Change is the change in the number of jobs added or lost over the previous month.

For example, if there were 20,000 jobs in January, and, in February, the figure was 25,000 jobs, then the Employment change would be +5,000. If the total jobs in February were 10,000 only then the Employment Change would report -10,000. Hence, positive numbers indicate job growth or new jobs added to the economy. Conversely, negative numbers indicate jobs were removed from the economy.

It measures the estimated change in the number of employed people during the previous month, excluding the farming and government industry. Hence, it accounts for the non-farm payroll employees, that are widely used statistics to monitor employment levels.

How can the Employment Change numbers be used for analysis?

Employment is a politically and economically vital statistic in any country. High levels of unemployment threaten social structure, and the ruling party’s governance. There have been incidents in many examples, where high unemployment periods have led to an increased number of crime and suicide death rates. Hence, Central Authorities are politically committed to ensuring low levels of unemployment at all times.

High unemployment is terrible for the economy. As Consumer Spending makes more than 70% of the total Gross Domestic Product for many countries, it is no wonder employment statistics are one of the primary indicators in the currency markets. Employment has a direct effect on Consumer Spending. As more people are employed, more people have disposable cash to meet their needs and discretionary spending. Hence, high employment boosts Consumer Spending, which in turn propels the GDP higher.

High unemployment levels tend to have a ripple effect on the economy, as jobs removed from one sector also tends to induce the same effect on dependent industries, and on a smaller scale on indirectly dependent industries and the overall economy.

For instance, if a car manufacturing company has a slow down in business, and decides to lay off half of its staff, then the company supplying tires to this company will also see reduced demand, leading to the same lay off and reduction in business. Also, indirectly dependent industries like car paint and servicing shops, car perfume selling shops would similarly take a hit. Hence, we see how lay-offs in one sector tend to creep into other sectors as well.

Also, during this cascading effect, there is a definite impact on consumer sentiment as well. A drop in consumer confidence also discourages the spending habits of people, which further impacts consumer spending. Hence, people who are still employed are also affected by unemployment in one or the other way. People generally start saving for a rainy day when employment levels drop, thinking their turn is also around the corner. Generally, industries dealing with luxury and recreation tend to take the worst hit during economic slowdowns and recessions.

Employment Change is a nominal figure that is a little misleading and confusing to correctly analyze the severity of positive or negative numbers as it is a function of the population. A country showing -10,000 jobs lost over the previous month could be ignorable for a country like India or China where the population is vast, and critical for small countries where the population is just in a few million. Hence, people generally prefer the unemployment rate and other percentage metrics to analyze the severity of the country’s employment situation correctly.

Impact on Currency

Even though it is a nominal figure, this report’s earliness gives it an edge over other reports, as traders are always looking to be ahead of the game and beat the market trend before it sets in. Hence, seasoned traders look at the Employment Change reports and analyze them historically to make investment decisions before market trends are set in motion. Hence, there tends to be a lot of market volatility around Employment Change reports.

Employment Change is a coincident and high impact indicator that can generate enough market volatility during significant changes in the reports. It is always best to combine reports with initial jobless claims reports, non-farm payroll statistics to build a broader understanding in the long-term to correctly trade these short and long-term volatilities around the time of report’s releases.

Economic Reports

In the United States, the Bureau of Labor Statistics (BLS) publishes monthly, quarterly, semi-annually, and yearly reports of the Employment change seasonally adjusted figures on its website. The report classifies change in employment as per the major industry sectors.

ADP publishes Employment Change reports on its official website about two days after a month ends. Hence, it is a day or two earlier than other employment situation reports published by BLS. ADP Non-farm employment change is the closely watched statistic before BLS releases its Employment Situation Report later.

Image Credit: U.S. Bureau of Labor Statistics

Sources of Employment Change

We can find the earliest Employment Change report from the ADP employment report.

The United States Bureau of Labor Statistics publishes monthly Employment Change, employment, and unemployment reports on its official website.

We can also find the same indexes and many others with a comprehensive summary and statistics of various categories on the St. Louis FRED.

Consolidated reports of Employment Change of most countries can also be found in Trading Economics.

That’s about ‘Employment Change’ fundamental Forex driver. As mentioned above, the impact of this indicator’s new release on the Forex price charts is minimal. However, if we combine them with other credible employment data like initial jobless claims and non-farm payroll statistics, we can get a broader understanding, which is crucial. Cheers!

Categories
Forex Education Forex Fundamental Analysis

Beating the Masters of Forex – The Big Banks

Some traders trade alone, out of hobby, fun, trying to make some money. Some traders trade professionally for funds, proprietary companies, or investors. This is what one of those professionals has to say about the rulers of the forex market. At the end of the line, dedicating your career to be profitable in the long term in this market eventually produces scientific methods that work. Also, to have the edge in this game, one needs to know it inside out. This leads us to know what the major players are doing and how they affect the market, how we can adapt and not be the 99% of the accounts doomed to be the victims of the big banks.

Some traders trade alone, out of hobby, fun, trying to make some money. Some traders trade professionally for funds, proprietary companies, or investors. This is what one of those professionals has to say about the rulers of the forex market. At the end of the line, dedicating your career to be profitable in the long term in this market eventually produces scientific methods that work. Also, to have the edge in this game, one needs to know it inside out. This leads us to know what the major players are doing and how they affect the market, how we can adapt and not be the 99% of the accounts doomed to be the victims of the big banks.

Some traders trade alone, out of hobby, fun, trying to make some money. Some traders trade professionally for funds, proprietary companies, or investors. This is what one of those professionals has to say about the rulers of the forex market. At the end of the line, dedicating your career to be profitable in the long term in this market eventually produces scientific methods that work. Also, to have the edge in this game, one needs to know it inside out. This leads us to know what the major players are doing and how they affect the market, how we can adapt and not be the 99% of the accounts doomed to be the victims of the big banks.

When we sum everything up, this is a trading strategy that you must know to at least have a chance against players with extreme capital stirring in the forex arena. Prop traders and other professionals know this, and it is not an indicator, practical tip or something you can use right away, unfortunately. And to be honest, no single tool or tip can help you reap the profits out of the 5 trillion flow on forex. It may sound to you we are going to talk about a conspiracy theory about the invisible hand manipulating the market so you always loose. Well, since professional traders do not trade unless math and other facts are on their side, then they are certainly not guided by conspiracies.

The truth is this fact is obscured by overwhelming false information so the big banks can keep reaping your accounts. It is not a secret the big banks are setting the rules on forex, not the economic forces. It is not a free, perfectly competitive market at its core. There is measurable proof to this fact and it is public. Probably the more famous trader spreading the word about this is ICT (Inner Circle Trader) by the name of Michael Huddleston.

The huge capital big banks use completely dominates forex, and it is used for price control. Traders are the ones who are against these giants and could be interpreted as our nemesis. On the other hand, it is they who make all these nice trends, volatility and create opportunities. Knowing what they are doing is giving you the edge, and consequently puts your trading out of the 99% who lose in the long run. Unfortunately, traders that even know this fact still do not know how to avoid their attacks. Our greatest threat to the account balance is the Interbank or the big banks by the name of HSBS, Citi Bank, JP Morgan, ICBC who control the main part of Interbank.

Like every bank, it will use the client capital in various investments to gain more capital. Some of these investments have a very low, controlled risks by client contract and law. Forex is also their playground where they create liquidity by moving the price. This movement is done with extreme capital flows, constantly replenished by the everlasting supply of losing trades. Your lost trades is their win, they know where traders money is, they see your trades and your Stop Loss, on every currency pair.

How to cope with this? Using one of the best measures in trading – avoidance. You need to be under the radar, do not be popular, stay away from the flock. The minority of traders and their money is not the target to the big banks, it is the lump of the“dumb money”. It is easy for them. See where (what currency pair) major dumb money is, are they trading short or long, and move the price the other way. If there is a concentration of Stop Loss orders at a specific price, let’s do the whipsaw. Repeat. Traders that are doing the opposite of the majority still have to apply good money management to capture that scarce profit, and most of them do not. You probably know what currency pair is the most traded, the EUR/USD. Well, this currency pair also happens to be where big banks like to play with traders’ money. If you do not know by now, the information about traders’ positions is not a secret to us, although it is not widely known. The Sentiment indication is what we also have access to. It also happens to be direct proof of big bank manipulation.

The direct correlation between traders’ positions and price movements is evident. Whenever a collective starts to open short trades, the banks will move the price up, and vice versa into infinity. Interestingly, there will be times when the banks will not demoralize you completely. They will give you that hope you need to stay in the game by allowing the masses to have their short profit time, evident in the right part of the picture. In the long run, if your trades belong to the big group, it will be game over. Casinos are also the masters of this method, known as the Blackjack theory. They will give you a little bit so you feel lucky, keeping you in the game until you lose everything. At first, it will be winning excitement that is keeping you in, then the hope of recovery, and finally they will wish better luck next time so you try again. The example above shows the big bank action on the EUR/USD, but it is also present in other currency pairs. Some cross currency pairs like the AUD/NZD do not experience this manipulation that often, simply because this is not a popular pair, not where the flock is.

There is another proof the market is manipulated, and it is very noticeable on the charts. It is the flash crashes. They happen once in a while but when they do, it is often not only catastrophic to your balance but brokers as well. A typical example of a flash crash is the EUR/CHF pair in 2015. Namely, the Swiss National Bank decided to introduce a “peg” on the EUR/CHF, precisely on the 1.2 ratio. In other words, the price will never drop below this level as proclaimed by the SNB. This led the majority of traders, precisely at the ratio of 70 to 1, to open long positions as the price continued to bounce off the 1.2 level. They would think it can only go up since they said it cannot go down.

On January 14th, 2015 the EUR/CHF drop was fast and brutal crashing 2200 pips in a very short time. Stop Loss orders were not executed because of the server overloads (guaranteed Stop Loss service is rare even nowadays) crushing the accounts and even going below zero, into negative. FXCM is one of the victims of this crash, a large broker with strong capital and reports. FXCM got bailed out by IG and the brand exists although it is a shadow of what it once was. Not to discuss the consequences on the people who got CHF credits from banks. The IG Sentiment report is a must if you want to have a peek into what the big banks look at when they are ready for the harvest. There are also other portals with similar sentiment indicators.

The US dollar is the dominant currency on the most traded pairs in the forex. Be especially careful around these currency pairs. The dollar is also one of the most influenced currencies by the news events. Unsurprisingly, the big banks enjoy this. Traders like to trade around big news events, and all the big banks see are a mass of single direction positions opened by them ready for the reaping. How many times have you seen the price go up when the news report was negative for the EUR on the EUR/USD? Or more likely see it also come back down as the logic assumes, only after your trade hit the Stop Loss. You may think your logical thinking was right, you have entered that trade just too soon. Try again. Eventually, you will understand there is no logic or economic laws. The banks, the Bloomberg and other portals can always give the excuse for this, they can choose what sounds reasonable enough and move on after the event is over. Before the event, it is also popular to give you useless tips from the pros that come down to: the price could move up and it can also move down.
To sum it up here is what you can do about all this.

-Avoid. Avoidance is one of the best measures in your strategy. Avoid the news.

-Do not be popular. Avoid the flock, use the sentiment reports. It is not a secret but traders still lose.

-Do not use the same tools the masses use. Using the same tools puts you in the same flock thinking where the price is going to go. You will be the big bank target. Popular tools are the ones you can easily find, probably the ones you have used first too, and the ones promoted on many videos, portals, and brokers pages. They are not only ineffective but also a favorite big bank “collectors” for the flock.

-Consider the USD pairs avoidance. See how it affects your balance. Seeking out currency pairs that are not exotics but are not popular is the goldilocks zone for you.

-Trading plan. It needs to have good money management in place even when you know what the big banks are doing. You still need to rely on the system to capture the profits.

-Experiment, test, build and look out for new ways to trade. This does not only include finding new tools or indicators, but it also means improving your trading plan and finding new markets.

There are many ways to trade, you may even build a system on unorthodox charting or timeframes, create an automated script which reads the sentiment, find that ultimate combination of indicators, and so on. There are infinite possibilities but one is certain, you have to put in the work. Trading is not easy and not for everyone.

This is a collection of what some of the professional prop traders agree on what is a base for those that want to succeed in the long run. You can trade your way and even be the one who is successful using the popular tool or trading the news, although the odds are against you. Every bullet above may be too vague for you to have something ready to be put to use. Focusing on each will require a separate article and, again, some traders invest a lot of time testing, reading, building, over and over until they find their complete system. What comes after is the easy part, you know your systems works, you are not getting in its way and just repeat. Traders focus on other investments once they have their profit-making machine on forex.

Categories
Forex Fundamental Analysis

Minimum Wages – Understanding This Macro Economic Indicator

Introduction

Introduction

Introduction

Minimum Wages are essential for protecting citizens and ensuring that everyone gets a fair share of the fruits of the progress made. Minimum Wages act as the foundation for everyone at the entry-level to compete equally to the top. Minimum Wages are used by a majority of the countries across the world. Understanding Minimum Wages and its importance can help us better understand improvement in people’s living standards over time alongside the country’s economic growth.

What are Minimum Wages?

The International Labor Organization (ILO) defines Minimum Wages as “the minimum amount of remuneration that an employer is required to pay wage earners for the work performed during a given period, which cannot be reduced by collective agreement or an individual contract.” It is the least money paid out for work as a wage over a given period. It cannot be lowered by mutual understanding nor through a legal agreement. Hence, it is the lowest remuneration that an employer can give their employees.

The Minimum Wage can be set by a statute, wage board or council, competent authority decision, industrial or labor courts, tribunals, or law enforced collective arguments. Most countries had introduced the Minimum Wages by the end of the twentieth century.

Minimum Wages initially started off to stop exploiting workers in sweatshops (places with unacceptable working conditions, potentially illegal and dangerous). Owners at such places generally had dominion over that workplace and people working. But later on, it became a means to help uplift the lower-income families. Minimum Wages were first incorporated by New Zealand in 1894, followed by many other countries gradually.

How can the Minimum Wage numbers be used for analysis?

Minimum Wages acted as the price floor beneath which a worker may not sell their labor. The purpose of Minimum Wages is to set a barrier to exploiting the labor force through unduly low wages for their work. It will ensure a just and equitable way of distributing the returns on the progress made collectively. It will also ensure people receive the money required to sustain a living and act as legal protection for people who need it.

Minimum Wages are also used as part of a policy to eradicate poverty. It also helps curb inequality amongst employees based on age, sex, or race for the work of equal value done. Minimum Wages also acts as a floor for wage negotiations and collective agreements. Any negotiation always has a legal and reasonable base, only above which all negotiations can take place and shall not fall below it.

The effect of increasing the Minimum Wage had a negligible impact on the employment rate in general. Still, cost-cutting in other sectors and the profitability of the company become vulnerable. Minimum Wage level adjustments are deemed to be made from time to time, meaning whenever the board feels it is needed based on the cost-of-living indices. Most countries adjust their Minimum Wages yearly, some do on a six-month basis, and some do it on a two-year basis.

Inflation and Cost-of-Living fluctuations erode the purchasing and protection power of the Minimum Wage. At such times, unscheduled interventions become essential to keep protecting the labor force.

Fixing Minimum Wage too low defeats the very purpose for which they were set and too high creates a significant impact on employment, worsening the situation. Careful and objective decisions have to be made to set and adjust Minimum Wages periodically as per economic conditions.

Setting too low could constrain consumer spending, which is terrible for the economy as it fuels the GDP. Setting too high could trigger inflation on subsequent levels, hurting exports, decreasing profit margins, and reducing employment.

The ILO deems the following three economic factors to take into account to set Minimum Wages: economic development requirements, productivity levels, and desirability of achieving and maintaining high levels of employment. All the factors are correlated and have to be set to optimize all three economic factors.

The ratio of Minimum to Average Wage is also used to understand wage inequality among laborers within an organization. In developed economies, Minimum Wages generally range 35 to 60 percent of the Median Wage. In developing economies, the percentage is even higher, indicating higher-level workers are relatively underpaid. Minimum Wage at aggregated levels classified based on regions can also help central authorities to identify lagging states or regions, where the standard of living can be improved and economic backwardness eradicated.

Images Credit: International Labour Organization

Impact on Currency

Minimum Wages changes are often annual and do not have an impact on currency markets as it pertains to a particular section of working-class people. Minimum Wage is a low impact lagging indicator and does not deem any importance in the currency markets.

It is useful for central authorities and vulnerable workgroups to raise their living standards and maintain economic equality. When everyone is treated justly in terms of wages, economic growth is not crippled by exploitation and discrimination.

Economic Reports

In the United States, the Department of Labor enforces the Fair Labor Standards Act (FLSA) and sets the Minimum Wage and overtime pay standards. It is enforced by the Department’s Wage and Hour Division. Annual revisions to the same are made and announced, if any.

Sources of Minimum Wages

  • Minimum Wage details set by the Department of Labor is available here.
  • The OECD also maintains the same as Real Minimum Wages.
  • Consolidated reports of Minimum Wages of most countries can be found on Trading Economics.
  • We can find guidelines on setting the Minimum Wage and various nuances associated with it on ILO.

Minimum Wages Announcement – Impact due to news release

The Minimum Wage is an employees’ base rate of pay for ordinary hours worked. It is dependent on the industrial policies that apply to their employment. Employees cannot be paid less than their Minimum Wage, even if they agree to receive it.

Every year, the work commission reviews the minimum wages received by employees in the national workplace system and then submits it to the government’s labor ministry. Looking at the suggestions mentioned, the government increases the minimum wages for workers of the nation. Minimum wages have little impact on the value of a currency as it does not considerably affect the industrial output and the economy.

The below image shows that the weekly wages were increased for Australian employees in 2020. Although the difference is not huge, it still is a positive step taken for the daily wage workers. Looking at the data, we should not expect significant volatility in the currency pairs during the announcement.

AUD/EUR | Before the announcement

In the above image of the AUD/EUR 1-hour timeframe chart, we try to establish potential trading opportunities. The pair has been ranging for the past three days before June 19th, 2020.

AUD/EUR | After the announcement

The above image highlights the news announcement day. It may seem there was a small uptrend that was built was erased in the second half of the day. An increase in the minimum wages in favor of AUD did not break the trend established a few days earlier. The pair continues its range post the announcement day also.

AUD/USD | Before the announcement

The above image highlights the AUD/USD pair a few days before the news announcement day. No trend has been established as of now.

AUD/USD | After the announcement

The above image highlights the news announcement day, and we see a similar pattern to the AUD/EUR. We see it is in the typical volatility range of the AUD/USD. The news announcement did not help AUD break the previous and post ranging trend here also.

AUD/CHF | Before the announcement

The above image is AUD/CHF pair, and here also, no potential trading opportunities are building up until June 19th, 2020.

AUD/CHF | After the announcement

The above image highlights the news announcement, and we see that the news did not move the currency in favor of AUD. The AUD/CHF continued to stay in the same range as before the news release day.

Overall, in all the three scenarios, we see the minimum wage economic indicator despite coming in favor of AUD; the market impact was negligible. The market is aware that it is a low impact indicator and affects only a specific section of the labor force.

Hence, changes in minimum wages of a country do not translate to its currency volatility, as already confirmed through our fundamental analysis. Moreover, it is a yearly statistic, and the corresponding effects of increased minimum wages will be captured through monthly indicators better.

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Forex Daily Topic Forex Fundamental Analysis

Understanding ‘Full-Time Employment’ Fundamental Forex Driver

Introduction Full-Time Employment statistical figures are a good measure for long term economic growth. Understanding the difference between part-time and  Full-Time employment and its economic impact can help us better understand the long-term trends in economic growth. What is a Full-Time Employment? Employment It is the state of having paid work. A person is considered […]

Introduction Full-Time Employment statistical figures are a good measure for long term economic growth. Understanding the difference between part-time and  Full-Time employment and its economic impact can help us better understand the long-term trends in economic growth. What is a Full-Time Employment? Employment It is the state of having paid work. A person is considered […]

Introduction

Full-Time Employment statistical figures are a good measure for long term economic growth. Understanding the difference between part-time and  Full-Time employment and its economic impact can help us better understand the long-term trends in economic growth.

What is a Full-Time Employment?

Employment

It is the state of having paid work. A person is considered employed if they do any work for pay or profit. People who are eligible for employment are between the age of 15 and 64 and are called the working-age population.

Full-Time Employment

As such, there is no fixed law defining and differentiating full and part-time employment. Conventionally 40 hours a week has been considered as Full-Time employment, but lately, deviations from this have been observed.

For instance, the United States Bureau of Labor Statistics (BLS) describes 35 hours or more per week as Full-Time employment. Conversely, 1 to 34 hours of work per week is considered part-time employment. The Affordable Care Act (ACA) explains Full-Time employees as those who are working for 30 or more hours a week.

How can the Full-Time Employment numbers be used for analysis?

Distinguishing between the part and Full-Time employment has benefits. Full-Time employment generally has the following benefits over part-time or contract-based employment:

Paid leaves: Full-Time employees are eligible to take leaves or vacation for which there would be no loss of pay. It is generally not applicable to part-time employees. Most part-time employees have a per hour payment. They are paid for the number of hours worked.

Healthcare plans: When an employee spends most of his life working for an organization, it is the company’s responsibility to take care of his health and well being. Full-Time employees enjoy the benefits of healthcare insurance for themselves and their family members as well. Health insurances secure employees against heavy financial losses during health emergencies. Part-time employees don’t generally have those benefits.

Pension plans: Full-Time employees are also given the benefits of retirement plans through pension funds or any other retirement scheme. It financially secures the employee in his/her old age, which is essential. Part-time employees generally do not have any such benefits and usually have to save for retirement themselves.

Job Security: During times of economic slowdown or even worse a recession, companies generally lay off their part-time and contract workforce first. Full-Time employees are their prime assets and generally are managers or professionals in the organization. Hence, Full-Time employees are generally less vulnerable to business and economic cycles.

Part-time employees could also be seasonal and find it hard to get work during off-seasons and are more vulnerable to business cycles.

It is easy to infer that the standard of living of Full-Time employees is generally better than that of their counterparts. As employees feel more financially secure in a Full-Time job, their spending habits would reflect the same. Credit eligibility also is more for Full-Time employees over part-time ones. Hence, in the long run, much of the consumer spending would likely be coming from Full-Time employees.

No one seeks part-time employment voluntarily, and no one wants to sit idle during certain quarters of a year. When companies are making long term progress in their profits rather than short-term gains during particular business cycles, a growth in Full-Time employment could be observed. When businesses are fully established in their sector and are marginally well-off, they opt to hire and retain Full-Time employees more. Otherwise, companies would rely on seasonal hiring and firing strategy only to keep the business running.

Policymakers giving the necessary support and means in terms of infrastructure, financial support, ease of doing business could help organizations to grow faster and offer better employment benefits. As more people from the labor force go into the full-time employment category, fewer people are working as part-time employees overall. When the majority of the labor force is full-time employed, we can expect a robust economy and steady economic growth that is immune to both domestic and international business and economic cycles.

Impact on Currency

Full-Time employment and its other half part-time employment only come into picture when we are trying to assess long-term economic growth and improvements in the citizens’ living standards. Hence, Full-Time employment statistics are more useful to policymakers who are committed to bringing wellbeing to their citizens through meaningful policies.

The currency markets are more concerned with the overall picture and the current business cycle’s impact on the currencies. Hence, Full-Time employment statistics, which are only part of the total labor force, do not move the markets like other employment indicators.

Full-Time employment is a low impact coincident indicator that is more useful for measuring long-term improvements in the quality of people’s lives for investors and policymakers only.

Economic Reports

In the United States, the Bureau of Labor Statistics (BLS) publishes monthly, quarterly, semi-annually, and yearly Employment Situation Reports on its website. The labor force statistics from the Current Population Survey details the nominal values of the full and part-time workers classifying them based on age, sex, race, and ethnicity. Full-Time employment reports are available monthly, quarterly, and annually.

Sources of Full-Time Employment

The United States Bureau of Labor Statistics Current Population Survey details Full and Part-time employment statistics in detail. The United States Bureau of Labor Statistics publishes monthly employment and unemployment reports that are very useful for market analysis. We can also find the same indexes and many others with a comprehensive summary and statistics of various categories on the St. Louis FRED that are relevant for our study. Consolidated reports of Full-Time employment for most countries can be found in Trading Economics.

Full-Time Employment Announcement – Impact due to news release

Full-time employment refers to the number of people working a specified number of hours or more per week at their main job or only job. The number of hours is fixed by the government, who later classify employees in different categories.

Traders and investors worldwide watch the indicator value closely as it tells about a country’s employment situation. For example, in Canada, if a person works 30 hours or more per week, he is considered a full-time Employee. One should expect high volatility in the currency during and after the news release.

The below image shows the employment change in Canada during May. We see that full-time employment increased in Canada by 219.40, which should be positive for the currency. Let us witness the impact of this news release on the Canadian dollar by considering various currency pairs.

CAD/USD | Before the announcement

Let us start with the CAD/USD currency pair to observe the impact of full-time employment change on the Canadian dollar. The above snapshot shows the 15 minutes time-frame chart of the currency pair. The currency has been maintaining a range before the news announcement, and it is only three hours before the release, there seems to be a positive momentum building up for CAD/USD.

CAD/USD | After the announcement

After the news announcement, the price initially moves higher, but this is immediately sold, and the market erases most of the gains. The wick on top of the news candle indicates a strong buy sentiment that is carried over, and momentum continues to build up over the next days. As we can see, despite strong sell at the end-of-the-day positive momentum still built up and the market reached a new high than before the news announcement.

AUD/CAD | Before the announcement

The above image is a snapshot of the AUD/CAD pair on a 15-minute time frame before CAD full employment data release at 12:30 GMT. As we can see before the news announcement, positive momentum was building up, and a downward trend started just hours before the news candle.

AUD/CAD | After the announcement

After the news announcement that came in favor of CAD, AUD/CAD falling momentum increases, and investors lose further confidence in AUD, and a strong sell is seen. That momentum is carried over to the next two days, and the AUD continues to fall against CAD.

CAD/JPY Before the announcement

The above image is a 15-minute time-frame snapshot of CAD/JPY. Before the news announcement, there is no clear uptrend or downtrend.

CAD/JPY After the announcement

It is only after positive news for CAD through full-time employment report the uptrend is further amplified and continues throughout the next few days.

The full-time employment data was able to move currency in favor of CAD against significant currencies after the news announcement confirming the importance of the economic indicator.

Categories
Forex Fundamental Analysis

The Impact Of ‘Labor Costs’ Fundamental Driver’s News Release On The Price Charts

Introduction

Introduction

Introduction

Labor Cost is a critical element affecting business profitability and sustainability. Labor costs have a direct feedback effect on inflation rates. Understanding its effect on the labor force, economic growth, and inflation helps understand how market forces act.

What are Labor Costs?

It is defined as the total cost of labor used in a business. It is the sum of all wages paid out to the employees of business by the employer. Labor costs include payroll taxes and employee benefits also. Hence, from a business standpoint, it is part of business expenditure dealing with human resources. It can also be defined as the wages cost paid to workers during an accounting period, including taxes and benefits.

Most often, countries measure Unit Labor Cost, which is the labor compensation for a unit of business value produced. It is also a measure of international competitiveness amongst different labor markets throughout the world. Many companies in the United States have shifted their production plants to countries like Mexico, China, and India, where labor cost is relatively lower than the United States.

Labor costs are broadly categorized into the following two categories:

Direct cost: It is the cost of labor that can be traced to produce. It is the labor cost of employees that produce a product. It is a tangible measure. For example, if forty employees are working on assembling and packing an automobile engine, then the labor cost can be traced to the engine’s sale prices.

Indirect cost: It is the labor cost that cannot be traced to any tangible business produce. For instance, building security does not contribute to business output but ensures the safety of the place. It is generally associated with support labor that maintains business activity.

Businesses price in the labor costs, material charges, and overheads, if any, into the final sales price of the product or service they produce. The final product must factor in all the costs incurred; otherwise, it can hurt the company’s profit margin.

While it is easier to evaluate direct costs, indirect costs are a little trickier to evaluate due to their intangible nature. Undervaluation or overvaluation of costs drives the actual price of products away from correct prices. Undervaluation can force employees to quit for better opportunities. Overvaluation can hurt business profit or translate those prices into the end product. When overvalued products hit markets, they lose out to competition and hurt business. Hence, correctly modeling labor costs is vital for business sustenance.

Labor costs are sometimes also classified as fixed and variable costs. Variable costs change based on the amount of work done or business production. For instance, workers working on the production line can see reduced or increased work during business cycles. In such instances, workers are paid for the hours worked, or the output produced. Fixed costs do not vary over the entire business cycle. For instance, a contract with a maintenance company for a year would be fixed for repairs throughout the year.

How can the Labor Costs numbers be used for analysis?

Labor costs are affected by the following factors:

Labor Availability: The supply and demand for labor will drive labor costs. Lack of availability of the required skilled laborers for a particular business can drive up the labor costs due to demand outweighing supply. Conversely, when the market is saturated, labor costs go down due to market forces.

Workplace Location: The cost of living varies across different regions. Businesses having multiple branches can offer different pay for the same work in different areas due to differences in living costs. Wages are generally high in metropolitan cities and lower in semiurban areas.

Task Complexity: The more complex the work, the more a business pays out for it. The task difficulty drives up the labor cost.

Efficiency and Productivity: Efficiency can improve productivity for the same hours of work and workforce. It can increase business profits that can translate into higher labor wages also.

Worker Unions: Hiring a union member ensures that the wages are above a particular minimum pay set by the union. Unions have control over demand and supply of workers, thereby having the power to negotiate labor wages.

Legislation: With many countries adopting minimum wages, and having dedicated acts and laws to protect labor exploitation, labor costs have a price floor below which it cannot drop.

Employer’s idealogy: Some business owners place more emphasis on its employees and view them as the heart of the business. Such people pay higher wages compared to other businesses that emphasize more on profit.

Labor costs are directly proportional to inflation. As prices rise, the cost of living increases and laborers demand higher wages. When labor costs increase, the profit margin of the company decreases. To avoid a reduction in profits, companies may employ cost-cutting mechanisms or lay-offs to accommodate the new wage hike. A significant increase in labor costs can increase unemployment.

On the flip side, the increased labor cost may translate to the product’s end sale price, giving a feedback loop to price inflation. It continues until market equilibrium is achieved through the open demand and supply market forces.

Impact on Currency

Significant and quick increases in the labor market induce inflation, which is depreciating for the currency. Labor cost in itself does not directly affect the country’s currency worth. It is part of a more extensive system. Labor costs are seen from the business point of view and are associated more with inflation.

Overall, labor costs are low impact lagging indicators that do not have a significant effect on currency market volatility. It is deemed more useful for businesses and policymakers to balance laborer’s well-being and business sustainability.

Economic Reports

In the United States, the Bureau of Labor Statistics releases quarterly “Labor Productivity and Costs” that details the Unit Labor Cost also. The report is released in the following mid of the month for the previous quarter.

Sources of Labor Costs

The BLS Labor Productivity and Costs report contains the Unit Labor Cost reports.

The OECD also maintains data of the Unit Labor Cost data of its member countries.

Consolidated Labor Costs data is also available on Trading Economics for most countries.

Labor Costs Announcement – Impact due to news release

In the previous section of the article, we understood the labor costs economic indicator, which essentially measures the change in the price companies pays for labor, excluding overtime. It is a leading indicator of consumer inflation. High labor costs make workers better off, but they reduce companies’ profits and net cash flow.

Policies that increase labor costs can significantly affect employment and working standards, which has an indirect impact on the overall economy. Since labor costs are a company-specific factor, its impact is primarily felt on the company’s stock price and the stock market.  Hence, currency traders do not give much importance to the official labor costs news release.

In today’s article, we will be analyzing the latest labor costs data of New Zealand that was released in May. In the below image, we can see that labor costs were slightly lower than last time and almost equal to market expectations. Let us find out the market’s reaction to this data.

NZD/USD | Before the announcement

The above image shows the NZD/USD 15-minute timeframe chart right until 22:30 GMT. The news release is at 22:45 GMT. Before the news release, the market has no clear pattern and maintains a range with no clear uptrends or downtrends.

NZD/USD | After the announcement

After the news announcement at 22:45 GMT of labor costs Index quarterly reports, which came a little lower than the forecast, no new trends developed. The pair kept its ranging trend before, during, and after the news release.

NZD/CAD | Before the announcement

The above image is the NZD/CAD 15-minute timeframe chart, and we can see here also there is no clear trend building up throughout the day. The currency pair has been in a ranging trend throughout the timeline.

NZD/CAD | After the announcement

After the news announcement, there seems to be no significant volatility in either direction. The news did not create enough volatility to bring about any trend.

NZD/EUR | Before the announcement

The above chart is the NZD/EUR 15-minute time frame chart, and there have been here also no trends building up before the news announcement. There are no potential trade signals here until now.

NZD/EUR | After the announcement

After the news announcement, there seems to be no volatility around the candle. The pair did not build any momentum after the announcement also.

In conclusion, even though the news announcement came slightly less favorable to the NZD currency, we did not see any downtrends for NZD currency against any other currency. The market ignored the news, and there was no impact significant enough to move the currency in either direction. All of this again firmly establishes our fundamental conclusion that the labor costs economic indicator is a low impact indicator in the currency markets and can be overlooked for the fundamental analysis of currencies.

Categories
Forex Fundamental Analysis

The Impact Of ‘Long Term Unemployment Rate’ On A Nation’s Economy

Introduction

Introduction

Introduction

The long-term unemployment rate is a killer of economic growth. Its impact on the individual and society as a whole cannot be ignored, particularly in emerging economies. Understanding long-term unemployment trends can help us identify increases and decreases in the dependent economic indicators and their overall impact.

What is Long Term Unemployment Rate?

Long-term unemployment

It occurs when a worker actively seeking employment is unable to find a job for 27 weeks or more. To be included in the statistic, the participant should have actively sought employment in the last four weeks. To be recorded in the statistic, the worker should have been actively seeking employment even after being unemployed for six or more months. Hence, it is probably undercounted as most people do not continuously seek employment for six straight months out of discouragement.

Hence, the long-term unemployment rate is then the percentage share of the labor force that is unemployed for six or more months, given that they have actively sought employment in the last month.

How can the Long Term UR numbers be used for analysis?

Long-term unemployment is majorly caused by cyclical and structural unemployment. Cyclical unemployment occurs due to the natural business cycles that companies go through. Most businesses have specific quarters when business is low, where they might downsize and lay off employees. Seasonal hiring and firing constitute cyclical unemployment. Cyclical unemployment also occurs during economic slowdowns and recessions.

Structural unemployment occurs when unemployed labor skills do not match the available job requirements. Unlike cyclical unemployment, it is not dependent on business cycles. Structural unemployment is more challenging to address than cyclical unemployment. It keeps the unemployment rates high long after the economy’s recovery out of recession. It occurs when business and technology shifts during the time of unemployment make unemployed labor skills outdated.

Long-term cyclical and structural unemployment has a positive feedback effect on each other making things worse. Cyclical unemployment during business slowdowns increases the unemployment rate. When they are unemployed long enough, their skills become outdated and gives rise to structural unemployment. This overall reduces consumer spending for the unemployed and indirectly affects consumer sentiment of the employed. When consumer spending drops, other industries also observe the same cyclical and structural unemployment, spiraling the economy downward.

Long-term unemployment can lead to people working in underpaid jobs or find work not relevant to their skills out of desperation. It reduces economic productivity as skilled laborers are not being utilized for what they know best. Secondly, long-term unemployment places a financial crunch that can have a demoralizing effect on happiness, mental state, and job satisfaction. It is also observed that long unemployment periods tend people to self-isolate from the community. Anti-social behavior and hooliganism are also benefited from long-term unemployment.

While the government gives out unemployment benefits, which may encourage them to hold off to find better paying and more suitable jobs to their skills, it decreases public spending. When the unemployment rates are high, public spending takes a direct hit, crippling the government from spending their revenue on activities that help economic growth. As the government keeps giving out benefits, it has led to a rise in long-term unemployment rates. While benefits are necessary to mitigate financial impact during unemployment, it also tends to increase unemployment duration, which is terrible for economic growth.

As long as long-term unemployment is prevalent, improving the living standards of people is hard to accomplish. People cannot apply for loans or buy a house on a mortgage if they frequently lose jobs and take a long time to find new jobs. Financial insecurity and strained personal finances discourage people from spending and encourage saving for another jobless quarter or two. Long-term unemployment has a severe effect on householders, with only one working individual who provides for the family.

Long-term unemployment is bad for the economy. On the flip side, 50% of the long-term unemployed find a job in six months, and 75% do within a year. Within 18 months, the remaining also does find something or the other if they keep looking.

Chart Credit: OECD

Overall, it is more challenging to reduce long-term unemployment than short-term cyclical unemployment. It is a critical hindrance to achieving high growth rates for any country. The above statistic shows how it is an international issue and not any particular set of countries.

Impact on Currency

Long-term unemployment rates are not as important as unemployment rates, jobless claims, non-farm payroll numbers. As unemployment rates itself include the long and short-term ones, it is not an important economic indicator for currency markets.

Hence, it is a lagging low-impact indicator. It is an inversely proportional indicator, meaning high long-term unemployment is bad for the economy and currency.

Economic Reports

In the United States, The Bureau of Labor Statistics publishes monthly employment and unemployment reports under the Employment Situation Report. Table A-12 in it details the long-term unemployed figures. The figures are seasonally adjusted for month-over-month, and year-over-year comparisons are also provided.

Long-term unemployment reports are also maintained by the Organization for Economic Cooperation and Development (OECD). It defines long-term unemployment if a person is unemployed for 12 or more months.

Sources of Long Term Unemployment Rate

The United States Bureau of Labor Statistics’ Long-term Unemployment data is available here. The Bureau of Labor Statistics publishes monthly employment and unemployment reports on its official website for our analysis. The OECD also maintains long-term unemployment data. Consolidated reports of long-term unemployment rates of most countries can also be found in Trading Economics.

Impact of ‘Long Term Unemployment Rate’ News Release on the Forex Price Charts

The long term unemployment refers to those persons who have been unemployed for more than 52 consecutive weeks. Very long term unemployment rate refers to those persons who have been unemployed for more than 104 consecutive weeks. This data is essential for the government and economists who analyze quarterly and yearly trends of unemployment.

It helps them in understanding the long term employment situation of the country. However, the monthly numbers are significant to the market players when it comes to the forex market. Therefore, the impact of long term unemployment is not realized immediately on the currency pair.

The below image shows the latest long term unemployment data of Australia that was released in February. We can see the unemployment rate was the same compared to the previous year, but there was a reduction in the percentage of the labor force. In the following sections, we will observe the change in volatility due to the news release.

AUD/USD | Before the announcement

The above image is a 1-hour timeframe AUD/USD chart showing the moves from February 25th to March 1st, 2020. The currency has been slowly moving down and picks up a little momentum in its drop-down after February 28th.

AUD/USD | After the announcement

The above image is a snapshot of AUD/USD on the day of long-term unemployment rates in Australia news announcement on February 27th, 2020. The report published by the treasury department of Australia showed lower unemployment rates than the previous year. The favorable figures for AUD did not reflect in the pair’s non-volatility.

AUD/GBP | Before the announcement

The above image is a 1-hour timeframe AUD/GBP chart showing the moves from 25th to February 26th. The currency has not shown any clear down or uptrends till now.

AUD/GBP | After the announcement

The above image highlights the currency pair move throughout the news announcement day. We can see that there was only about a 40-pip maximum move, which is minimal movement and typical for such a pair. The news did not build any rallying up for AUD against GBP.

AUD/EUR | Before the announcement

The above image is a 1-hour timeframe AUD/EUR chart before February 27th, 2020. As we can see, AUD has been losing its value slowly against EUR in the last two days.

AUD/EUR | After the announcement

The above image highlights the news announcement day. We can see that despite the long-term unemployment rates came in favor of AUD, the market ignored and continued selling AUD and purchased EUR. The downward trend before continued during and after the news announcement day without any effect.

In conclusion, as we have seen, the long-term unemployment economic indicator was almost entirely ignored by the market. The market knows it is a lagging indicator, and the effects have already been priced into the market, therefore showing no volatility during the news announcement. Hence, the above trend analysis confirms our fundamental analysis of the economic indicator as a low impact lagging indicator that is overlooked by the currency market.

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Forex Fundamental Analysis

What Does The ‘GDP Growth Rate’ Forex Driver Say About A Nation’s Economy?

Introduction

Introduction

Introduction

GDP Growth Rate is the most critical fundamental macroeconomic indicator for measuring economic prosperity. It is the number one macroeconomic indicator, and all other leading, coincident, and lagging indicators are all trying to predict what GDP Growth Rate would be. Our fundamental analysis revolves around predicting the growth rate before the GDP Growth Rate reveals it. It is the de facto measure of economic growth for all countries worldwide.

The importance of this economic indicator cannot be understated. GDP Growth Rate figures move the markets like no other, be it the currency or the stock markets. Hence, understanding the significance of this macroeconomic indicator is paramount for traders and investors.

What is the GDP Growth Rate?

Gross Domestic Product

It is a measure of the total economic output of a country. It is the total monetary value of all the goods and services produced within the country regardless of citizenship (resident or foreign national). The commonly used term “size of the economy” refers to this economic indicator. The US is the world’s largest economy, and it means it has the highest nominal GDP or highest economic output.

GDP Growth Rate

GDP Growth Rate is the measure of the rate of economic growth. In other words, it tells the pace at which an economy is growing. Generally, developing or emerging economies like China, India, or Japan will have a higher GDP growth rate than the mature or developed economies like the United States, United Kingdom, etc.

Mathematically, it is the percentage change of Gross Domestic Product with regards to the previous quarter. Although the GDP Growth Rate is reported quarterly, it is annualized for better analysis and comparison. It means that the quarterly GDP is scaled to a year to compare the Growth Rate with the previous year and understand whether the economy is growing faster or slower compared to the previous year. 

The other reason is that the GDP Growth Rate changes according to the business cycle and is usually very high during the last quarter, accounting for holiday shopping from consumers driving up the GDP. Hence, annualizing with seasonal adjustment makes it more accurate for analysis. The Real GDP Growth Rate accounts for inflation and is the most-watched GDP statistic.

The GDP Growth Rate is affected by the four components of the GDP:

A | Consumer Spending: It is also called Personal Consumption. It represents spending associated with the end-consumers or the general population. The Personal Consumption Expenditure reports, Retail Sales, are all different economic indicators representing Consumer Spending. It makes up about 69% of the total GDP in the United States.

B | Business Investment: Economic Output of the Business Sector makes up 18% of the total GDP in the United States. Business Surveys like Purchasing Manager’s Index, Industrial Production, etc. help assess the Business Sector’s contribution to economic output.

C | Government Spending: It involves all the expenditures incurred by the Government to maintain and stimulate economic growth and run its operations. In the United States, significant proportions of Government Spending go to Social Security, Medicare benefits, and Defense Spending. It accounts for 17% of the total economic output for the United States.

D | Net Exports: It is the difference between the total exports and imports. Revenue is generated from exports and depleted from imports. Developing economies will mostly have positive Net Exports as it is an integral part of their revenue generation. The United States has -5% Net Exports of the total GDP, meaning it is a net importer.

How can the GDP Growth Rate numbers be used for analysis?

When the economy is growing or expanding, the GDP Growth Rate is favorable. When the GDP Growth Rate is increasingly positive, businesses, jobs, and personal income all grow followingly. Developing economies grow faster than mature economies (as the developed economies are already more saturated compared to developing ones). It is generally standard for matured economies to peak out at 3-4% GDP Growth Rate and developing economies can have anywhere between 5-20%.

When the economy is slowing or contracting, businesses will halt new investments and plans to avoid deflation. New hiring is also postponed; people will save more than spend to prepare for the oncoming deflationary conditions. The economy comes to a slowdown. The Government intervenes through fiscal and monetary levers to stimulate economic growth and bring it back to normal conditions and maintain the growth rate. Overall, the GDP growth rate tells us the economy’s health.

Impact on Currency

The GDP is a lagging macroeconomic indicator that has high-impact on the market volatility. Investors’ decisions are based on the GDP growth rate. It is a proportional indicator. High GDP Growth Rates are suitable for the economy overall and vice-versa.

Though it is a lagging indicator, it has many implications for the economy. It is the most extensive measure of economic activity and the primary gauge of the economy’s health. GDP Growth Rate comparisons amongst different economies are vital for currency markets, and hence, it has a very high impact on the currency market.

Economic Reports

For the United States, the Bureau of Economic Analysis releases quarterly GDP Growth Rate figures on its official website every quarter. The release schedule is already mentioned on the website and is generally released one month after the quarter ends. 

Major international organizations like the World Bank, International Monetary Fund, OECD, etc. actively maintain track of most countries on their official website: 

Sources of GDP Growth Rate

For the United States, the BEA reports are available here.

The St. Louis FRED keeps track of all the GDP and its related components in one place on its official website. You can find that information in the sources mentioned below.  

GDP & GNP – FRED 

GDP Growth Rate – World Bank

GDP Growth Rate – IMF

Impact of the “GDP Growth Rate” news release on the Forex market

In the previous section of the article, we explained the GDP Growth Rate fundamental indicator and saw how it could be used for gauging the strength of an economy. The GDP Growth Rate indicates how quickly or slowly the economy is growing or shrinking.

It is driven by four components of GDP, the largest being personal consumption expenditures. But economists prefer using real GDP when measuring growth because it is inflation-adjusted. When the economy is improving, the GDP Growth Rate is favorable. If it is contracting, businesses hold off investing in new technologies. If GDP Growth Rate turns, then the country’s economy is in a recession.

In the following section, we will analyze India’s GDP Growth data and observe the change in volatility due to the news announcement. The below image shows the fourth quarter GDP Growth data of India, where there has been a fall in the value compared to the previous quarter. The most critical and highest contributor to the growth of the Indian economy is services. Let us find out the reaction of the market to this data.  

USD/INR | Before the announcement:

We shall start with the USD/INR currency pair to study the impact of GDP Growth Rate on the Indian Rupee. The above image shows the ‘Daily’ time-frame chart of the currency before the news announcement, where we see that the market is moving within a ‘range’ and currently the price seems to have broken out of the ‘range.’ The volatility is high on the upside, indicating that the Indian Rupee is weakening. Depending on the GDP Growth Rate data, we will take a suitable position.  

USD/INR | After the announcement:

After the news announcement, we see a sudden rise in the volatility to the upside. The price moves higher initially, but selling pressure from the top makes the ‘news candle’ to close with a wick on the top. This was a result of the harmful GDP Growth data where there was a reduction in the Growth Rate from last quarter.   

INR/JPY | Before the announcement:

INR/JPY | After the announcement:

The above images represent the INR/JPY currency pair, where it is clear from the first image that the price was moving in a ‘range’ before the announcement, and presently it has broken the ‘support’ with a lot of strength. This is the first sign of weakness in the Indian Rupee that could probably extend. If the price remains below the moving average, a ‘sell’ trade can be initiated.

After the news announcement, the price crashes lower but immediately gets reversed, and the ‘news candle’ closes with a wick on the bottom. The initial reaction was a result of the weak GDP Growth Rate, which lead to the further weakening of the currency. Volatility increased to the downside due to the news announcement, which was on expected lines.

AUD/INR | Before the announcement:

AUD/INR | After the announcement:

The above images are that of AUD/INR currency, where we see before the news announcement, the market is in a downtrend, and currently, the price is at its lowest point. Technically, we should be looking to sell the currency pair after a price retracement to the nearest’ resistance’ level or an appropriate Fibonacci ratio. Therefore, depending on the volatility change due to the news release, we will take a pair.

After the news announcement, the volatility emerges to the upside, and we see a sudden rise in the price that also goes above the moving average. This was a result of the weak GDP Growth Rate that made traders to ‘long’ in the currency pair by selling Indian Rupees. The news release hurts the currency where the weakness persists for a while, but later, the downtrend continues.

We hope you understood the concept of “GDP Growth Rate” and its impact on the Forex price charts after its news release. All the best. Cheers!

Categories
Forex Fundamental Analysis

How The New Announcement Of ‘GDP Per Capita’ Indicator Affects The Forex Market?

Introduction

Introduction

Introduction

GDP per capita is the primary economic indicator in macroeconomics to measure the standard of living and economic prosperity. While GDP indicates the economy’s size in terms of economic output, it does not reveal for what populace the output is divided. Hence, GDP per Capita is more suited to assess the wealthiness of the country’s population. 

Every nation strives to improve its standard-of-living by increasing the wealth of the population beyond just meeting daily needs. Hence, GDP per Capita becomes an important economic indicator for countries’ comparison of how well-off their people are.

What is the GDP per Capita?

GDP 

GDP is the measure of a country’s total economic output. It is the total monetary value of all the goods and services produced within the country regardless of citizenship (resident or foreign national). It is the market value of all the finished goods and services within a nation’s geographical borders for a given period. The period is generally a quarter (3 months) or a year. The commonly used term “size of the economy” refers to this economic indicator. The USA is the world’s largest economy, and it means it has the highest nominal GDP or highest economic output.

GDP Per Capita

It is a metric that is obtained by dividing a country’s GDP by its population count. Here, “per Capita” translates to “per average head” or “for one individual.” Hence, GDP per Capita is the measure of economic output per person. 

If we want to compare GDP per Capita amongst countries, we use the Purchasing Power Parity (PPP). Through PPP measure, we can compare countries on equal terms, as many countries have different currencies, comparing economic output becomes difficult. Hence PPP measures everything in the United States dollar terms, thus creating a base standard for comparison.

How can the GDP per Capita numbers be used for analysis?

Since GDP is the total economic output, countries with lower economic output than other countries may not necessarily be poorer. On the contrary, it could be wealthier. For example, Qatar has only 19 billion US dollars GDP in comparison to the USA, which has 20.54 trillion US dollars. But Qatar is the number one ranked the country as per GDP per Capita. It has 126,898 US Dollars compared to the United States that has only 62,794 US Dollars. Hence, the people of Qatar are wealthier than those in the United States. 

Here, we have to understand GDP per Capita is a function of the population. Higher population results in higher GDP prints but also distributes the GDP amongst more people. Qatar is a prosperous country with sizeable natural oil resources, which is not a labor-intensive task to extract and export. Hence, the high GDP through Crude Oil exports is divided amongst a few populace of 2.7 million people compared to the United States 328 million. The USA is the third most populous country after China and India.

Overall, small and prosperous countries and developed industrial nations tend to have high GDP per Capita. The wealthiest and most impoverished countries are also assessed based on the GDP per Capita as a primary metric.

The income per capita and GDP per Capita are the two most common tools for measuring economic wealth and prosperity. GDP per capita is more popular and widely used as it is more regularly tracked and maintained on a global scale by most countries. It, in turn, helps in ease of calculation, usage, and comparison amongst countries.

It tells us how much economic output is attributed to a citizen. Hence, it is a measure of national wealth. On the other hand, it can also tell us the economic productivity of the people. Productive and talented groups of people will contribute more value to the GDP prints.

GDP per capita is used alongside GDP and other GDP related metrics like the GDP Growth Rate, Real GDP, by policymakers to assess the economic health and take necessary actions to drive the economy in the right direction. When the GDP prints are consequently decreasing for two quarters, Central Authorities intervene through monetary and fiscal levers to counter deflation and stimulate economic growth through inflationary pressures. 

GDP metrics are closely watched by investors (domestic and foreign alike) to make investment decisions. Declining GDP holds off investments from investors, due to decreased confidence and vice-versa.

Impact on Currency

GDP metrics are used in a variety of ways by a variety of people. Economists and Central Authorities primarily use GDP per Capita to understand the economic wellbeing of its people. GDP Growth Rate is primarily used by Traders, Business people, and Investors to make business decisions.

GDP per capita would likely be more useful for Policymakers, and Business people. Business people can use this as a wealth metric and consequently decide the products that would suit the budget of people. The higher the wealth of the individual citizen, the costlier products and services they can afford. Hence, business decisions can also be impacted.

It is a proportional high impact indicator. Fluctuations in the GDP metrics bring a lot of volatility in currency markets. Falling GDP metrics are terrible for the economy, its businesses, consumers, and the Government. GDP impacts everyone. Hence, Central Authorities are committed to maintaining GDP Growth and take the necessary actions to avoid deflation. Businesses also hold off investment decisions in the stagnating economy and vice-versa.

Higher GDP per Capita is good for the currency and the economy and vice-versa. Although for trading decisions, GDP Growth Rate serves as a more relevant metric for comparisons amongst different currency countries. 

Economic Reports

For the United States, the Bureau of Economic Analysis releases quarterly GDP figures from which we can obtain our statistics on its official website every quarter. The release schedule is already mentioned on the website and is generally released one month after the quarter ends. 

Major international organizations like the World Bank, International Monetary Fund, OECD, etc. actively maintain track of GDP figures of most countries on their official website:

Sources of GDP per Capita

For the United States, the BEA reports are available here.

The St. Louis FRED keeps track of all the GDP and its related components in one place on its official website. You can find this information in the below-mentioned sources. 

GDP & GNP – FREGDP per Capita

Real GDP per Capita – FRED

GDP per Capita – World Bank

Impact of the “GDP per Capita” news release on the Forex market

In the above section of the article, we saw the definition of GDP Per Capita and understood how it differs from the nominal GDP. Per Capita GDP is calculated by dividing GDP over the entire population of the country. GDP Per Capita is a universal measure used by most economists to gauge the prosperity of nations.

It provides insight into the economic prosperity and economic development across the globe. Countries with high technological progress see a significant increase in GDP Per Capita. It is also a significant indicator of comparing the economic growth between the two countries. GDP Per Capita if often analyzed alongside GDP. GDP Per Capita considers both the GDP and its population.   

In today’s lesson, we will analyze the impact of GDP on the value of the currency and observe the variation in volatility due to the news announcement. In this regard, we have collected the year-on-year GDP of Japan, where the below image shows the GDP measured in the last fiscal year. Let us find out the reaction of the market to this data.

USD/JPY | Before the announcement:

We shall start with the USD/JPY currency pair to observe the impact of GDP data on the Japanese Yen. We can see in the earlier image that the market is in a downtrend with a large bearish candle visible a few minutes before the news release. As the market is very bearish, we will look to the currency pair after a price retracement to a technically significant level. At this point, we cannot take any position in the market. 

USD/JPY | After the announcement:

After the news announcement, we see that the price moves lower, resulting in further strengthening of the Japanese Yen. As the GDP data was very close to market expectations, traders comprehended this data to be positive for the economy and bought Japanese yen by selling the currency pair. In terms of positioning ourselves in the market, once should not go ‘short’ in the market soon after the news release as this would mean chasing the market, which is very risky.     

NZD/JPY | Before the announcement:

NZD/JPY | After the announcement:

The above images represent the NZD/JPY currency pair, where we see that the market has crashed recently, and the price is at the same level since then. This means there is extreme optimism in the market concerning the Japanese Yen. As the price is meager, we need a pullback before we can take a ‘short’ trade in the currency pair. Until then, we will watch the impact of GDP on the currency.

After the news announcement, the volatility expands on the downside, and the price sharply lower. The market reacted positively to the GDP data since it was measured to be nearly the same as before. This proved to be bullish for the Japanese Yen, where traders bought the currency and took the price lower.   

EUR/JPY | Before the announcement:

EUR/JPY | After the announcement:

The above images are that of EUR/JPY currency pair where we see that again, the market is in a downtrend, but in this pair, we notice a strong bullish candle from the lowest point, which has taken the price higher. This means the Japanese Yen is not as bullish as it was in the above two pairs. Since the market is not expecting a fall in the GDP, aggressive traders can take a ‘short’ position with a strict stop loss.

After the news announcement, the price moves lower and closes with a large bearish candle. This increases the volatility to the downside and strengthens the Japanese yen. Therefore, it clear that the GDP data had a hugely positive impact on all the currency pairs.    

We hope you understood the concept of ‘GDP per Capita’ and how the Forex price charts get affected after its news release. All the best. Cheers!

Categories
Forex Fundamental Analysis

Everything You Should Know About ‘GDP Per Capita PPP’ Macro Economic Indicator

Introduction GDP per Capita PPP is the popular macroeconomic indicator for comparing economic prosperity and wellbeing of its citizens amongst countries, especially those with different currencies. As currencies can be managed lower or higher, GDP per Capita PPP is the most commonly used metric by economists for comparison and analysis. GDP and its related metrics […]

Introduction GDP per Capita PPP is the popular macroeconomic indicator for comparing economic prosperity and wellbeing of its citizens amongst countries, especially those with different currencies. As currencies can be managed lower or higher, GDP per Capita PPP is the most commonly used metric by economists for comparison and analysis. GDP and its related metrics […]

Introduction

GDP per Capita PPP is the popular macroeconomic indicator for comparing economic prosperity and wellbeing of its citizens amongst countries, especially those with different currencies. As currencies can be managed lower or higher, GDP per Capita PPP is the most commonly used metric by economists for comparison and analysis.

GDP and its related metrics are the most important economic indicators for macroeconomic analysis, especially for traders’ fundamental analysis. Hence, it is imperative to understand GDP per Capita PPP to better understand relative economic prosperity in the international market place.

What is GDP Per Capita PPP?

GDP

Gross Domestic Product helps in measuring a country’s total economic output. It is the total monetary value of all the goods and services produced within the country regardless of citizenship (resident or foreign national).

It is the market value of all the finished goods and services within a nation’s geographical borders for a given period. The period is generally a quarter (3 months) or a year.

The commonly used term “size of the economy” refers to this economic indicator. The USA has the world’s largest economy, and it means it has the highest nominal GDP or highest economic output.

GDP Per Capita

It is a metric obtained by dividing a country’s GDP by its population count. Here, “per Capita” translates to “per average head” or “for one individual.” Hence, GDP per Capita is the measure of economic output per person. It tells us how much economic output is attributed to a citizen. Hence, it is a measure of national wealth. On the other hand, it can also tell us the economic productivity of the people.

Purchasing Power Parity (PPP)

It is an economic theory that compares different countries’ purchasing power through a basket of goods common in both countries. By evaluating the cost of a particular good in both countries, the PPP is calculated. For example, comparing the price of 1 gallon of milk in two countries would help us know the purchasing power parity. Parity means a state of being equal, and all things being equal, how much currency is required to procure identical goods in both countries helps understand the purchasing power of that country.

It measures how much a particular set of goods and services cost in each country, instead of the exchange rates that can be manipulated by speculative trading, or central authorities’ intervention.

A wide range of goods and services are taken into account to develop the PPP, and hence the process is complicated, but once generated, the PPP remains mostly constant in the long run.

GDP Per Capita PPP

If we want to compare GDP per Capita amongst countries, we use the Purchasing Power Parity (PPP). Through PPP measure, we can compare countries on equal terms, as many countries have different currencies, comparing economic output becomes difficult. Hence PPP measures everything in the United States dollar terms, thus creating a base standard for comparison.

How can the GDP per Capita PPP numbers be used for analysis?

Using nominal GDP values for economic growth comparisons would be misleading as currencies are often manipulated in favor of countries by the governing agencies. For example, China frequently devaluates currencies to increase their income through exports and offer their goods at a competitive price in the international markets.

Hence, using the GDP per Capita PPP is a more sensible approach as PPP values stay stable over more extended time frames and better understand and analyze economies with different currencies. The below table proves our above analysis.

It is important to understand we use PPP for making a fair comparison, but PPP is not perfect, it has the following limitations:

Taxes: Tax policies differ from country to country and consequently affects the price of goods and services, thereby making the PPP skewed.

Transportation: Goods need not be available across the planet at the same level. The import of goods from the manufacturing site would add to the prices of the goods differently to different countries. 

Tariffs: Governments can intervene to impose tariff barriers for economic reasons like protecting domestic businesses, which may again impact the imported product prices, making it costlier in the concerned country.

Non-Traded Services: Cost of Labor, utility, or equipment costs variation can also induce price differences in the reference goods.

Market Competition: Popularity in particular areas can give companies an edge and enable them to price higher than in other countries. Established reputation can change prices, which varies from its market presence duration. On the international scale, the popularity of a good is not the same across all economies and hence can skew prices.

All the above factors limit PPP in some ways, but PPP is still better than nominal GDP comparisons. So, GDP per Capita PPP may not be perfect, but currently, there is no better metric for economic prosperity comparisons amongst countries.

Impact on Currency

GDP metrics are used in a variety of ways by a variety of people. Economists and Central Authorities primarily use GDP per Capita PPP to understand its people’s economic wellbeing in contrast to other economies. GDP Growth Rate is primarily used by Traders, Business people, and Investors to make business decisions.

GDP per Capita PPP would likely be more useful for Policymakers, and Business people. Business people can use this as a wealth metric and consequently decide the products to suit the budget of people. The higher the wealth of the individual citizen, the costlier products and services they can afford. Hence, business decisions can also be impacted.

The PPP value can be used to base exchange rate fluctuations and identify signs of strengthening or weakening of currencies. 

It is a proportional high impact indicator. Higher GDP per Capita PPP is good for the currency and the economy and vice-versa. Although for trading decisions, GDP Growth Rate serves as a more relevant metric for comparisons amongst different currency countries. Also, GDP per Capita PPP is a yearly statistic and is more relevant for long term investment decisions than short-term currency trading decisions.

Economic Reports

Major international organizations like the World Bank, International Monetary Fund, OECD, etc. actively maintain track of most countries’ GDP figures on their official website. The World Bank maintains the GDP per Capita PPP for most countries. Every three years, the World Bank announces a report comparing the productivity and growth of different countries based on PPP. It is a yearly data.

Sources of GDP per Capita PPP

GDP per Capita PPP – World Bank

GDP per Capita PPP – CIA World Factbook

GDP per Capita PPP – the United States – FRED

We can find a consolidated list of the same here as well.

Impact of the ‘GDP Per Capita PPP’ news release on the price charts 

In the previous section of the article, we understood the definition of GDP based on PPP and how it is different from the nominal GDP. PPP based GDP is converted to international dollars using purchasing power parity rates and divided by the total population. 

Purchasing Power Parity (PPP) between two countries, X and Y, is the ratio of several units from country X’s currency required to purchase in country X. The same quantity of an excellent/service as one unit of country Y’s currency will purchase in country Y. It can be used mostly to compare inflation in two and, to some extent, the economic growth. But the nominal GDP is one that taken into consideration while making investment decisions.

In today’s example, we will observe the impact of GDP on various currency pairs and witness the change in volatility due to the official news release. The below image shows the GDP in the Euro Zone during the fourth quarter, where we see the GDP was as in the previous quarter. Let us find out the reaction of the market. 

EUR/USD | Before the announcement:

We shall start with the EUR/USD currency pair to analyze the impact of GDP on the Euro. It is clear from the preceding illustration that the market is not trending in any direction, which means there is confusion concerning the market trend. Therefore, until we have clarity in the market, it is smart not to take any trade.

EUR/USD | After the announcement:

After the news announcement, the price gets volatile as it moves in both the directions and finally, closes near the opening price. The GDP data did not strengthen or weaken the currency where the ‘news candle’ closed, forming an indecision candlestick pattern. As the news release did not bring about any significant change to the currency pair, one should analyze the currency based on technical indicators.    

EUR/JPY | Before the announcement:

EUR/JPY | After the announcement:

The above images represent the EUR/JPY currency pair, where we see that the overall trend of the market is up, and recently it is has shown signs of reversal before the news announcement. One needs to wait for confirmation before taking a trade as the news event can cause significant changes to the existing chart pattern, resulting in an unnecessary loss. Until the price is below the moving average, the uptrend shall not continue.

After the news announcement, the price initially moves lower, but it gets immediately bought and closes with a wick on the bottom. There is some volatility seen, which eventually takes the market lower. The GDP data came out to be as expected, where it was the same as before. Since there was no improvement in the GDP, we can ascertain that it was negative for the currency.    

EUR/AUD | Before the announcement:

EUR/AUD | After the announcement:

The above images are that of EUR/AUD currency pair, where we see that before the news announcement, the market is in a strong downtrend, and currently, the price is on the verge of continuing the downward move. However, since a significant news announcement is due, there is a possibility that it can change the trend, hence need to take a position based on the impact of the news.

After the news announcement, market shoots up, and volatility increases to the upside. Here we see that the GDP data has a positive impact on the Euro, and the currency strengthens after the news release. Now it is clear that selling the currency pair is no longer valid.

We hope you understood all about the ‘GDP Per Capita PPP.’ Do let us know your thoughts in the comments below. Happy Trading!

Categories
Forex Fundamental Analysis

What Is ‘GDP From Public Administration’ Forex Fundamental Driver All About?

Introduction

Introduction

Introduction

Public Administration is a critical aspect that drives overall economic growth. GDP from Public Administration can give us insights into the strength of the current central authorities’ efficiency in governance. Public Administration is the levers to the economic engine, and it can put brakes or accelerate the economy to sink into a recession or propel to economic growth. Hence, understanding Public Administration and its contribution to GDP will help us better understand its role in society’s functioning as a whole.

What is GDP from Public Administration?

Gross Domestic Product

GDP is the measure of a country’s total economic output. It is the total monetary value of all the goods and services produced within the country regardless of citizenship (resident or foreign national).

It is the market value of all the finished goods and services within a nation’s geographical borders for a given period. The period is generally a quarter (3 months) or a year.

The commonly used term “size of the economy” refers to this economic indicator. The USA is the world’s largest economy, and it means it has the highest nominal GDP or highest economic output.

Public Administration

It is the implementation of government policies. Public Administration is a part of every economy. Policies can be either monetary policy or fiscal policy.

Public Administration is concerned with the operations of government that run the nation. It is centered around the structuring of the Government policies and programs and government officials’ conduct to implement the same.

Public Administration’s definition and goals are vast subjects. In our analysis, we will only focus on the economic impact of Public Administration. 

How can the GDP from Public Administration numbers be used for analysis?

An analogy to understand the importance of Public Administration would be if an economy or nation is viewed as a car or engine. Public Administration would be the brake, gear, and acceleration levers. Levers determines whether the car moves forward or backward, and also the pace of movement.

Similarly, Public Administration determines what direction the economy’s growth is going towards and at what rate. Monetary policy is associated with the Central Bank of a nation. Fiscal Policies are associated with the Central Government. 

Officials working as per the Public Administration policies are called Civil Servants, together the Governing body and its policy determine how effectively the opportunities are maximized to satisfy the public demands and lead to overall economic wellbeing.

Policy reforms and effective Administration can reduce economic disparity amongst different classes of people, increase employment, wages, and business prosperity. Government Spending, Tax programs, Outlays, allowances, funding programs are all part of the Government policy. Public Administration determines how effectively such policies are implemented.

Public Administration provides the foundation for economic activity through laws and as a catalyst to economic wellbeing through its services. 

Without firm laws and regulations and active civil servants, the nation is in jeopardy. Weak governance and policy can sink the nation where corruption, political instability, riots, public protests, etc. can creep in. 

Services like transportation, maintaining law and order, road construction, police, jails, tax exemptions, medicare, social security, etc. directly may or may not generate revenue for the government but indirectly helps other sectors to boost overall economic prosperity.

When a nation’s government fails to stimulate the economy, there is a probability that it will continue for its elected period. Hence, International Investors can glean such clues from GDP from Public Administration figures. They can understand the behavioral nuances of the government and its probable impact in the upcoming quarters.

The government impacts the people and the business. On an absolute basis, the government has complete control over the nation for the elected period. It can bring about any policy reforms they see fit. It can help businesses or impede businesses. It can control money flow through the economy, and how much people pay taxes.

It is also essential to perceive that the GDP from Public Administration is only part of the government’s revenue. It assists in the functioning of other sectors through its public services that are not accounted for in the GDP. 

Hence, GDP from Public Administration itself does not tell us the real contribution of Public Administration in growth. The functions of a government span across various sectors and vary from region to region based on the economic region’s requirements.

Impact on Currency

The GDP from Public Administration is a low impact indicator, as the broader measures like Real GDP and GDP Growth Rates are more important for the Currency Markets. 

GDP from Public Administration does not paint the full picture of the economy, but it tells us the effectiveness of the current government and its policies. Still, for the International Currency Markets, it does not serve as a useful indicator.

It is a proportional and lagging indicator. Higher GDP from Public Administration is good for the economy and its currency, and vice-versa.

Economic Reports

For the United States, the Bureau of Economic Analysis releases quarterly GDP figures on its official website every quarter. The release schedule is already mentioned on the website and is generally released one month after the quarter ends.

In the full report, we can extract the GDP from Public Administration figures. We can also go through GDP by Industry to get the Public Administration performance in the report. Below is a sample of the same:

World Bank actively maintains track of GDP by Sector figures of most countries on their official website. Public Sector 

Sources of GDP from Public Administration

For the United States, the BEA reports are available here.

We can use the GDP by Industry to see the government’s contribution to GDP here. 

Different metrics like Public Debt, Expenditure, etc. are all categorically available here.

We can also find GDP from Public Administration for different countries here.

Impact of the ‘GDP From Public Administration’ news release on the price charts 

In the previous section of the article, we understood the importance of Public Administration in an economy and how it impacts economic growth. It plays an essential role in overseeing and shaping new impact market strategies. It is the responsibility of public administrators, whether policymakers or non-profit executives, to make use of the opportunity to ensure that the economy flourishes.

Profound policies are needed to facilitate private-sector investment in socially beneficial concerns. All this is in the hands of public administrators and the government. Therefore, the department has a fair amount of contribution to the GDP and the economy. When it comes to investing based on this information, investors do not make investment decisions based on the contribution from different sectors. They look at the final GDP and take a position in the currency.

In today’s lesson, we will analyze the impact of GDP on different currency pairs and see the volatility created after the news release. The below image shows the first-quarter GDP data of Singapore, where we see a significant drop in the GDP value compared to the previous quarter. Let us find out the reaction of the market to this data. 

USD/SGD  | Before the announcement

 

Let us start with the USD/SGD currency pair, where the above image shows the state of the chart before the news announcement. We see that the market is moving in a small ‘range,’ and just before the release, the price is at the top of the ‘range.’ This means we can expect selling pressure from this point that can take the price lower. However, it is better to take a position based on the volatility caused by the news announcement. 

USD/SGD  | After the announcement:

After the news announcement, we see that the price moves lower, and the market falls considerably. The market reacted oppositely to what was expected as it resulted in the strengthening of the Singapore dollar even though the GDP data was negative. The volatility increased to the downside, and eventually, the market turns into a downtrend.    

SGD/JPY | Before the announcement

SGD/JPY | After the announcement:

The above images are that of the SGD/JPY currency pair, where we see that the price is precisely at the ‘support’ before the news announcement. There is a high chance that the buyers might come back in the market and go ‘long’ in the currency pair. Since economists forecast a lower GDP for this quarter, it is advised not to take a ‘short’ position before the news release.

After the news announcement, the price initially moves higher, but this gets immediately sold into, and the candle closes with a large wick on the top. We witness a fair amount of volatility in the currency, and finally, it gets extended to the downside. One can take a ‘short’ position in the currency after noticing trend continuation patterns in the market and after confirmation from technical indicators.     

GBP/SGD | Before the announcement

GBP/SGD | After the announcement:

The above images represent the GBP/SGD currency pair, where we see that before the news announcement, the market has reversed to the upside, and currently, the price has reacted strongly from the ‘demand’ area. This indicates a high amount of bullishness in the currency pair and weakness in the Singapore dollar since it is on the left-hand side of the currency pair.

After the news announcement, the market falls lower, and the volatility slightly increases to the downside. The Singapore dollar gets more influential after the news release, despite reporting weak GDP data. Thus, we can conclude that there is some confusion in the market and hence it moves in both the directions. Traders should technically analyze and take positions accordingly. 

That’s about ‘GDP From Public Administration’ and its impact on the Forex market after its news release. In case of any questions, let us know in the comments below. Good luck!  

Categories
Forex Fundamental Analysis

‘GDP From Manufacturing’ – Understanding The Macro Economic Indicator & Its Impact

Introduction

Introduction

Introduction

GDP from Manufacturing is significant for many developing economies. It is their primary driver for economic growth to improve the standard of living and generate wealth. Manufacturing Sector has supported a large share of jobs in the economy. 

Manufacturing Sector has helped many economies to come out of underdeveloped status to developing nation status. Hence, understanding GDP from Manufacturing has varying significance in different countries is suitable for macroeconomic view in the international markets.

What is the GDP from Manufacturing?

Gross Domestic Product

GDP is a basic measure of a country’s total economic output. It is the total monetary value of all the goods and services produced within the country regardless of citizenship (resident or foreign national).

It is the market value of all the finished goods and services within a nation’s geographical borders for a given period. The period is generally a quarter (3 months) or a year. The commonly used term “size of the economy” refers to this economic indicator. The USA has the world’s largest economy, and it means it has the highest nominal GDP or highest economic output.

Manufacturing

It is producing goods for use or sale labor, processing equipment, or machinery. It is a process that could be physical, chemical, or mechanical. The manufacturing sector mainly uses raw materials to make finished goods for consumption by end customers or intermediate goods for other manufacturing industries. For example, a car Manufacturing company could import raw iron ore metal, and process it to produce metal car body parts.

In the lifecycle of a finished good, the Manufacturing comes in as the second stage in the supply chain right after the source of raw materials. The manufacturing sector includes plants, factories, mills, and generally use power-driven machinery in their process. The manufacturing sector can also include small businesses, or home startups like bakeries, candy stores, or custom tailors, etc.

How can the GDP from Manufacturing numbers be used for analysis?

Manufacturing is an essential component of GDP. In the United States, it contributed 11.6% of total GDP. Manufactured products make up half of the total United States exports. In the United States alone, the Manufacturing Sector has 12.85 million jobs, about 8.5% of the total workforce. The importance of the Manufacturing Sector is evident from the rapidly developing economies like China, Japan, and India. 

The industrialization has been the main propellent for economic growth in these countries that put them back on the map. With export-led growth, China has primarily used Manufacturing Sectors to achieve growth rates of 10% and above to catch up with the advanced economies like the United Kingdom, and the United States. Manufacturing Sector is a labor-intensive sector, and it requires skilled labor. Despite the advent of modern technologies, equipment, and automated machinery, it still requires skilled laborers to fill the gaps.

Developing economies do not have a competitive edge over the developed economies in the services sector. But they do have the advantage in the Manufacturing and Industrial Sectors due to the availability of cheap labor. The low costs associated with a low standard of living and maintenance attracts business to establish their production centers in such countries. For example, an autoworker in Detroit makes 58 dollars an hour compared to 8 dollars in Mexico.

With an improved standard of living in developed economies like the United States, the cost of labor is high in comparison. It is the primary reason for the decline in the Manufacturing Sector growth in the developed economies for over two decades, paired with rapid growth in developing economies during the same period. 

With many developed economies transitioning more into the services sector, the Manufacturing Sector has lost its fair share in developed economies while developing ones like China have significantly increased their Manufacturing Industry production levels. 

About Thirty percent of the GDP of China comes from the Manufacturing Sector alone. Hence, we can understand that the Manufacturing Sector is the primary source of growth for many developing countries. The above plot shows the increase in Manufacturing Production in China. It is steady and steep growth. The vertical axis is plotted in CNY HML (Chinese Yuan Hundred Millions).

As the countries develop, they start to get involved in the Service sector by investing the wealth generated from the Manufacturing Sector to come on par with developed economies and establish a total equilibrium. But there is a long way to go before all developing economies become developed.

Impact on Currency

The GDP from Manufacturing in itself is not a high impact indicator, as the broader measures like Real GDP and GDP Growth Rates are more important for the Currency Markets. GDP from Manufacturing does not paint the full picture of the economy. It can be an essential tool for the Central Authorities to keep track of Manufacturing Sector performance and its implications to the economy.

As established, the Manufacturing Sector is a significant contributor to economic growth for developing economies. Hence, changes in this sector widely affect the overall economic health, and all the dependent industries therein. It is a proportional and lagging indicator. Higher GDP from Manufacturing is good for the economy and its currency, and vice-versa.

Economic Reports

For the United States, the Bureau of Economic Analysis releases quarterly GDP figures on its official website every quarter. The release schedule is already mentioned on the website and is generally released one month after the quarter ends.

In the full report, we can extract the GDP from Manufacturing figures. We can also go through GDP by Industry to get the Manufacturing Industry performance in the report. The World Bank actively maintains track of GDP by Sector figures of most countries on its official website.

Sources of GDP from Manufacturing

For the United States, the BEA reports are available below: 

World Bank also maintains the Manufacturing Sector’s contribution as a percentage of GDP on its official website, as given below for reference. ‘GDP From Manufacturing’ of various economies can be found here.

Impact of the ‘GDP from Manufacturing’ news release on the price charts

The manufacturing sector is crucial for the development of a country. The growth of machinery output and technological improvements are the main drivers of economic growth. The service sector, too, is dependent on most of the manufactured goods. Manufacturing also revives the economy by creating tens of millions of new jobs, eradicating recession.

Therefore, the manufacturing sector contributes a significant part of the GDP of a country. When we drill down to the fundamental analysis of the currency, investors do not look at the manufacturing sector’s contribution alone but consider the distinct GDP as the leading indicator of economic growth.

For example, we will be analyzing the influence of GDP on various currency pairs and see the impact it makes on the value of a currency. The below image displays the previous and latest GDP in the United Kingdom released in May, where we see a significant drop in the GDP compared to the previous month. Let us find out if the market reacts positively or negatively to the news release.  

GBP/USD | Before the announcement:

We shall start our analysis with the GBP/USD currency pair, where the above image shows the properties of the pair before the news announcement. We can see in the above image that the market is in a downtrend, and recently the price has been moving within a ‘range.’ Since the GDP announcement is a high impact event, we should wait for the news release to clarify the direction of the market.  

GBP/USD | After the announcement:

After the news announcement, we witness a slight amount of volatility in the currency pair where the price initially goes up, and later it closes with a wick on the top. We do not observe the kind of impact that was expected due to the news release may be because the market had already priced in a negative outlook. Since the impact was less, we should look to trade the currency pair based on technical indicators and chart patterns.     

GBP/CAD | Before the announcement:

GBP/CAD | After the announcement:

The above images represent the GBP/CAD currency pair, where we see in the first image that the market seems to be resuming the downtrend after a price retracement to the resistance. Given that the impact of GDP announcement is high, we will look to take a ‘short’ only after confirmation from the market. There is a probability that the market may turn to the upside from this point if the news comes out to be positive for the British Pound.

After the news announcement, we see that the price rises above the moving average, and it closes with some bullishness. Even though the GDP data was fragile, traders bought British Pound and strengthened the currency. One of the reasons could be that the market has factored in the negative expectations, which led to a positive reaction after the news release. One should analyze the pair technically before taking a position in the currency.  

EUR/GBP | Before the announcement:

EUR/GBP | After the announcement:

The above images are of the NZD/GBP currency pair, where we see that the market is in a steady uptrend before the news announcement, signifying the enormous amount of weakness in the British Pound. Ideally, we will be looking to buy the currency pair after a suitable price retracement to the ‘support’ or ‘demand’ area. By the way, we should also not forget that the news release can reverse the trend.

After the news announcement, we see that the market reacts negatively to the news release but positive for the British Pound since it is on the right-hand side of the currency. The volatility slightly increases to the downside, which is evident from bearish ‘news candle.’

That’s about ‘GDP from Manufacturing’ and its influence on the Forex market after its news release. If you have any questions, please let us know in the comments below. Good luck!

Categories
Forex Daily Topic Forex Fundamental Analysis

What Does ‘Gross Fixed Capital Formation’ Economic Indicator Tell About A Nation’s Economy?

Introduction 

Introduction 

Introduction 

Gross Fixed Capital Formation can help us as a leading indicator of economic growth. GFCF figures increase when growth is forecasted, be it for companies, governments, or organizations, etc. Understanding this macroeconomic indicator can help us understand the level of economic activity going on the global scale and forecast the changes in the rate of growth for different economies, as indicated by the Gross Fixed Capital Formation figures.

What is Gross Fixed Capital Formation?

Gross Fixed Capital Formation (GFCF) is a measure of gross net investment into fixed capital goods by companies, governments, and households within the economy for a specific period. It is also called investment in short, or business investment generally.

Capital Goods: These are tangible assets that are used by companies to produce consumer goods and services. In simpler words, it refers to the physical goods required by a company to run its business. For example, a transportation company will have trucks as its capital assets that enable them to run its business and generate revenue. An IT company would have computers that would be its capital assets or goods that help it run its business. Any tangible (or physically quantifiable) good required in assisting the company production is termed as Capital Goods. Hence, Capital Goods can be tools, equipment, raw materials, transportation assets, power supply, etc.

Hence, GFCF is a measure of how much a company invests in acquiring capital assets to maintain or enhance its production capacity and efficiency. Capital Formation is a necessary component for any business or government operation. 

It is called “Gross” because it does not take into account the adjustments to consumption associated with the fixed capital, i.e., depreciation of the fixed capital assets that occur over time due to normal wear and tear. 

GFCF is not a gauge of total investment. It only measures net addition to fixed assets, and all financial assets are excluded along with inventory stocks and other operating costs. Among all these exclusions, the essential exclusion is that of real-estate (land sales and purchases). Real estate transactions only mean that land has been only transferred in ownership from one organization to another and is only included when a new land that did not exist before was created and added into the economy.

How can the Gross Fixed Capital Formation numbers be used for analysis?

As the capital goods wear out over time and a decrease in value, companies that cannot afford new capital goods will observe a reduction in production output. Also, a company that plans on expansion would be required to acquire new capital assets to increase its production capacity.

The difference in the Capital Formation figures for different countries reflects the economic development rate and the catch-up process amongst the compared economies. Higher investment rates into capital goods in less developed economies will lead to improved living standards in the long term on account of accelerated economic growth and improved equipment for the workforce with modern technology. 

GFCF is, in a way, a measure of how much of the revenue is invested back into its growth. The higher the investment into its growth, the more accelerated growth the economy undergoes in the long-run. Of course, when a portion of the revenue goes back into the business itself, it leaves lesser revenue for the shareholders or the business owners in the short run, but it pays off in the long run.

Changes in GFCF is indicative of fluctuations in business activity, business confidence, growth pattern. During economic uncertainty or a recession, business investment is reduced, as decreased revenue is consumed for immediate needs and maintenance operations. On the other side, during times of consistent economic growth and stable market, there is a general increase in GFCF as it is more likely to yield favorable returns in the future. It is less risky to invest in a stable market environment.

The below snapshot of the GFCF for the United States establishes our analysis point above:

Impact on Currency

GFCF is a proportional macroeconomic indicator. It is very suitable for macroeconomic analysis and is more suited to the regional or international level analysis of market conditions. While the increase in the GFCF figures is good for the economy in the long run, it is an especially useful indicator for long term traders and investors. It is not a very reliable measure for short-term currency market volatility assessment.

It is a quarterly report, and hence, other monthly indicators would be more appropriate for traders looking to stay ahead of the fundamental trends. But this GFCF is a leading indicator for companies, or economic growth both and can act as a double-check for our fundamental analysis.

Hence, in the currency markets, the GFCF figures bear low impact due to the frequency of release, and its long-term trend indicative nature makes it a less favorable indicator for day and swing traders.

Economic Reports

The GFCF figures are macroeconomic indicators and are generally available on the official websites of international organizations like the OECD (Organization for Economic Co-operation and Development), World Bank, or IMF (International Monetary Fund). The reports are released quarterly and annually for most countries, as data becomes available from different countries’ respective reporting institutions.

Sources of Gross Fixed Capital Formation

For the United States, the St. Louis FRED maintains the OECD data of GFCF here. 

You can find the GFCF data for all the OECD countries on its official website here.

You can find the GFCF list for various economies in the sources mentioned below. 

GFCF – Trading Economics

GFCF – World Bank

GFCF – United Nations

GFCF – IMF

Impact of the” Gross Fixed Capital Formation” news release on the Forex market

In the above section of the article, we defined the Gross Fixed Capital Formation economic indicator, which estimates the value of acquisitions of new or existing fixed assets by the business sector, governments, and households. When this value is subtracted from the fixed assets, we get the Gross Fixed Capital. Investors around the world consider this indicator to be an essential determinant of the GDP of a country. This value is directly reflected in the GDP as it measures the total assets owned by the government and individuals. 

In today’s article, we will be analyzing the impact of Capital Formation on the value of a currency and watch the change in volatility due to the news announcement. For that purpose, we have collected the previous and latest Capital Formation data of Japan as it is shown in the below image. A higher than expected number is considered to be bullish for the currency while a lower than expected number is considered bearish. Let us find out the reaction of the market to this data.

USD/JPY | Before the announcement:

The first pair we will be reviewing is the USD/JPY currency pair, where the above image shows the characteristics of the price before the news announcement. It is very clear from the chart that the market is in a strong downtrend with no retracement. This means the Japanese Yen is stable, and we might not see price retracement until strength comes back in the U.S. dollar.    

USD/JPY | After the announcement:

After the news announcement, volatility increases to the upside, and the price shows signs of bullishness. Since the Japanese Yen is on the left-hand side in this pair, and increasing price signifies the weakening of the currency. The market reacted negatively to the news release due to the weak numbers. However, we see that weakness does not sustain, and the volatility increases to the downside after a couple of candles.

GBP/JPY | Before the announcement:

GBP/JPY | After the announcement:

The above images are that of the GBP/JPY currency pair, where we see in the first image that the market is in a strong downtrend indicating that the Japanese Yen is stable. As there is a lot of bearishness in the market concerning the British Pound, an ideal trade plan would be to take a ‘short’ trade as the price pulls back to a ‘resistance’ or ‘supply’ area. Until then, we cannot position ourselves in the currency pair. After the news announcement, the price initially moves higher, owing to weak Capital Formations data where there was a reduction in the total assets compared to the previous quarter. Due to the selling pressure witnessed from the top, the weakness in Japanese Yen does sustain, and the ‘news candle’ closes with a wick on the upper side. The market fails to retrace even after the news release, and the price continues to move lower.       

CAD/JPY | Before the announcement:

CAD/JPY | After the announcement:

The above images represent the CAD/JPY currency pair, where the characteristics of the chart appear to be similar to that of the above-discussed pairs. The price is violently moving lower before the news announcement with almost no retracement of any kind. We will be looking to sell the currency pair only if we geta price retracement due to the news release or any other release.

After the news announcement, we see the volatility increases to the upside for some time, and the ‘news candle’ closes with some bullishness. The market goes up as a consequence of the below than expected Capital Formation data where there was a reduction in the Capital Formation during the fourth quarter. Cheers!

Categories
Forex Fundamental Analysis

The Impact Of ‘GDP From Agriculture’ News Announcement On The Forex Price Charts

Introduction

Introduction

Introduction

Economic output from the Agriculture Sector is non-negotiable for the economy. The increasing population must be fed and meet the demands of consumption at all times. Hence, the Central Government is committed to making positive growth in the Agriculture Sector. Agriculture Sector is the primary sector where Government Spending goes.

Since food is an essential commodity, it is an ever-green industry that will never run out of demand. Hence, understanding this sector can help us understand dependent industries’ performance and expenses associated with personal consumption.

What is GDP from Agriculture?

Gross Domestic Product 

GDP is the measure of a country’s total economic output. It is the total monetary value of all the goods and services produced within the country regardless of citizenship (resident or foreign national).

It is the market value of all the finished goods and services within a nation’s geographical borders for a given period. The period is generally a quarter (3 months) or a year.

Agriculture Sector

Also, it accounts for all the activities associated with crop production called the Primary Sector of an economy. From the point of cultivation to end-marketing of the food products all are accounted under the Agriculture Sector. It primarily includes farming, fishing, and forestry.

The quick increase in the world population has put pressure on the Agriculture sector to bring innovations through science and technology to increase crop yield. Agriculture Sector is the primary source of food for a country’s population.

The Agriculture Sector goes beyond farm business and includes farm-related industries like Food Service and Food Manufacturing (Packaged Foods, Processed Foods).

How can the GDP from Agriculture numbers be used for analysis?

The agriculture sector contributes about 6.4% of the World GDP. The most significant contributor to this being China, followed by India. China accounts for 19.49%, and India accounts for 7.39% of total agricultural output. The United States is in third place. 

It is necessary to understand the economic output of Agriculture is a function of population, as China, India, and the USA are ranked in population terms in the same order.

The three sectors of the economy, namely, primary Sector, secondary (Industry) Sector, and tertiary (Service) sector, contribute to the overall GDP. It is common for developed nations to have a high contribution to GDP from the Service Sector. Developing economies like China, Japan would have higher contributions from the Industry Sector. The underdeveloped economies would have Agriculture or Primary Sector as a leading contributor to GDP.

In the United States, the entire Agriculture Sector contributes about 5.4% of the GDP. The farms have only contributed 1% of GDP, and the rest is contributed to by the dependent industries that rely on agricultural input to produce goods. The Food Service, Textiles, Beverages, Processed Foods, Tobacco products, etc. contribute the remaining 4% to the GDP.

11% of the total U.S. employment is accounted for by the Agriculture Sector, which is about 22 million jobs in 2018. Food accounts for 13% expenditure of an average American Household. 

It is essential to understand that food is an essential requirement for conducting our livelihood. Hence, Government Spending first prioritizes the Agriculture Sector and releases benefit programs to assist the sector and maintain and grow its economic output. The society and Government will quickly collapse if the Agriculture Sector slows down, and that is why it is called the “Primary Sector.”

The Government Outlays on Food Programs and Nutrition Assistance exceeds that of any other federal program. Improper management and assistance to the Agriculture Sector can lead to price hikes in the food industry. It would trigger a negative response from the public that could cost them in the next elections. Hence, the Government is committed to assisting the Agriculture Sector at all times, good or bad.

Impact on Currency

GDP from Agriculture in itself is not a high impact indicator, as the broader measures like Real GDP and GDP Growth Rates are more important for the Currency Markets. 

GDP from Agriculture does not paint the full picture of the economy, but can be an essential tool for the Central Authorities to keep track of Agriculture Sector performance. Businesses dependent on Agriculture input may use this data to understand potential business opportunities amongst different countries. Still, for the International Currency Markets, it does not serve as a useful indicator.

It is a proportional and lagging indicator. Higher GDP from Agriculture is good for the economy and its currency, and vice-versa.

Economic Reports

For the United States, the Bureau of Economic Analysis releases quarterly GDP figures on its official website every quarter. The release schedule is already mentioned on the website and is generally released one month after the quarter ends.

In the full report, we can extract the GDP from Agriculture figures. We can also go through GDP by Industry to get the Construction Industry performance in the report. Major international organizations like the World Bank, CIA World Factbook, etc. actively maintain GDP by Sector figures of most countries on their official website.

Sources of GDP from Agriculture

For the United States, the BEA reports are available in the sources mentioned below. 

GDP -BEA | GDP by Industry – BEA | FARM – GDP

The St. Louis FRED keeps track of all the GDP and its related components in one place on its official website here. World Bank also maintains the Agriculture Sector as a percentage of GDP on its official website. We can find GDP sector composition for different countries here. We can find the consolidated list of Agriculture – GDP figures for most countries here.

Impact of the “GDP from Agriculture” news release on the Forex market

The agricultural sector plays an essential role in the process of economic development of a country. It contributes to the economic prosperity of advanced countries, and its role in the economic development of underdeveloped countries is of vital importance. In other words, countries where per capita real income is low, the emphasis is laid on agricultural and other primary industries.

History tells us that agricultural prosperity contributed considerably to the national income and the GDP. When we are talking about the impact of this contribution on the currency, we will have to say that it is least and not of much importance to investors. They look at broader data, which is the GDP, and make decisions based on the reading. 

In today’s example, we will examine the impact of GDP on different currency pairs and observe the volatility due to the news announcement. The below image shows the latest quarter GDP data of Australia, where it was more or less the same as in the quarter. Let us find out the reaction of the market to this news release.

AUD/USD | Before the announcement:

We will first look at the AUD/USD currency pair to observe the impact of GDP on the Australian dollar. In the above image, we see that the market is in an uptrend, and recently the price seems to have retraced the up move. This is an ideal chart pattern for joining the trend, but since a significant news announcement is due, we need to wait to understand the impact it creates on the chart.

AUD/USD | After the announcement:

 

After the news announcement, the market moves higher, where the price rises sharply above the moving average. The bullish ‘news candle’ is a consequence of better than expected GDP data, which was higher by 0.2%. Although it was marginally less than the previous quarter, it turned out to be positive for the currency. This is a confirmation sign of trend continuation where one can expect a new ‘higher high.’      

AUD/JPY | Before the announcement:

AUD/JPY | After the announcement:

The above images represent the AUD/JPY currency pair, where the market moves within a ‘range’ before the news announcement. We also notice an initial reaction from the ‘support’ where the price has moved higher from the ‘low.’ Since economists have forecasted a lower GDP estimate in the fourth quarter, it is not recommended to take a ‘long’ position before the news release.

After the news announcement, we see that the price quickly moves up, and market surges to the upside. As the GDP data was beyond expectations, traders bought Australian dollars and strengthened the currency. Therefore, the news release has a hugely positive impact on the currency pair. In this pair, once needs to be cautious before taking buy trade as the price is at the top of the ‘range.’ 

GBP/AUD | Before the announcement:

GBP/AUD | After the announcement:

The above images are that of GBP/AUD currency pair, where we see that before the news announcement, the market has retraced the downtrend by more than half, indicating that the Australian dollar has gained strength newly. After the occurrence of trend continuation candlestick patterns, it could result in a flawless sell trade. However, there is also a probability that the news release could change the dynamics of the chart.

After the news announcement, market crashes and the price significantly moves lower. As the GDP data was positive for the economy, it leads to bullishness in the Australian dollar resulting in the price fall. One could take a risk-free ‘short’ position at this point, expecting the market to move much lower.

That’s about ‘GDP from Agriculture’ and its impact on the Forex market after its news release. If you have any questions, please let us know in the comments below. Good luck!

Categories
Forex Fundamental Analysis

Knowing The Significance Of ‘Gross National Product’ Macro Economic Indicator

Introduction

Introduction

Introduction

The two most important metrics of economic growth are the Gross Domestic Product (GDP) and Gross National Product (GNP). Up until 1991 the United States primarily measured its economic growth in terms of the Gross National Product and switched to Gross Domestic Product to make it easy for comparison with other countries, since many other countries were measured through the same.

But in practice, it is always necessary to assess a country’s growth in both the GDP and GNP terms to better understand the overall economic output. Hence, GNP also forms an excellent fundamental indicator of economic growth, almost as important as the GDP.

What is the Gross National Product?

Gross National Product, also called GNP, is the total monetary value of all goods and services produced by the country’s residents and businesses, irrespective of the production location. It means a business earning revenue in a foreign land is included in the domestic country’s GNP. 

Gross National Product defines the economic output based on citizenship, or that country’s native people. Hence, a citizen having an extra income source in any monetary form overseas is factored into the GNP. GNP is higher for countries that have many of their businesses established in a foreign land. Accordingly, any output generated by foreign residents within the country is excluded out from the GNP.

Gross Domestic Product (GDP) v/s Gross National Product (GNP)

It is essential to understand the difference between GDP and GNP during our analysis. GDP and GNP both measure economic output for a given period but differ in how they define the economy’s scope.

Gross Domestic Product is the total value of all goods and services produced by the nation. Here, GDP limits its assessment to the nation’s geographical borders and does not take into account the overseas economic activities of its nationals.

GNP does not restrict itself to the geography of the nation but limits itself in terms of citizenship. GDP does not reflect determinant in nationality. As long as the finished goods and services are within the country’s borders, it is included. On the other hand, GNP will not include any of the domestic borders’ revenue if it is from a foreigner.

The formula for GNP is given as:

GNP = Consumption + Investment + Government + Net Exports + Net Income

In the above equation,

  • Net Exports stands for the difference between the revenue generated from Exports and revenue going out for imports.
  • Net Income stands for the income of domestic residents from overseas or foreign investments minus net income of foreign residents from domestic investments.

The GNP is very indicative of the financial well-being of a country’s nationals and its country-based multinational corporations. From a relative perspective, it does not tell us much about the country’s health, as the GDP does. GNP is a more realistic measure of a country’s Income than its production.

To clarify the role of each metric better, consider the below examples:

Microsoft is the United States-based multinational company. It has a branch in India. The revenue generated from the Microsoft-India branch will be included in the GNP of the United States, but not in India’s GNP. On the other hand, Microsoft-India’s revenue is not included in the GDP of the United States but is included in India’s GDP.

How can the Gross National Product numbers be used for analysis?

It is essential to understand that GNP does not reflect the domestic (geographical basis) conditions well. If a natural disaster were to occur within the United States, then the GNP would not be as affected as the GDP, as the foreign revenue by its residents would not depend on the domestic situations. Hence, GDP is a more accurate measure of economic activity. On the other hand, its citizens’ financial well-being is more accurately measured through GNP than GDP.

GDP is a measure of economic health, while GNP is a measure of a nation’s Real Income. Both are different but related. A country like China, where many companies from other countries have their business has higher GDP than GNP, on the other hand, the United States, which has many of its firms’ production houses outside its land, has higher GNP than its GDP. Significant differences between the GDP and GNP values can be accounted to the openness of the countries to International Trade and Global Markets.

Impact on Currency

The Gross National Product is itself susceptible to the currency and exchange rate. When the currency falls, the Gross National Product increases due to the strengthening of other countries’ currencies where the domestic firms are doing business. The health of the economy is not gauged by the GNP accurately. Currency movements are not as driven by the GNP as they are by the GDP. Hence, it is more critical as a financial indicator than as an economic indicator in our analysis.

It is a lagging and proportional indicator, and hence the impact of the GNP is not as pronounced as the GDP, as all other countries use GDP as their primary measure of economic health. Investors, economists, policymakers, and traders all use GDP primarily over GNP to assess the economy’s current health and direction. Hence, it is a low impact indicator of our fundamental currency analysis.

Economic Reports

For the U.S., the Bureau of Economic Analysis releases quarterly reports of the Gross Domestic Product, which contains the GNP information. The St. Louis FRED consolidates the same data and maintains it on its website.

Sources of Gross National Product

The St. Louis FRED website holds the GNP data that is very easy to access and analyze, and the link is here.

GNP data for various countries can be obtained here

Impact of the “Gross National Product” news release on the Forex market

In the above section of the article, we defined the Gross National Product (GNP) and described the analysis method. We will extend our discussion and understand the impact of the Gross National Product news announcement on the value of a currency. The GNP gives an estimate of the total value of all the final products and services rolled out in a given period utilizing production owned by a country’s residents.

The GNP includes personal consumption expenditures, domestic investment, government expenditure, net exports, and Income from foreign investments. A small distinction between the GNP and GDP is that GDP measures the value of goods and services produced within the country’s borders. In contrast, GNP calculates the value of goods and services produced by the country’s citizens only both domestically and abroad. However, GNP is also one of the most commonly used indicators for measuring the country’s economy.    

In today’s example, we will analyze the impact of the United Kingdom’s GNP on the value of the Great British Pound. The below image shows the GNP in the U.K. during the fourth quarter, which was higher than the third quarter. Let us find out the impact.  

GBP/USD | Before the announcement:

We will begin our discussion with the GBP/USD currency pair to observe the change in volatility after the news announcement. The earlier image shows the state of the chart before the news announcement, where we understand the market is in a strong downtrend, and recently the price seems to be moving upwards. This could be a possible price retracement that could lead to the continuation of the trend and an opportunity. 

GBP/USD | After the announcement:

After the news announcement, the market gets very bullish, and we see a sharp rise in the price. The positive reaction from the market is a result of the upbeat GNP data, which was better than expectations. This brought cheer among the market participants who took the price higher by strengthening the British Pound. We should not take any ‘short’ position until we notice trend continuation patterns in the market.

GBP/CAD| Before the announcement:

GBP/CAD| After the announcement:

The above images represent the GBP/CAD currency pair, where in the first image, we see that the market appears to be moving within a ‘range’ with the price currently at the bottom of the ‘range.’ Before the news announcement, the currency pair is very volatile, suggesting that there is a lot of trading action in this pair. In such high volatile environment, we recommend waiting for the news release and then taking a suitable position in the pair.

After the news announcement, the price suddenly moves higher and volatility expands on the upside. The bullishness in the British Pound is a consequence of the optimistic GNP data, which showed a growth in the economy during the fourth quarter. Since the price is at the bottom of the ‘range,’ one can take ‘long’ in this currency pair with a target until the ‘resistance.’

EUR/GBP | Before the announcement:

EUR/GBP | After the announcement:

The above images are that of the EUR/GBP currency pair, where we see that the market is in a strong uptrend before the news announcement, signifying the enormous amount of strength in the British Pound, since the currency is on the left-hand side of the pair. Depending on the outcome of the news and change in volatility, we will analyze the currency pair accordingly.

After the news announcement, market crashes, so much that the price goes below the moving average. The ‘news candle’ closes, forming a reversal candlestick pattern that could lead to the beginning of a downtrend. The volatility increases to the downside as the GNP data was reasonably good.

We hope you understood what ‘Gross National Product’ is and its impact on the Forex price charts. Cheers!

Categories
Forex Daily Topic Forex Fundamental Analysis

Understanding ‘Retail Sales MoM’ Fundamental Forex Driver

Introduction

Introduction

Introduction

The Month-over-Month Retail Sales figures are one of the closely watched statistics in the financial markets and have a lot of volatility in the markets around these figures. An increase in sales is one of the earliest signs of growth for businesses that can imply a multitude of things for the economy. It is a closely watched high impact leading indicator. Hence, an understanding and analysis of Retail Sales are paramount for our fundamental analysis.

What is Retail Sales Month-over-Month?

Retail Sales

In the purest sense, it is just the dollar amount of purchase of goods and services made by end-consumers for a given period. Here, the period is MoM, which stands for Month-over-Month. It is the sale of durable and non-durable goods at the retail outlets to consumers.

It can also be defined as the purchase of finished goods and services by consumers and businesses. The goods and services have reached the end of the supply chain. The chain generally starts with the manufacturer or provider and ens up at the retailer where the general population or other businesses consume it.

The Retail Sales figures are often presented in two ways: including and excluding auto and gas sales. As the Auto (vehicle purchase) figures and Oil prices fluctuate frequently, the exclusion helps to identify the trends better once the volatile components are removed. The excluded version is called the Core Retail Sales report.

Retail Sales statistic covers the in-store (retail) sales, catalog sales, and out-of-store sales of durable (goods that last more than three years) and non-durable goods (that have short-life span). The major categories include:

Retail Stores have the following categories:

How can the Retail Sales MoM numbers be used for analysis?

The Retail Sales figures provide us a reliable measure of CURRENT economic activity. It is essential to an objective assessment of the need for and impact of a broad range of policy decisions. Hence, the policymakers use this statistic to keep a pulse-check on the economy’s health.

The Retail Sales figures are significant statistics for many as the Consumer Spending makes up 66% of the United States Gross Domestic Product. The remainder is from Government Spending, Business Spending, and Net Exports. It is also essential as it represents the end of the supply chain figures. All the statistics that precede the Retail Sales figures like Inventory Changes or Manufacturing Production figures all lead up to the Retail Sales, which confirms and triggers the next wave in the trend change in the other indicators, in a feedback loop.

In other terms, once Retail Sales figures improve, businesses see an increase in their revenue and correspondingly demand their products, which leads to an increase in their Manufacturing Production figures, and that would later translate to Change in Inventory statistics. So, we see how the Retail-Sales figure operates amongst the economic indicators in a feedback loop cyclical pattern.

Once Retail Sales figures improve, businesses see profits that encourage expansionary plans, that would increase investment in their business, employment, or even wage growth. It is necessary to understand, Sales improve business, once business improves, wage growth or employment increase is a possibility. Hence, the Retail Sales figure is an essential leading macroeconomic indicator for our fundamental analysis.

The US Bureau of Economic Analysis releases quarterly GDP statistics. If the Month-over-Month Retail Sales figures have been influential, then there is a good chance that the GDP print will be higher. The only downside to the Retail Sales figures that we need to be careful of is that it does not account for inflation, and the increase in the Retail Sales figures could also be a by-product of inflation.

To be noted: The Retail Sales figures are seasonal. It generally tends to increase around the holiday season. Hence, care must be taken during analysis that the decline in stats is due to a business slowdown or seasonal effects. In this case, the Retail Sales figures Year-over-Year is also another parameter that we can use to compare the current conditions with the preceding year to understand the growth trend better, as the GDP is also compared with the last year.

Although data is available in the seasonally adjusted format, to account for the seasonal patterns but it does not adjust for inflation. Hence, it is essential for users of the data to check for the seasonally adjusted figures.

Impact on Currency

Retail Sales is a leading macroeconomic high impact indicator. An increase in Retail Sales is the first sign of growth for businesses in monetary terms. Due to a multitude of economic factors that are affected by the Retail Sales figures, the volatility around the release of these figures is generally high.

It is a proportional indicator, meaning that a consistent or significant increase in the Retail Sales figures translates to increased profits for the businesses, indicates reasonable Consumer Confidence and Consumer Spending, and in turn it will also translate to increased employment, and wage growth. It is a cyclical effect that further promotes spending, and business booms and the economy prospers. It translates to higher GDP prints, which is appreciating for the currency.

Low Retail Sales figures are indicative of a slowdown of business, bearish Consumer Sentiment, where consumers are saving more and spending less. It stagnates the businesses, in the worst case, could lead to lay-offs, and ultimately recession. It will translate to lower GDP prints, which is depreciating for the currency.

Economic Reports

In the United States, the Census Bureau publishes monthly reports of the Retail Sales figures on its official website under the section “Monthly Retail Trade.” The report is released at 8:30 AM about two weeks after the reference month (13-15th day of the month). The schedule for the year is already posted on the website for the user’s convenience. The report details the total sales, percentage changes, and also YoY (Year-over-Year) changes.

Sources of Retail Sales MoM

  • The Month-over-Month Retail Sales statistics can be found here
  • Both advance estimates and Retail Sales figures are available in aggregated format in St. Louis FRED website here
  • We can find Retail Sales monthly figures for various countries here

Impact of the ‘Retail Sales – MoM’ news release on the Forex market

In the previous section of the article, we understood the Retail Sales economic indicator and its consequences on the economy. We will take this discussion forward in identifying the impact of Retail Sales on the value of the currency. Retail Sales is an important economic indicator because consumer spending drives much of our country.

When consumers spend more, the economy tends to hum along, whereas if consumers are uncertain about their financial future, they hold off their purchases that lead to the slow down of the economy. The release of Retail Sales numbers is said to have a large impact on the currency, as shown in the below image.

In this section, let’s analyze the Retail Sales data of the Unites States that was gathered in the month of March. The below image shows that there was a big drop in the Retail Sales compared to the previous month indicating a major disruption in the economy. Let’s see how the market reacts to this data.

USD/JPY | Before the announcement

We will start with the USD/JPY currency pair to witness the impact of the news announcement. The above image shows the state of the chart before the news announcement, where we see that the overall trend of the market is up, and currently, the price is on the verge of continuation of the trend. Depending on the impact of the news, we will position ourselves in the currency pair.

USD/JPY |  After the announcement

After the news announcement, there is a surge in the price, and volatility jumps to the upside. Even though the Retail Sales were very poor in the month, the market reaction was opposite to what was expected. After the news release, traders bought US dollars and strengthened the currency much more. The bullish ‘news candle’ shows the impact of the news on the currency. Since the market reacted very positively to the data, we should take a ‘buy’ trade only after a price retracement.

EUR/USD | Before the announcement

EUR/USD | After the announcement

The above images represent the EUR/USD currency pair, where we see that the market is in a significant downtrend indicating the great amount of strength in the US dollar. The price is currently is at its lowest point, which means we need a pullback in the market to join the trend. If the news announcement results in a retracement of the price, this could be taken as an opportunity for taking a ‘short’ trade.

After the news announcement, the market moves lower, and volatility increases to the downside. Although the Retail Sales data was weak, it did not result in weakening of the currency, but rather the US dollar strengthened. This means the news data was not bad enough to turn the markets to the upside. We will still be looking to enter the market only after a price retracement to a key technical level.

USD/CAD | Before the announcement

USD/CAD | After the announcement

The above price charts are of the USD/CAD currency pair, where we see that the market is aggressively moving up with almost no price retracement. This indicates the US Dollar is very strong, or the Canadian dollar is weak. In any case, we will join the trend only if the price retraces to a ‘support’ or ‘demand’ area.

After the news announcement, volatility expands on the upside, and the price closes, forming a bullish ‘news candle.’ Here too, the Retail Sales data has an opposite impact on the currency as the market reacts positively to the data even though the Retail Sales were largely lower in this quarter. It is advised not to chase the market after the news release since it against the rules of risk management.

We hope you understood Retail Sales MoM fundamental Forex driver and the relative impact of its news announcement on the Forex price charts. Cheers!

Categories
Forex Fundamental Analysis

The Impact Of ‘GDP Constant Prices’ News Announcement On The Forex Market

Introduction

Introduction

Introduction

GDP Constant Prices is the primary indicator used by Government Agencies, Economists, Investors, Traders for year-to-year analysis of economic progress. GDP Constant Prices is the real scorecard for a country’s progress. 

It is a national level indicator and is closely watched by the market. The most important fundamental indicator Real GDP Growth Rate is derived from GDP Constant Prices. Hence, overall it is very critical for us to understand GDP Constant Prices and its nuances for correct interpretation.

What is GDP Constant Prices Indicator?

Gross Domestic Product (GDP) 

GDP is the measure of a country’s total economic output. It is the total monetary value of all the goods and services produced within the country regardless of citizenship (resident or foreign national).

Nominal GDP is also called Current Dollar GDP. It is the market value of all the finished goods and services within a nation’s geographical borders for a given period. The period is generally a quarter (3 months) or a year.

The commonly used term “size of the economy” refers to this economic indicator. USA has the world’s biggest economy, which means it has the highest nominal GDP or highest economic output.

GDP Constant Prices

It is the inflation-adjusted GDP value. It is the total monetary value of all goods and services produced, excluding the effects of inflation in prices. It is also called Real GDP, Constant Dollar GDP, Inflation-Corrected GDP, or only Constant Prices. The raw value of the economic output is called the Nominal GDP, whereas Real GDP accounts for inflation effects and is a more accurate measure of growth.

GDP Constant Prices or Real GDP is obtained by dividing the Nominal GDP with a GDP deflator. The GDP deflator is an inflation measurement from a fixed base year. Real GDP is inflation-adjusted to compare on an as-if basis with the base year GDP. It means GDPs are compared as if the prices remained the same as the base year and see if the GDP has improved due to increased economic activity.

Calculating GDP Deflator is a bit tedious process, that is best left to the experts like the Bureau of Economic Analysis. The Real GDP is made up of the following components and is affected by them:

A) Consumer Spending: It represents spending associated with the end-consumers or the general population. It makes up about 69% of the total GDP in the United States.

B) Business Investment: Economic Output of the Business Sector makes up 18% of the total GDP in the United States. 

C) Government Spending: It involves all the expenditures incurred by the Government to maintain and stimulate economic growth and run its operations. It accounts for 17% of the total economic output for the United States.

D) Net Exports: It is the difference between the total exports and imports. The United States has a -5% Net Exports of the total GDP, meaning it is a net importer.

How can the GDP Constant Prices numbers be used for analysis?

Inflation is the underlying fire that drives capitalist economies. In general, a low inflation rate of 2-3 % a year is good for the economy. A stable inflation rate of 2-3% will stimulate economic growth to achieve a 3-5% annual GDP growth for developed economies.

As prices increase year-over-year, the economic output will also seem inflated even though it is the same as the previous year. Hence, Real GDP is a more accurate measure of scoring the economic output of a country.

Nominal GDP is useful when comparing economic output within a year among different quarters, while it is more sensible to use Real GDP for year-over-year comparison. Policymakers use both Nominal and Constant Prices GDP for economic assessment and implementing policy reforms as deemed necessary.

When inflation is positive (which is the cast most of the time), the GDP Constant Prices will be lesser than Nominal GDP. When there is deflation in the economy (during slowdowns or recessions), the GDP Constant Prices may be higher than the nominal GDP value.

GDP Constant Prices is better for assessing long-term growth, or knowing whether the economy has grown over the previous year or not. With Nominal GDP, it is difficult to tell whether an increase in the figures is due to an expanding economy or just a factor of inflating prices of goods and services.

Impact on Currency

GDP data is essential for almost everyone. Economists use for macroeconomic analysis and Central Bank planning. Policymakers are committed to maintaining a steady Real GDP Growth. Hence, Central Authorities also watch it tightly.

Investors make decisions based on GDP data. Businesses hold their expansion plans based on economic stability and market stability, as indicated by GDP. Traders heavily trade once GDP estimates and actual figures are published.

Hence, overall it is a high impact indicator. It is a proportional macroeconomic indicator, meaning higher GDP Constant Prices are suitable for the overall economy and currency. The opposite also holds. 

Lower Real GDP prints indicate weakening economy, businesses hold hiring or investment plans, spending is reduced, and in extreme cases, it can lead to a recession. All of this leads to currency depreciation.

Economic Reports

In the United States, the Bureau of Economic Analysis publishes quarterly and annual Nominal and Real GDP reports on its official website. It is released almost 30 days after a quarter ends. The schedule of release is available on the website. The headline number is the GDP Constant Prices figure, GDP Growth Rate figure.

Major international organizations like the World Bank, International Monetary Fund, OECD, etc. actively maintain track of most countries’ GDP figures on their official website.

Sources of GDP Constant Prices

For the United States, the BEA reports are available here 

The St. Louis FRED keeps track of all the GDP and its related components in one place on its official website here:

GDP & GNP – FRED

Real GDP – FRED

The World Bank GDP Constant Prices with base year as 2010 in US Dollar terms are available here:

GDP Constant Prices (2010 US$) – World Bank

OECD – GDP Constant Prices and other variants

We can find a consolidated list of most countries’ GDP Constant Prices here.

Impact of the ”GDP Constant Prices” news release on the Forex market

GDP Constant Prices, also known as real GDP, is a measure of GDP that has been adjusted for the price level. Current prices measure the GDP using the actual prices we notice in the economy. Current prices make no adjustments for inflation. However, constant prices adjust to the effects of inflation. Using persistent prices enables us to measure the actual change in the outcome and not just rise due to inflation’s effects. The real GDP is calculated by dividing nominal GDP over a GDP deflator. When nominal is higher than real, inflation is occurring, and when real is higher than nominal, deflation is occurring. Fundamentally speaking, nominal GDP matters to investors when taking a position in currency or the stock market.      In today’s lesson, we will analyze the impact of GDP on various currency pairs by observing the change in volatility before and after the news announcement. For that purpose, we have collected the GDP data of Canada, where the below image shows the month-on-month GDP data released recently. Let us find out the market’s reaction to this data.

USD/CAD | Before the announcement:

We will start with the USD/CAD currency pair to observe the impact of GDP on the Canadian dollar. The above image shows the state of the chart before the news announcement, where we see that the market is in a downtrend, and recently the price has reversed to the upside. Either could result in a reversal of the trend or a continuation of the current trend. The impact of GDP will decide the direction of the market and so our position. 

USD/CAD | After the announcement

After the news announcement, the price drops below the moving average, and the market falls considerably owing to the positive GDP data. Even though there was a decrease in the GDP, it was only a tad bit lower and much around the market expectations. Hence, it proved to be bullish for the Canadian dollar, and the market goes lower. One should confirm the continuation of the trend using technical indicators before taking a ‘short’ trade.

GBP/CAD | Before the announcement:

GBP/CAD | After the announcement:

The above images represent the GBP/CAD currency pair, where we see in the first image that the market has broken out from a downward ‘channel’ and is moving higher and higher from then on. It very likely that the up move will continue further, which makes us wait for a price retracement to take a buy trade. Based on the volatility caused by the news release, we will have a clear idea about the direction of the market.

After the news announcement, volatility slightly increases to the downside, and the market falls by a few pips. The bearish ‘news candle’ is a consequence of the positive GDP data, mostly on expected lines. We need to note that the news release did not change the overall trend of the market, where the uptrend is still intact.    

CAD/CHF | Before the announcement:

CAD/CHF | After the announcement:

The above images are that of CAD/CHF currency pair, where we see that before the news announcement, the market has reversed from an uptrend to a downtrend and is currently on the verge of continuing the downward move. Since the GDP has a high impact on the currency (indicated by the red box), it is advised not to take any position before the news release.

After the news announcement, the price moves higher by a small amount and manages to close on a bullish mark. The GDP data was close to what was expected, it leads to bullishness within a currency, and hence the Canadian dollar gains strength for a short while.

We hope you understood the concept of ‘GDP Constant Prices’ and how the Forex price charts get affected after its news release. All the best. Cheers!

Categories
Forex Fundamental Analysis

Everything About ‘Changes in Inventories’ Macro Economic Indicator

Introduction

Introduction

Introduction

Changes in Inventories are one of the primary business leading economic indicators that can give us insight into economic prospects for the coming months. Understanding of Inventory Changes and Sales can help us forecast economic growth, which is our primary objective through Fundamental Analysis.

What are Changes in Inventories?

Inventory: It is the stock of goods that retailers, wholesalers, and manufacturers hold with them. Inventory is measured in their appropriate dollar values. Businesses often keep stock of their finished goods when they predict an increase in sales in the coming months so that they are ready to meet the increased demand and can lock in profits.

The Monthly Retail Trade Survey, the Manufacturer’s Shipments, Inventories, and Orders Survey, and the Monthly Wholesale Trade Survey are the primary sources from which Business Inventory is compiled.

At the level of Retail Merchandise, Inventories are measured at cost level at the retailers as per the FIFO (first-in, first-out) method of valuation. At the Wholesalers who distribute goods to retailers, the inventories’ values are added to the business inventories every month. At the manufacturer level, the inventories, whether in raw material, work-in-process or finished, are valued at cost, primarily by the FIFO method of valuation.

How can the Changes in Inventories numbers be used for analysis?

Business owners and retailers have a certain kind of acquaintance with market trends, and due to their years of experience running their business, they know the subtle trends of increase in sales, demand, etc. Hence, Businesses stocking up on inventories is not a joke, as it costs them real money for producing as well as holding the stocks. If they did not forecast an increase, they would not have increased inventories in the first place.

Seasonally Adjusted Inventory Changes can thus act as a leading indicator for the increase in consumer consumption, which is good for business, and the economy. On the other hand, increased inventory figures could also indicate that the sales have fallen, and thus creating an inventory stockpile, which indicates decreased consumer spending, which signals terrible times for the economy are ahead.

Hence, it is often essential to combine Inventory figures with Retail Sales figures to correctly gauge the economic trend. Retail Sales figures indicate actual consumption of goods by consumers and hence is the more accurate figure when compared to Changes in Inventories.

An increase in Manufacturing Production is followed by an increase in Inventory. It is then followed by an increase in Retail Sales. The first two stages, i.e., increase in Manufacturing Production and Inventory Changes, are still forecast, i.e., the rolled dice can turn either way. But Retail Sales is a guaranteed economic indicator, as money comes back into the pockets of retailers and manufacturers.

Hence, the more commonly watched statistic out of the business inventories figures is the Inventory-to Sales Ratio. It is the ratio of Inventory value to Retail Sales figures. It gives us an indication, by how many times the inventories outpace the Retail Sales. The lesser the number, the better.

For example, an Inventory-to-Sales Ratio of 2.5 indicates that there is enough inventory stock to supply 2.5 months of Retail Sales. When the ratio increases, it is an indication that the inventories are increasing in contrast to the sales, which indicates the economy is slowing down. The upcoming Production activity would be reduced until the current Inventory stock starts to deplete off. On the other hand, when the ratio is falling, it is indicative of manufacturers to increase production activity to the oncoming increase in demand.

Inventories are primarily concerned with the Manufacturing Sector, which accounts for 20% of GDP in the United States. It drives a significant portion nonetheless.  An increase in manufacturing activity as a consequence of decreasing ratio figures can add to employment, or even wage growth, which is good for the economy. Increased employment further stimulates Consumer Spending as more people have the cash to spend, which cyclically boosts the economy.

Impact on Currency

Changes in Inventory figures can be leading indicators. If correctly put, way too leading. It means that the changes in inventories are figures at the start of the manufacturing process-consumer purchase lifecycle. The indicator has two-way conclusions to be drawn, as discussed above. Hence, the traders who are not well versed with the industry should use this indicator with caution, as an increase in Inventory can mean slowdown or expected growth both.

Only investors or traders who have a historical perspective of the figures can use this indicator effectively to predict growth months ahead of the market. In general, the market follows Retail Sales and Ratio as reliable metrics, and hence there are significant moves in the market around these figures. Hence, although a leading indicator of economic growth, it is advised to combine it with Retail Sales figures to affirm your assessment of economic activity.

Economic Reports

In the United States, the Bureau of Economic Analysis releases quarterly reports of the GDP, wherein the section of “Key Sources and Assumptions” contains the details of “Changes in Private Inventories.” The BEA publishes quarterly reports on its official website after every quarter. The release dates are also posted on its official website.

The United States Census Bureau maintains the Manufacturing & Trade Inventories on its official website.

Sources of Changes in Inventories

BEA – Gross Domestic Product

The St. Louis FRED website makes the search and analysis of Inventories data from BEA a lot easier. The links are given below

Change in Private Real Inventories – FRED

Change in Private Inventories – FRED

Census Bureau – Inventory

Census Bureau – Shipment, Inventory, and Orders

Inventory data for various countries are available in statistical and list format here.

Impact of the ‘Change in Inventory’ news release on the Forex market

The Change in Inventory measures the value of change in producer-owned inventories between the beginning and the end of the calendar year. For businesses, the build-up of inventories can be a threat. The problem is that these inventories will probably be cut in the future, depressing demand for goods and leading to production cutbacks. In hard times, managers work hard to cut back on inventories. All companies need to be prepared for business cycles, which is driven by inventory swings. Companies must try to reduce their inventories by reevaluating their practices.

In today’s lesson, we will analyze the change in inventory levels of many agricultural commodities, particularly grains, that are produced in a given year and stored or held until they are marketed. The annual value of inventory change represents the gross value of agricultural production. The below image shows the net Change in Inventory from 2017 to 2018 in the agricultural sector of Canada. This value has been estimated for durum wheat, oats, rye, corn, soybean, potatoes, tobacco, and many other commodities. Let us find out how the market responds to this data.

USD/CAD | Before the announcement:

Let us start with the USD/CAD currency pair in order to observe the impact of the Change Inventory on the Canadian dollar. In the above image, we see that the market is in moving within a ‘range,’ and currently, the price is at the top of the ‘range.’ Since the impact of this news event is less on a currency, aggressive traders can take ‘short’ positions with a large stop loss.

USD/CAD | After the announcement:

After the news announcement, the market moves lower, and the price reaches to the moving average. The bearish ‘news candle’ indicates that the Change in Inventory data was positive for the Canadian economy, which resulted in the strengthening of the currency. The close of ‘news candle’ is a confirmation sign of a down move. Thus, one could take a risk-free ‘short’ position soon after the news release.

CAD/JPY | Before the announcement:

CAD/JPY | After the announcement:

The above images represent the CAD/JPY currency pair, where we see that before the news announcement, the market seems to be moving in a ‘channel’ with the price presently is at the bottom of the ‘channel.’ Since the Canadian dollar is on the left-hand side of the currency pair, an upward channel signifies strength in the currency. Therefore, traders who trade channel can buy the currency pair with a stop loss below an appropriate technical level.

After the news announcement, the price moves higher, and volatility expands on the upside. The ‘news candle’ closes with a fair amount of bullishness as a result of better than expected Change in Inventory data. At this point, once could confidently take a ‘long’ position with a target up to the higher end of the ‘channel.’

GBP/CAD | Before the announcement:

GBP/CAD | After the announcement:

The above images are that of GBP/CAD currency pair, where we can see in the first image that the market is in a strong uptrend, which signifies the great amount of weakness in the Canadian dollar. Technically, we should be looking to buy the currency pair after a price retracement to a ‘support’ or ‘demand’ area. Until then, we will be monitoring the impact of the news release.

After the news announcement, volatility slightly increases to the downside, and we witness a fall in the price. However, the Change in Inventory does not have a major on the currency pair where the Canadian dollar strengthens only momentarily. One needs to still wait for a pullback in order to join the uptrend.

That’s about the ‘Change in Inventory’ and the relative impact of its news announcement on the Forex price charts. Let us know if you have doubts regarding the article in the comments below. Cheers!

Categories
Forex Daily Topic Forex Fundamental Analysis

Heard Of Germany’s ‘ZEW Economic Sentiment Index’?

Introduction

Introduction

Introduction

ZEW Economic Sentiment Index is a leading economic indicator that specially focuses on Germany and a few other countries. The correlation of the index with the growth is healthy. Hence, like any other business sentiment index, it is handy for our fundamental analysis to predict near-term economic activity, and identify potential opportunities.

What is the ZEW Economic Sentiment Index?

The ZEW Economic Sentiment Index is a sentiment index compiled out of the ZEW Financial Market Survey.  ZEW stands for Zentrum für Europäische Wirtschaftsforschung, which means the Center for European Economic Research.

ZEW Financial Market Survey

It was introduced in 1991. A survey of about 350 analysts working at banks, insurances, and significant industrial firms are surveyed in a time frame of about two weeks. The proportion of participants from different sectors generally remains constant. It collects the general German sentiment or expectations with regards to the development of six international financial markets, especially Germany.

The panel of financial experts selected for the survey express their near-term expectations of the business cycle growth and progress, inflation rates, short and long term interest rates, stock market, exchange rates, and the oil prices. The survey questions aim to answer the situations in Germany, the USA, Japan, France, Great Britain, Italy, and the Euro-zone as a whole.

The experts are finally asked to assess the profitability of many economic sectors like banks, insurances, trade, construction, vehicle industry, chemistry, electronics, mechanical engineering, utilities, services, telecommunication, and information technology. Each expert forecasts on every category form a fraction that reflects different assumptions in percentages. The score from each individual in percentages are summed together to give an overall sentiment.

The results of this method, when it is applied to forecasted changes in the economic situation in Germany, is known as the “ZEW Indicator of Economic Sentiment.” The ZEW Indicator of Economic Sentiment is obtained from the results of the ZEW Financial Market Survey. It is computed as the difference between the percentage share of analysts that are bullish and those that are bearish towards the German economy in six months.

For instance, if 30% of the survey respondents predict the German economic situation to deteriorate, 20% expect it to remain the same as before, and 50% expect it to improve. The overall score of the survey would be a positive value of 20. It is a bullish reading and suggests that financial experts see positive signs for growth in the medium term.

Note: The IFO Business Climate Index is also a similar survey-based index that is popular in Germany. It is also a monthly report that surveys over 7,000 companies in Germany to obtain business condition sentiment for the near term. It measures business confidence and is also a leading indicator. It is a weighted index, meaning company scores are weighted in based on their contribution to the economy’s revenue.

However, the ZEW panel comprises of financial experts and is more diverse in its area of coverage as it also publishes estimates about other economic zones outside of Germany. IFO is business sentiment, while ZEW is economic sentiment, economic sentiment is a broader gauge, and hence, for our fundamental analysis, it is more useful.

How can the ZEW Sentiment Index numbers be used for analysis?

Sentiment Index in any country or any sector is the leading economic indicators for traders, investors, economists, and policymakers. Since the ZEW Sentiment Index is composed of a panel of financial market experts, people who are well-versed with the economy and business cycles throughout their career, their assessments generally have a strong correlation with actual GDP growth.

As with any sentiment index, the ZEW index also tends to be overly sensitive to changes in the economy, meaning the results sometimes would seem exaggerated but in the right direction. For our analysis, the direction of the economy is essential, and the magnitude can be understood over time with historical data.

Overall, the Economic Sentiment Index is helpful for us to predict the upcoming six-month changes with a good amount of certainty.

Impact on Currency

Market volatility is sensitive to Economic Sentiment Indexes. Significant moves in the index cause volatility in the market. It is a leading indicator. The above picture is a snapshot of ZEW for the past one year.

High Positive Economic Sentiment Index figures translate to improving economic prospects, which will translate to higher GDP prints and currency appreciation. Low or NegativeEconomic Sentiment Index figures translate to possible business slowdowns in the near-term, in extreme cases, even a recession. It will translate to the contracting economy, and lower GDP print, and thereby leading to currency depreciation.

Economic Reports

The ZEW Economic Sentiment Index is released every month on its official website, with insightful comments on different sectors. The IFO reports and ZEW Economic Sentiment Index are the two popular Sentiment Indexes in Germany.

Other companies also publish Economic Sentiment numbers, and IHS Markit Group is one such company that puts out numbers on the international scale for many countries. Internationally, IHS Markit business surveys are popular, but within Germany, ZEW is more popular amongst the traders, investors, policymakers.

Sources of ZEW Economic Sentiment Index

We can monitor the reports on the official website of the ZEW.

We can also go through the Sentiment Index of other countries here.

We can also find the aggregated statistics of all business confidence indexes for various countries here.

Impact of the ”ZEW Economic Sentiment Index” news release on the Forex market

In the previous section of the article, we understood the ZEW Economic Sentiment fundamental indicator, which essentially rates the outlook of an economy for a six-month period. On the index, a level above zero indicates optimism, below indicates pessimism. It is a leading indicator of economic health.

The reading is compiled from a survey of about 350 German institutional investors and analysts. Therefore, it is given a fair amount of importance from investors, especially when analyzing growth in the Eurozone. The ZEW financial market survey covers a number of areas, sectors, and regions which are used to create the ZEW Economic Sentiment.

In this part of the article, we will examine the impact of the ZEW Economic Sentiment indicator on the value of various currencies involving the EUR and witness the change in volatility. For that, we have collected the latest data of ZEW Economic Sentiment, which was published in the month of April. We can see in the below image that the index jumped by a huge margin in April 2020, which was well above market expectations.

EUR/USD | Before the announcement

Let us start with the EUR/USD currency pair to observe the impact of the ZEW Economic Sentiment Indicator on the value of EUR. The above image shows the state of the chart before the news announcement, where we see that the price is in a downtrend, and very recently, the price has formed a ”range.” Just before the news release, the price is at the bottom of the ”range,” so we can expect buyers to come back in the market, initiating some strength in the Euro.

EUR/USD | After the announcement

After the news announcement, market crashes below the ”support” of the ”range” and volatility increases to the downside. Although the ZEW Economic Sentiment was extremely positive for the economy, market participants do not by Euro immediately at the ”news candle,” but instead, we see a rally in the price after the close of ”news candle.” Thus, we witness moderate volatility in the currency pair after the news release.

EUR/CAD | Before the announcement

The above images represent the EUR/CAD currency pair, where, in the first image, we see that the market is in an uptrend signifying strength in the Euro. Currently, the price is at its highest point, crossing the previous ”higher high.” As per the technical analysis, we should wait for price retracement to a ”support” or ”demand” area in order to join the trend. Depending on the impact of the news release, we will position ourselves in the currency.

EUR/CAD | After the announcement

After the news announcement, the price initially falls lower due to volatility, but it does not sustain at that level where the buyers immediately take the price higher. We can see that the market bounces exactly from the moving average and continues to move higher. The market is seen to react oppositely to the ZEW Index at the time of release, but one should not conclude the impact of news from just one candle.

EUR/AUD | Before the announcement

  

EUR/AUD | After the announcement

The above images are that of the EUR/CAD currency pair, where we see that before the news announcement, the market is in a strong uptrend again, signifying the great amount of strength in the Euro. Just before the release, the price appears to be at the ”supply” area, which means we should expect some selling pressure from this point. A breakout trade is possible if the price sufficiently breaks the ”supply” area.

After the news announcement, we witness slight bearishness in the currency but was not large enough to cause a reversal of the trend. We see that the price only hovers at the ”supply” area, with no major impact, which results in a breakout.

That’s about the ‘ZEW Economic Sentiment Index’ and the relative impact of its news announcement on the Forex price charts. Let us know if you have doubts regarding the article in the comments below. Cheers!

Categories
Forex Fundamental Analysis

Did You Know That ‘Internet Speed’ Of A Nation Is Also Considered A Forex Fundamental Driver?

What is Internet Speed?

What is Internet Speed?

What is Internet Speed?

Internet Speed refers to the speed at which data, voice, and video travel long distances. This is achieved with the help of broadband. Broadband refers to the transmission technologies used to transmit the internet. The term is used to describe high-speed and high-bandwidth communication infrastructure. Without broadband, it is not possible to attain high-speed internet at any cost. The common medium of transmission technologies includes coaxial cable, fiber optic cable, and radio waves.

(Source: Statista.com)

Business and Internet Speed  

Companies accessing the internet is nothing new. In the 80s, banks and Wall Street began changing the way they dealt with information. Back then, internet-related tasks were accomplished with the help of a simple modem and dial-up connection. In today’s demand scenario, much faster and reliable systems of internet connection are required. Business owners and IT professionals have a lot to choose from.

High-speed internet leads to greater advantages for companies that rely on cloud-based apps and data. According to the study conducted by an international group, a city with high-speed internet, over a gigabit connection, has an overall healthier economy. The research was carried out by comparing 14 metropolitan areas where more than half the population has access to high-speed internet with that of 40 neighboring cities without high-speed internet.

It was reported that cities that had gigabit connections, like the fiber optics, can support a 1.1% higher gross domestic product than other “slower internet” cities. A 1.1% contribution might soundless, but when this is seen in the context of developed countries that grow a minimum of 1-2% every year, one can estimate how significantly it can impact economic growth. It could mean up to $1.5 billion in the local economy.

Importance of High-Speed Internet

On a global level, increasing internet speeds have the power to transform whole economies. During the keynote speech at Broadband World Forum, Johan Wiberg (Head of Business Unit Network, Ericsson) described that when more and more people begin to have access to high-speed internet and mobile broadband, people will find new ways to conduct the businesses.

High internet speed has the power to spur economic growth by creating efficient systems for businesses and consumers. It opens up opportunities for more advanced online services, smarter utility services, and telecommunication. In healthcare, for instance, innovative mobile applications will be used by nearly 800 million people.

But when it comes to high-speed internet, it is not easy to launch into an area overnight. It takes effort from companies and governments to introduce data and wi-fi connectivity in rural areas. Hence, the positive effects of these new technologies are hard to see right away. As more and more businesses get access to high-speed internet, whole verticals of the economy will transform.

With these effects sounding exciting, one shouldn’t expect higher income levels with the introduction of high-speed internet in our communities. When governments and policymakers fully comprehend the importance of digital highways, it is then we can find drastic changes in the economy in no time.

Countries with Fastest Internet around the World

Taiwan has the fastest internet with an average speed of 85Mbps, followed by Singapore, Jersey, Sweden, and Denmark. While Yemen has the slowest internet in the world with an average speed of just 0.38Mbps. Thirty-seven of the fifty fastest internet countries are located in Europe, with 10 in Asia, 2 in North America, and just 1 in Africa. The global internet speed is getting faster.

The previous year, global average internet speed was 9.1Mbps while this year, the global average is 11.03Mbps, a rise of more than 20%. Generally speaking, countries which have the fastest internet speeds are the ones which are small and developed. The larger & less developed a nation is, the slower will be the internet.

By looking at the present statistics, we can say that there is little change in development, availability, and rollout of faster infrastructure in the bottom half of the ranking compared to the top half.

Below is the avg Internet Speed of different countries in the world (In terms of MBPS)

(Source – Fastmetrics)

Impact on Currency 

Temporary internet shutdown in a high connectivity country is estimated to have a GDP impact per 10 million people per day of $23.5 million on average. The average impact in a medium connectivity country would be an estimated $6.5 million and $0.6 million of GDP, respectively. Therefore, Internet Speed does impact the value of the currency as well. But it does not an immediate impact, rather the effect is felt on a longer-term.

Sources of information on Internet Speed

There are many speed testing websites that calculate internet speed and keep them updated every few minutes. However, this information cannot be found on most of the economic websites as it is a very important economic indicator for traders. The website of telecommunication ministry is also a source of information on the internet and broadband.

Links to Internet Speed information sources

GBP (Sterling) – https://tradingeconomics.com/united-states/internet-speed

AUD – https://tradingeconomics.com/australia/internet-speed

USD – https://tradingeconomics.com/united-states/internet-speed

CAD – https://tradingeconomics.com/canada/internet-speed

JPY – https://tradingeconomics.com/japan/internet-speed

CHF – https://tradingeconomics.com/switzerland/internet-speed

Final Words

Broadband has created new sectors and redefined the old ones. The music industry, for example, after years of declining sales, is growing rapidly after the adoption of digital distribution models. All this is possible only with the help of fast internet. As broadband becomes abundant and faster, everything from retail to government services finds new ways to reinvent themselves, especially in knowledge-based sectors where such speed and efficiency can enhance competitiveness.

Digital infrastructure opens up possibilities for more advanced online services, smarter utility services, e-health, telecommunication, and telepresence. All are dependent on high-speed broadband networks. Hence Internet Speed of a nation pays a key role in determining how advanced the country is in terms of technology as well.

Having that said, the news release of Internet Speed figures for different countries doesn’t really affect the Forex price charts in any way. Hence, technical analysts can ignore this fundamental driver’s news announcements. Cheers!

Categories
Forex Daily Topic Forex Fundamental Analysis

How Important Is ‘Corporate Profits’ Economic Indicator In Determining A Nation’s Economy?

What is Corporate Profit?

What is Corporate Profit?

What is Corporate Profit?

Corporate profit is the money left after the company pays all its expenses and taxes. The money that is collected by the company after selling all products and services during the specified period is considered as line revenue. From this revenue, various deductions happen in the form of tax and salaries, to name a few. Money left over after all the expenses are paid considered to be the company’s profit. The profit earned by the company is an important parameter when it comes to the fundamental analysis of a company.

How is Corporate Profit measured?

The corporate profit economic indicator calculates the net income of a company that is measured by considering the following factors:

Profits from present production – This type of profit is gained from two components. First, the income that is gained after inventory replacement is included in this, and secondly, the income statement depreciation is considered. This type of profit is also known as operating or economic profit.

Profit on books – The profit earned from net income minus inventory and depreciation adjustment is known as book profits.

Profit after-tax – Book profit after the tax deduction is called profit after-tax. This type of profit is believed to be the most relevant number when calculating corporate profit.

Real Corporate Profit

Corporate profits are one of the most studied data of a company. It also plays a major role in other financial measures of the country. Profit is not a measure of the amount of cash a company earned in a given period. We need to understand the income statement that includes non-cash expenses as well. It is also important to understand the changes in accounting methods that have influenced the profit margins.

These are some hidden charges that are directly deducted from the net profit. Therefore, it is often more appropriate to consider profit as a percentage of sales when comparing one company to another. Remember, a comparison between companies should be made among companies within the same industry, and the net profit should be seen in this context.

Analyzing corporate profits

Corporate profit is nothing but a company’s income and the one that is directly reflected in the official statement. Hence, they are one of the most important things to consider when investing in the shares of a company. Increasing corporate profits means either increasing corporate spending, growth in retained earnings, or increasing dividend payments to shareholders. All of these are positive steps taken by a company indicating growth.

The corporate profits data is most useful for an investor rather than a trader. It involves buying the shares of a company and holding them for a minimum of 3 months. An investor may also use this number to do performance analysis. If an individual notices an increase in the profit of a particular company while the overall corporate profits are declining, it could signal company strength. Alternatively, if an investor notices that the company’s profits are declining while overall profits are increasing, i.e., of the sector, a structural problem may exist in the company.

Economic reports

Corporate profits are through statistical reports that are published by the Bureau of Economic Analysis (BEA). It is a comprehensive report comprising of the company’s net revenue, earnings before tax, earnings after tax, corporate profits, expenditure, etc. Finally, the report summarises the net income of corporations in the National Income and Product Accounts (NIPA). One thing we have to make a note of here is that the corporate profit numbers derived from the NIPA, which is dependent on the GDP growth, are different from the profit statements released by the companies. So, while analyzing the data, we need to be cautious by looking at both the numbers and rely on the ones where the difference is not huge.

Impact on Currency

There might not be a direct relationship between corporate profits and the value of a currency as the former is more company-specific and represents a very small portion of the economy. However, an overall corporate profit that is a collective data of all companies affects the stock market. If the data is good, it means the manufacturing is growing and that domestic companies are generating profits. This, in turn, has a positive impact on the currency and leads to an appreciation of the domestic currency. However, if the collective data is negative, it can lead to depreciation of the currency in the long term.

Sources of information on Corporate Profits

Corporate tax data is released by the Bureau of Economic Analysis (BEA) quarterly on the official website. Another reliable source of information on corporate profits is the press release by the respective companies. The press releases can be found on the website of the stock exchange. Links to Corporate Profits sources

GBP (Sterling) – https://tradingeconomics.com/united-kingdom/corporate-profits

AUD – https://tradingeconomics.com/australia/corporate-profits

USD – https://tradingeconomics.com/united-states/corporate-profits

CAD – https://tradingeconomics.com/canada/corporate-profits

EUR – https://tradingeconomics.com/germany/corporate-profits

JPY – https://tradingeconomics.com/japan/corporate-profits

Corporate profits are a closely watched economic indicator by institutional investors. Profitability provides a summary of the company’s financial health and serves as an essential indicator of economic performance. Profits are retained earnings, providing much of the capital for investing in productive capacity. The estimates of profits and related measures are used to evaluate the effects on corporations of changes in economic policy and the financial condition of the country.

Impact of the ‘Corporate Profits’ news release on the Forex market

Corporate profit, also called net income, is the amount remaining within the company after all costs such as interests, taxes, and other expenses are deducted from total sales. It is also referred to as net profit or net earnings. A high cumulative corporate profit generally indicates that a company is running efficiently, providing value to its shareholders, and contributing towards the growth of the manufacturing sector.

It is significant because it shows how well the company has managed its costs. The corporate profit data is not that important for traders as it does not have a direct impact on the value of a currency. Hence, we should not expect high volatility in the currency after the news announcement.

In the following section of the article, we will be analyzing the impact of Corporate Profit on various currency pairs and analyze the change in volatility due to the news release. The below image shows the latest quarter’s corporate profit in Canada that was released in June. We see a major drop in profits compared to the previous quarter, which means companies were unable to make huge profits in this quarter. Let us find out the reaction of the market to this data.

USD/CAD | Before the announcement

We will first examine the USD/CAD currency pair to observe the impact of corporate profit on the Canadian dollar. The above image shows the state of the chart before the news announcement. We see that the pair is in a strong uptrend, and recently the price seems to be retracing. Our approach should be to ‘buy’ the currency pair as the major trend is up, but the price needs to retrace to an important technical level before we can buy. Let us see that if ‘news’ gives us that opportunity.

USD/CAD | After the announcement

After the news announcement, the price goes lower, and volatility increases to the downside. Even though the Corporate Profit data was awful for the economy, traders went ‘long’ in the Canadian dollar by selling U.S. dollars. The bearish news candle shows that the news candle did not have any adverse effect on the currency. Few hours after the news announcement, volatility continues to increase on the downside, and we witness large selling pressure in the market.

GBP/CAD | Before the announcement

GBP/CAD | After the announcement

The above images represent the GBP/CAD currency pair, where we see that before the news, the market is moving in a ‘range,’ and recently, the price has moved higher after reacting from the support. Since the impact of corporate profits is least on the currency, traders shouldn’t be scared of the news release and can take a position in the market according to their strategy.

After the news announcement, the market slightly moves lower, or even one could argue that the news release had a major impact on the currency. The corporate profit data had a minor impact on the currency pair, which lasted for a few minutes. Traders should analyze the pair technically and not be worried about news data.

CAD/CHF | Before the announcement

CAD/CHF | After the announcement

The above images are that of CAD/CHF currency pair, where we see that the market in a strong downtrend with some minor price retracement at the moment. We should be looking to go ‘short’ in the currency pair after the occurrence of the price continuation pattern in the market. However, if the price continues to move higher, the sell trade is off the table. Conservative traders can wait for the news release and then take a position based on the impact of the news.

After the news announcement, the price moves higher, and volatility expands on the upside. The small up move gets completely retraced by the immediate next candle, and the market continues to move lower. Hence, it is evident that the news has a negligible impact on the currency pair, where the overall trend of the market dominates the move after the announcement.

We hope you understood this Fundamental Indicator and its relative impact on the Forex price charts. All the best!

Categories
Forex Daily Topic Forex Fundamental Analysis

The Impact Of ‘Factory Orders’ News Release On The Forex Price Charts

What are Factory Orders?

What are Factory Orders?

What are Factory Orders?

Factory orders are the dollar value of all orders received by factories. The U.S. Department of Commerce reports the number of new orders every month. Factory orders are divided into four parts: new orders, unfilled orders, shipments, and inventories. It includes information about durable goods and non-durable goods. Factory orders data is often not very surprising because the report of durable goods orders comes out one or two weeks earlier.

Dividing Factory Orders        

The factory orders data is divided into four sections:

  • New orders, which indicate whether orders are increasing or decreasing
  • Unfilled orders, indicating a backlog in production
  • Shipments, which indicate produced and sold goods
  • Inventories, which indicate the strength of future production

The figures are mentioned in billions of dollars and also as a percent from the previous month and previous year. Factory orders data is often dull, mostly because the durable goods orders come out a couple of weeks earlier, and people have an idea of factory orders for the current month. However, the official factory orders data gives more detailed information on orders estimate and fulfillment.

The factory orders report includes information about both durable and non-durable goods. Durable goods have a life span of at least three years and often refer to items not purchased frequently, such as machines, garden equipment, motor vehicles, and electronics. In contrast, non-durable goods include fast-moving consumer goods such as food, clothes, footwear, medication, and cleaning items.

Investors get an insight into the growing trend of the economy with the help of factory orders report, which largely influences their investment decisions. Factory orders give an early indication of the growth in the economy, and its impact is felt on the equity market.

Analyzing the data

When it comes to the fundamental analysis of a currency pair, it is important to understand how factory orders are analyzed to make proper investment decisions. Factory orders are analyzed by comparing the previous and current readings, where, if we notice a consistent drop in the ‘orders,’ it could signal a slump in the overall demand.

These factory orders are not just used for analyzing one country but also for comparing the economic growth of any two countries. Investors shift their funds to countries where there is a growth in the factory orders, and demand is high. One needs to remember to compare countries with the same economic status. For example, factory orders of a developed country should not be compared with that of a developing nation.

The economic reports

Factory orders are released monthly by the Censuses Bureau of the U.S. Department of Commerce. The full name is “Full report on Manufacturers’ Shipments, Inventories and Orders” but is commonly referred to as Factory Orders. This report usually follows the Durable Goods Reports, which provides data on new orders received from more than 4,000 manufacturers of durable goods.

The factory orders report is more comprehensive than the durable goods report, where it examines the trend within industries. For example, the durable goods report may account for a broad category, such as industrial equipment. In contrast, the factory orders report will provide details about the hardware, software, semiconductors, and raw materials. This lack of information in a durable goods report is attributed to its release speed.

Impact on currency

Factory orders are an important economic indicator. When factory orders increase, the economy usually expands as consumers demand more goods and services. High demand, in turn, requires retailers and suppliers to order more things from factories. This is interpreted as positive for the economy by foreign investors who then invest in the country through the stock market or currency.

An increase in factory orders could also mean that inflation is just around the corner. When factory orders decrease, the economy is usually contracted, which means there is less demand for goods and services, so retailers will not place a lot of orders. When this is reflected in reports, investors tend to have a negative on the economy and think twice before investing in such economies.

Sources of information on Factory Orders 

The factory Orders data is closely watched by investors around the world, which is why the report is immediately available on most of the open-source economic websites and some of the broker’s websites. The official source of information is the U.S. Census Bureau, where it provides statistical information of all the information related to factory orders.

Links to ‘Factory Orders’ information sources

GBP (Sterling) – https://tradingeconomics.com/united-kingdom/factory-orders

USD – https://tradingeconomics.com/united-states/factory-orders

EUR – https://tradingeconomics.com/germany/factory-orders

Factory orders are a key economic indicator for investors and others monitoring the health of economies. It provides information on how busy factories may be in the future. Orders placed in the current month may provide work in factories for many months to come as they will have to work to fill the orders. Businesses and consumers generally place orders when they are confident about the economy.

An increase in factory orders signifies that the economy is trending upwards. It tells investors what to expect from the manufacturing sector, a major component of the economy. The factory orders data often tend to be volatile with revision in the methodology now and then. Hence, investors typically use several months of averages instead of relying too heavily on a single month’s data.

Impact of the ‘Factory Orders’ news release on the Forex market

In the previous section of the article, we understood the factory orders economic indicator and saw how important it is for foreign investors. As defined earlier, it is a report which shows the value of new factory orders for both durable goods and non-durable goods. The survey is usually released a week after durable goods orders report. The report tends to be predictable, with only non-durable goods appearing as the new component compared to the previous report. Thus, investors would have priced in most of the information even before the official release. Still, it causes some volatility in the currency pair during the news announcement.

In today’s lesson, we will analyze the impact of the factory orders news announcement on various currency pairs and witness the change in volatility due to the news release. The below image shows the latest factory orders data of the United States, where it can be seen that the orders were better than expectations but were lower than last time. A higher than expected reading is considered to be bullish for the currency, while a lower than expected reading is considered negative. But, let us find out how the market reacts to this data.

EUR/USD | Before the announcement

Let us start with the EUR/USD currency pair to observe the impact of factory orders on the U.S. dollar. The above image shows the 15 minutes time-frame chart of the currency pair where the market is in a strong uptrend before the news announcement. Recently the price has formed a ‘range,’ and the price is at the top of the ‘range’ at this moment. Technically, this is an ideal place for going ‘short’ in the market, but since a news announcement is due, it is advised not to take any portion before the announcement.

EUR/USD | After the announcement

After the news announcement, the price initially moves higher, but this is immediately sold, and the market erases all the gains. The ‘news candle’ finally closes at the price where it had opened. Therefore, the factory orders data brought about a great amount of volatility in the currency pair, which is evident from the wick on top of the ‘news candle.’ One should wait for the volatility to settle down before taking a position in the market.

USD/CAD | Before the announcement

USD/CAD | After the announcement

The above images represent the USD/CAD currency pair, where we see that the market is extremely volatile before the news announcement, and there is no clear direction of the market. As a point of a tip, it is not advisable to trade in currency pairs where the volatility is more than normal as there are a lot of risks associated with trading in trading such pairs.

After the news announcement, the currency pair gets exceedingly volatile where essentially the price drops greatly, but buyers pressure from the bottom takes the price back to its opening level. Therefore, the factory orders data had a major impact on the pair where the price continued to move lower a few minutes after the news release.

AUD/USD | Before the announcement

AUD/USD | After the announcement

The above images are that of the AUD/USD currency pair, where the price is retracing the overall uptrend of the market. In such market situations, we should be looking for trend continuation candlestick patterns to confirm that the market will continue moving up.

After the news announcement, the price sharply moves higher and leaves a wick on top of the ‘news candle.’ Since volatility is high on both sides of the market during the announcement, we cannot ascertain if the factory orders data was positive or negative for the currency. As the market continues to move higher after the close of the ‘news candle,’ one should look for going ‘long’ in the market a few hours after the news announcement.

This ends our discussion on the ‘Factory Orders’ Fundamental driver. It is crucial to know its impact on the Forex price charts before trading this market. Cheers!

Categories
Forex Daily Topic Forex Fundamental Analysis

Understanding ‘Industrial Production Index’ & Its Relative Impact On The Forex Market

What is the Industrial Production Index?

What is the Industrial Production Index?

What is the Industrial Production Index?

Industrial Production Index or IPI, as it is commonly called, is an index that tracks manufacturing activity in different sectors of the economy. The IPI number measures the industrial production for the period under consideration, usually a month. IPI is a key economic indicator of the manufacturing sector of the economy. It measures the real output in the mining, electric, and gas industries, relative to the base year.

How is IPI calculated? 

Industrial Production is expressed as an index relative to the base year, which is 2012. They do not express absolute production numbers or volume, but the percentage change in production relative to 2012. The parameter taken into account is often varied, including physical inputs and outputs such as tons of iron, or inflation-adjusted sales figures, and when these parameters are not available, hours logged in by production workers is considered. This data is obtained from industry associations and government agencies, and the index value figure is obtained after incorporating these numbers in the Fisher-Ideal formula.

Within the IPI index, several sub-indices provide a detailed look at the production levels of highly specific industries. One can find the monthly production data of residential gas sales, ice cream, carpet and rug mills, spring and wire products, audio and video equipment, and paper in these sub-indices. The indices are seasonally adjusted, and sometimes the format is unadjusted.

Limitations of the IPI

While GDP estimates show that the manufacturing sector has picked up, the IPI doesn’t. In such cases, the question arises, which of the two should we believe. The selection of items for measuring the production output has remained the same for many years. This will have implications on the index value. IPI growth will have a certain directional bias. The recommendation has always been to make it more dynamic. All they are saying is to revise it more frequently. But the officials have been only pushing the dates forward.

Another limitation is in the selection of the base year. The 2011-2012 base year series shows faster growth than the previous one, 2004-2005 base year. Therefore, it is suggested to use the old methodology alongside the new method.

Analyzing the IPI 

The IPI data is particularly useful for money managers and investors who are a part of the business. At the same time, the composite index is an important macroeconomic indicator for economists who analyze the impact of the numbers on the economy and industry. Fluctuations within the industrial sector account for variation in the overall economic growth. The monthly metric keep investors informed about the shifts in the production levels.

At the same time, IPI ignores the most popular economic output measure, the Gross Domestic Product (GDP). GDP calculates the price paid by the end-user, so it includes the value-added in the retail sector. This is ignored by IPI. Another observation is that the industrial sector is losing its share in the GDP of a country; for instance, it made up less than 20% of the GDP of the U.S. economy as of 2016.

Along with IPI, capacity utilization is another useful indicator that investors analyze to assess the demand scenario. Low capacity utilization or overcapacity, in other words, signals weak demand. Policymakers read it as a need for fiscal or monetary stimulus in the economy. Investors read it as a sign of coming downtrend for the currency and the stock market. High capacity utilization, on the other hand, acts as a warning signal that the economy is overheating, suggesting the risk of price hikes and asset bubbles. Policymakers react to such threats with interest rate hikes or fiscal austerity. There is also a possibility that this could ultimately result in a recession.

Impact on Currency

Industrial production figures are directly proportional to the value of a currency. When Industrial Production is high, it means economic activity is improving in the country that directly contributes to the GDP. A rate of GDP leads to an appreciation in the currency value. However, an effect on the overall economy is felt when industrial production is increasing each month. An improvement in the production output for one month has no impact on the currency; the average value of at least three months makes a difference. The IPI is an early indication of growth in the manufacturing sector, which is why it is closely watched by investors and traders.

Sources of information on Industrial Production Index

The Federal Reserve Board publishes the industrial production index (IPI) every month, which is released approximately in the 2nd week of the month. The revisions in the method of calculation, if any, are released at the end of every March. As it is an important indicator of growth in the manufacturing sector, most open-source economic websites keep track of their respective countries’ data.

GBP (Sterling) – https://tradingeconomics.com/united-kingdom/industrial-production

AUD – https://tradingeconomics.com/australia/industrial-production

USD – https://tradingeconomics.com/united-states/industrial-production

CAD – https://tradingeconomics.com/canada/industrial-production

EUR – https://tradingeconomics.com/european-union/industrial-production

JPY – https://tradingeconomics.com/japan/industrial-production

The Industrial Production Index (IPI) is an important economic indicator published by the Federal Reserve Board (FRB) of the United States that measures manufacturing, mining, and utilities’ real production output. The indices are computed mainly as fisher indices with more weightage on the annual estimates of value-added. The fisher methodology only preserves the growth information, which is why the value of the base year, i.e., 2012, is randomly set to 100. This index, along with other industrial output indexes and construction, accounts for the bulk of the total output variation throughout the business cycle.

Impact of the ‘Industrial Production Index’ news release on the Forex market

In the previous part of the article, we understood the significance of Industrial production fundamental indicators in an economy. Now let’s discuss the impact of the Industrial Production Index news announcement on the value of a currency and witness the change in volatility due to the news release. As discussed previously, Industrial Production measures the change in the total inflation-adjusted value of output produced by manufacturers, mines, and utilities.

For instance, Industrial Production measures the output of businesses in the industrial sector of the United States economy, where the manufacturing sector accounts for 78 percent of total production. Some of the biggest segments of this sector are Chemicals, food, drinks and tobacco, machinery, computer and electronics, motor vehicles, and others.

Now let’s analyze the Industrial Production data of the United States released in June. As we can see in the below image, Industrial Production in the United States increased to 1.4% percent in May, which was much higher than the previous month. The Industrial Production numbers in April and May are largely influenced by COVID-19. Let us find out the reaction of the market to this data.

EUR/USD | Before the announcement

Let us start with the EUR/USD currency pair witness the change in volatility due to the news announcement. The above image shows the state of the chart before the news announcement, where we see that the market was in an uptrend and recently has laid out signs of reversal.

EUR/USD | After the announcement

After the news announcement, the price moves higher, and volatility slightly increases to the upside. However, the price does not go much higher, and the major trend to the downside continues. Thus, it would be right to say that the news announcement had a positive impact on the U.S. dollar.

USD/JPY | Before the announcement

USD/JPY | After the announcement

The above images represent the USD/JPY currency pair, where we see that the market is moving within a ‘range’ before the news announcement. Just when the Industrial production numbers are to be released, the price is at the top of the ‘range,’ and volatility is high. Depending on the impact of the news release, we take a suitable position in the currency pair.

After the news announcement, the market moves lower by a couple of candles, as seen in the above image, and gets retraced by strong buyers who take the price above the ‘news candle.’ But since the price is again at resistance, it eventually moves lower and reaches the support. By this price action, we can say that the currency pair becomes highly volatile after the news announcement.

NZD/USD | Before the news announcement

NZD/USD | After the news announcement

The above price charts belong to NZD/USD currency pair, where we see that before the news announcement, the price was moving higher, and now it has displayed a strong reversal pattern in the market, indicating a reversal to the downside. If the news release does not change the underlying price action pattern, one can take a risk-free ‘short’ position in the currency pair. This is how technical analysis is used in conjunction with fundamental analysis.

After the news announcement, the price moves higher by a little, and ultimately the reversal pattern dominates the market, and price makes a ‘lower low.’ Therefore, the slight bullishness that was witnessed due to the news announcement was of significance, and the market crashed.

We hope you got the gist on what the ‘Industrial Production Index’ is and its impact on the Forex price charts after its news release. In case of any questions, let us know in the comments section below. Cheers!

Categories
Forex Fundamental Analysis

Significance Of ‘Composite PMI’ As A Forex Fundamental Driver

Introduction

Introduction

Introduction

Composite Purchasing Manufacturing’s Index (PMI) is one of the major indicators of the country’s economic health. It is mainly concerned with the manufacturing and service sectors. The PMI provides information about the current business conditions from the data gathered from the company’s decision-makers, such as analysts and purchasing managers.

The PMI survey of each country consists of a questionnaire for the manufacturing or service sector, which collects the responses from the panel of senior purchasing executives at over 400 companies. The Composite PMI is basically a number that ranges between 0 to 100. The number above 50 represents an expansion compared to the previous reading. A PMI reading below 50 represents a contraction, and a reading at 50 indicates no change.

Calculation of the PMI

As mentioned in the above paragraph, the PMI is a number from 0 to 100, but we need to understand how one arrives at those numbers. The PMI is calculated using the below formula.

PMI = (P1 * 1) + (P2 * 0.5) + (P3 * 0)

Where:

P1 = percentage of answers stating an improvement

P2 = percentage of answers stating no change

P3 = percentage of answers stating a deterioration

The percentage stating deterioration has a zero multiplier; thus, it is always zero, but the larger the value of P3, the fewer the weight of the first two factors, thus lowering the total PMI value. in the case of P3=100% PMI = 0.

Use of Composite PMI

The PMI data is a critical decision-making tool for money managers that influences their investment across sectors to a great extent. Let us take the case of an automobile manufacturer, where the production decisions are based on the new orders it expects from the customers in future months. This will make them buy dozens of parts and raw materials, such as tires and plastics. The inventory rules also drive the amount of production the manufacturer needs to finish to fill new orders and to keep some inventory at the end of the month.

From the supplier’s point of view, the PMI data matter to him the most as well. The parts supplier to a manufacturing company will estimate the amount of demand it might get from these companies based on the PMI. Due to this, the suppliers charge more for their parts. The new orders data is closely related to the Composite PMI. For instance, if the new orders are growing, the manufacturing company may raise the prices of its products and accept the high cost of the parts. A company also uses the Composite PMI to plan its annual budget, supervise staffing levels, and manage cash flow.

The Economic Reports 

The Economic Reports of Composite PMI and related data are published monthly by the Institute for Supply Management (ISM) that is extremely useful for manufacturers and the investment managers. The ISM monitors changes in production levels from month to month and is at the core of the Manufacturing report. This is one of the earliest indicators of economic activity and that investors and economists get regularly. The institute also releases a Semi-annual report in May and December. When the number is rising, investors anticipate a bullish reaction from the market to the data that is seen in the currency and stock market.

Analyzing the data

The PMI data is very easy to analyze, where we only have to look at the number and compare it with the previous readings. A PMI reading above 50 indicates growth or expansion of the manufacturing sector. A reading of 50 indicates that the number of manufacturers reporting good business is equal to those stating business is not good. Another key number to look for is 43.2. If the PMI index has been above this number for a period of time, it indicates an expansion of the overall economy. Any number under 50 indicates a contraction in the manufacturing sector and that most businesses are not expecting good business in the near future.

Impact on the currency 

The composite PMI is closely watched by traders and investors around the world that greatly influences their investment decision. They mainly if the number is below or above the 50 levels, which shows potential contraction or expansion in the economy. If the number is greater than 50 over the last few quarters, it indicates growth in the economy, which drives the currency higher. If the number remains below the 50 mark, it means the economy has entered into a recession. Investors will not be interested in investing in countries where the economy is in a recession, which leads to a depreciation of the currency.

Sources of information on Composite PMI

Composite PMI is available on the official website of the Institute for Supply Management (ISM), which also provides a comprehensive analysis of the same. The data can also be found on some open-source economic websites and financial magazines.

Links to Composite PMI information sources

GBP (Sterling) – https://tradingeconomics.com/united-kingdom/composite-pmi

AUD – https://tradingeconomics.com/australia/composite-pmi

USD – https://tradingeconomics.com/united-states/composite-pmi

EUR – https://tradingeconomics.com/euro-area/composite-pmi

NZD – https://tradingeconomics.com/new-zealand/composite-pmi

JPY – https://tradingeconomics.com/japan/composite-pmi

The Composite PMI is a monthly survey sent to senior executives at more than 400 companies in 19 primary industries. The industries and companies are selected based on their contribution to the GDP and the sector, respectively. The surveys include questions about business conditions and any changes, whether it be improving, no change, or deteriorating. Hence, traders must keep an eye on this data and watch for its official releases.

Impact of the ‘Composite PMI’ news release on the Forex market 

Investors consider Composite PMI as a leading indicator of the economic health of a country. It is extremely for international investors looking to form an opinion on a country. The PMI is also a leading indicator of the growth in the gross domestic product (GDP). When formulating monetary policy, central banks use PMI surveys, which is reflected in the fixing of interest rates.

When it comes to predicting the GDP growth, a reading above 42 is considered a benchmark for economic expansion. In contrast, a reading below 42 indicates that the economy is heading into a recession. Since it is an important indicator for most of the people related to the economy and financial sector, it is bound to have a major impact on the value of a currency.

In today’s lesson, we will analyze the impact of composite PMI on different currency pairs and identify the change in volatility due to the news announcement. We will be looking at the PMI data in the Eurozone that was released in June (May as the reference month). The below image shows the previous, predicted, and latest PMI reading, where we see a big increase in the number compared to the previous month. Let us find out if the market receives the data positively or negatively.

EUR/USD | Before the announcement

Let us start with the EUR/USD currency pair to observe the change in volatility due to the news release. The above image shows the price’s behavior before the news announcement, where we see that the market is a strong uptrend. We will be looking to buy the currency pair after a price retracement to a support or demand level. At this point, we shouldn’t be taking any position in the currency pair.

EUR/USD | After the announcement

After the news announcement, volatility expands to the upside, and the market moves higher. As the PMI data was extremely positive for the economy, traders bought the currency and took the price higher. The PMI data had a positive impact on the currency pair, and the market makes new ‘high.’ One has to be cautious here by not jumping into the market for a ‘buy’ as it is against risk management rules.

EUR/JPY | Before the announcement

EUR/USD | After the announcement

The above images represent the EUR/JPY currency pair, where we see that the price is continuously moving higher with minimum retracements before the news announcement. It means the uptrend is very strong. From a ‘trade’ point of view, a similar approach will be followed here as well as we had in the previous currency pair, where we will be looking to buy the currency pair only a price retracement.

Right after the news is released, the price initially moves higher, but later selling pressure makes the ‘news candle’ to close near the opening. Therefore, we witness volatility in both the directions of the market in this currency pair. We can say that the PMI data did not have a major impact on the currency where the market remains sideways a few minutes after the news release as well.

EUR/AUD | Before the announcement

EUR/AUD | After the announcement

The above charts are that of the EUR/AUD currency pair, where the market shows a strong downtrend signifying a great amount of weakness in the Euro. Recently, the price has shown signs of retracement, and so we can expect a continuation of the down move after noticing trend continuation patterns. Until then, we will see what impact the PMI data makes on the currency pair.

After the news announcement, the price does not move adversely in any direction and remains almost at the same place as it was before. The PMI data has a neutral effect on the currency pair where ‘news candle’ forms a ‘Doji’ candlestick pattern. However, the Euro becomes bullish a few minutes after the news release and markets move higher, nearly reversing the downtrend.

This ends our discussion on ‘Composite PMI,’ and its relative impact on the Forex market post its news release. In case of any questions, please let us know in the comments below. All the best!

Categories
Forex Daily Topic Forex Fundamental Analysis

Understanding ‘Electricity Production’ & Its Importance As A Forex Fundamental Driver

Introduction

Introduction

Introduction

Electricity is the most versatile and controlled form of energy. It is non-polluting and loss-free. It can be produced entirely using renewable methods, such as wind, water, and sunlight. Electricity is weightless, more comfortable to transport and distribute, and represents the most efficient way of consuming energy. Strategies are being developed to generate and use electricity in the most efficient way. It must be produced in the least damaging way, without inhibiting economic development.

Net power generation

The total worldwide production of electricity in 2016 was 25,082 TWh. Sources of electricity were coal 38.2%, natural gas 23.1%, hydroelectric 16.6%, nuclear power 10.4%, oil 3.7%, solar 5.6%, biomass and waste 2.3%.

Choosing the mode of production 

The selection of electricity production mode and their economic viability is linked with the demand and supply in that region. The dynamics vary considerably around the world, resulting in different selling prices across the globe; for example, the price in Iceland is 5.54 cents per kWh while in island nations, it is 40 cents per kWh. Hydroelectric plants, thermal power plants, nuclear power plants, and renewable sources have their pros and cons, and selection is based on the local power requirement and fluctuations in demand. All power plants have varying loads on them, but the daily minimum is baseload, often supplied by plants that run continuously. Nuclear, coal, gas, oil, and some hydro plants can supply baseload.

Due to the advancement in technology, renewable sources other than hydroelectricity experienced decreases the cost of production, and the energy in many cases is cost-comparative with fossil fuels. Many governments around the world are allocating funds to offset the higher cost of new power production and make the installation of renewable energy systems economically feasible. However, their use is curtailed by their intermittent nature, less demand, and sometimes transmission constraints.

Economic development and electricity

Electricity is a major contributor to the economic development of a nation. It is the wheel that drives most aspects of everyday life in society. A nation is a compilation of activities and people whose progress is determined by the infrastructural components. Electricity is the source of fuel for almost all sectors of the economy. Most of our daily activities are dependent on electricity, our hospitals need electricity for various purposes, and airports need electricity for regular functioning and ensuring the safety of passengers.

When so many activities are dependent on electricity, production of the same is very important for every nation’s economic development because it brings investment opportunities for the country. In a country where electricity production is more, investors get interested because the cost of production in such a country is minimal compared to where there is no electricity. Running machines on electricity is cheaper compared to running them on generators. High electricity production helps to reduce the mortality rate in the country because the hospitals will be efficiently powered and is a key factor in service delivery at hospitals.

In countries with good electricity production, agricultural productivity is also high because electricity can help in powering irrigation, food preservation, and seed preservations. They enable the country to have fewer damages to agricultural products because they can be kept in storage facilities, and wastage can be avoided.

Impact on currency

Although electricity production is an important sector of the economy and a vital component, it may not have a direct impact on the value of a currency. The effect of shortage in electricity is first felt on the company, which will be reflected in its quarter-quarter data. If the results are bad, one can analyze the impact of electricity on the numbers and the stock price. If the industry itself is suffering, it primarily impacts the stock market and not the currency value. Hence, we can say that the impact of electricity is minimal on the value of a currency where investors, too, do not give much importance to this data.

Sources of information on Electricity Production

Economists and investors have not keenly tracked the electricity production data, so not many economic websites and newspapers publish the data regularly. The country’s electricity board is the official source of the data from where reliable figures can be obtained. However, we were able to collect the data on the electricity production of a few countries that can be used for reference and comparison.

GBP | AUD | USD | CAD | NZD | JPY

High levels of electricity production improve the standard of living of the people in the country. This is very important for the economic advancement of a country. If people live in better conditions, it has ripple effects on every aspect of the country. It reduces unnecessary expenditures for the government. It improves the security of the country and helps to create job opportunities for the entire country because the indirect sectors use electricity to power their businesses. Development can only be realized when the key drivers of the economy are unhindered by the country’s lack of infrastructural components.

Impact of Electricity Production’s News Release On The Forex Market

In the previous section of the article, we comprehended the Electricity Production economic indicator and saw it’s economic importance. We shall extend our discussion and understand the impact of the Electricity Production news announcement on various currency pairs.

It is important to note that although electricity is needed for the economic development and well-being of citizens, it is not a crucial fundamental indicator. Therefore, investors and traders do not invest based on Electricity Production data. However, let us find out the impact on a few currency pairs on the day of the announcement.

The below image shows total Electricity Production in the United Kingdom, where it increased to 29731 in Gigawatt-hour in December from 28902 Gigawatt-hour in November of 2019. Let us see how the market reacts to this data.

GBP/USD | Before the announcement

We will begin our analysis with the GBP/USD currency pair and observe the change in volatility due to the news announcement. The above image shows the daily time frame chart of the currency pair before the news announcement. We see that the market has been moving in a ‘range,’ and currently, the price is almost at the top of the ‘range.’ Aggressive traders can take ‘short’ positions with a large stop-loss, as there can be volatility in the pair during the news announcement.

GBP/USD | After the announcement

After the news announcement, the price hardly makes a move and stays at the same place as it was before. There is no change in the volatility, as indicated by the ‘news candle.’ The market continues to move higher on subsequent days and breaks out from the ‘range.’ The move should not be considered as a result of news but instead was a technically driven move. Now traders should trade this currency pair using their breakout strategy.

GBP/CAD | Before the announcement

GBP/CAD | After the announcement

The above images represent the GBP/CAD currency pair, where we see that the market is in a strong uptrend before the news announcement and recently has been sideways. We should not expect major volatility in the pair. Technically speaking, we will be looking to go ‘long’ in the market after a suitable price retracement to the nearest support or demand level.

After the news announcement, the market moves higher by little, and volatility expands to the upside. We could say that since the Electricity Production data was slightly positive for the British economy, traders bought the currency after the news announcement and raised its value. At this point, we cannot take any trade as there is no formation of an appropriate continuation pattern in the market.

GBP/CHF | Before the announcement

GBP/CHF | After the announcement

The previous images are of the GBP/CHF currency pair, where we see that before the news announcement, the market is in a strong uptrend, indicating a great amount of the strength in the British Pound. Here too, the idea is to go ‘long’ in the market after a price retracement to a key technical level. The price seems to have broken out a small ‘range.’ Thus, we cannot take any position in the market at this point.

After the news announcement, the market instantly drops, and the prices move lower. The news data had a negative impact on the currency pair, where volatility increases to the downside. As the Electricity Production data does not have a long-lasting effect on the currency, the fall in price due to the release of the news can be an opportunity for joining the uptrend.

We hope you find this article informative. Let us know if you have any questions in the comments below. All the best.

Categories
Forex Fundamental Analysis

Why Understanding ‘Corruption Index’ Is Crucial In Determining Economy’s Health?

Introduction To Corruption Index

Introduction To Corruption Index

Introduction To Corruption Index

The corruption index is a score that is given to the government of a country, which indicates the degree of corruption in the country. The value is assigned from 0 to 100, with 0 indicating high levels of corruption and 100 indicating low levels. The score is given by Transparency International, an organization that tries to stop bribery and other forms of corruption activities in the country. Transparency international started ranking in 1995, and today it scores more than 176 countries and territories.

The Corruption Index focusses on the public sector and evaluates the degree of corruption among public officials and politicians. In highly corrupt countries, the judiciary’s quality and independence are usually low, and official statistics try to underestimate the level of corruption to hide the bitter truth. The international agencies are a valuable alternative source of information to report the extent of illegal practices being done by civil servants and politicians in a given country.

Impact of corruption on the economy  

Most economists view corruption as a key obstacle to economic growth. It is seen as one of the reasons for low income and plays a critical role in generating poverty traps. It prevents economic and legal systems from functioning properly. Other effects are a misallocation of talent or human development, reduction in the incentive to accumulate “capital.”

Corruption hampers development by allowing agents to interfere in the usual functioning of the government. Economists believe that corruption is like a competitive auction; those who want a service, use the power of money to get it, and the result is an inefficient allocation of resources. The resources get used by people who do not deserve or are not meant to use it.

Contrary to this idea, some people argue that corruption ‘greases’ the wheels of development and that foster growth. The main idea is that corruption facilitates beneficial trades that otherwise would not have taken place. In this way, it promotes productivity by allowing individuals in the private sector to correct or avoid government failures of various sorts.

Limitations of Corruption Index

The index has been criticized lately based on its methodology used for ranking countries. Political scientists find some flaws in the way the corruption index is calculated. These flaws include:

  • Corruption data is too complex to be captured by a single source. For example, the type of corruption in rural Michigan will be different from that in the city administration of Chicago, yet the index measures them in the same way.
  • It is seen that the corruption index is influenced by perception about it. It means it is not measured by considering its real value, where the index may be reinforcing existing stereotypes and clichés.
  • The index only measures public sector corruption and ignores the private sector. This means the well-publicized scandals such as the Libor scandal, or the VW emissions scandal were not included in the corrupt segment.

 Analyzing the data

Corruption index is an important economic indicator that most economists and money managers look at before making investments. In recent times, it is making a huge impact on the economic development of a country. Thus, we need to understand how the data is analyzed. By comparing the two countries’ rankings, one can determine which of the two economies is stronger and enjoying investor confidence.

While analyzing the data, it important to keep in mind that economies of the same stature should be compared. We cannot compare the ranking of a developed country with that of a developing country. This is because corruption has a much greater impact on the growth rates of developing countries.

Impact on currency

Public corruption in emerging countries, especially, contributes to currency crises and put a major dent in the development of the country. Corruption acts repel stable forms of foreign investment and leave countries dependent on foreign bank loans to finance growth. Foreign investors refuse to put their money in developing countries where, for example, local bureaucrats accept bribes, and the government has been known to fall prey to businesspersons and builders.

A corrupt government may be undesirable for foreign direct investment (FDI), but it may not be equally disadvantageous when it comes to obtaining loans from international creditors. This is because governments of most countries offer considerably more insurance and protections to lenders than to direct investors. The result is a country with high debts and no foreign investment. Such an imbalance leaves an economy much more vulnerable to currency crises.

Sources of information on Corruption Index

The Corruption Index is published annually by Transparency International since 1995, which ranks countries by their perceived levels of corruption in the public sector. Transparency International is the official agency that keeps track of the corruption activities and wrongdoing of the government, which is reflected in the rankings. However, other economic websites measure corruption based on their parameters and factors. They also provide a statistical comparison of different countries with a clear graphical representation.

GBP (Sterling) – https://tradingeconomics.com/united-kingdom/corruption-index

AUD – https://tradingeconomics.com/australia/corruption-index

USD – https://tradingeconomics.com/united-states/corruption-index

CAD – https://tradingeconomics.com/canada/corruption-index

NZD – https://tradingeconomics.com/new-zealand/corruption-index

JPY – https://tradingeconomics.com/japan/corruption-index

The corruption index is gaining a lot of attention and importance around the world. Corruption decreases the amount of wealth in a country and lowers the standard of living. The economic impact of corruption is measured in two ways, first, the direct impact on the GDP growth rate and, secondly, an indirect impact on human development and capital inflow. The new methodology used by Transparency International uses four basic steps, including the selection of data, rescaling source data, aggregating the rescaled data, and a statistical measure indicating the level of certainty. The data collection and calculations are done by two in-house researchers and academicians.

Impact of Corruption Index’s news release on the Forex market 

The Corruption Perception Index (CPI) scores countries on how corrupt a country’s public sector is perceived to be by experts and business executives. It is a composite index, which is a combination of 13 surveys and assessments. The data is collected and compiled by a variety of reputed institutions.

The CPI is the widely used indicator of corruption all over the world. The corruption index is closely watched by investors who take investment decisions based on the ranking. However, it has a long-term impact on the currency, and the effect may not be seen immediately after the official news release.

In this section of the article, we will observe the impact of the CPI announcement on different currency pairs and witness the change in volatility due to the news release. For that purpose, we have collected the CPI ranking of Japan, where the below image shows Japan’s corruption score and rank in 2019. A score above 50 indicates low corruption levels and that the country’s government is clean.

USD/JPY | Before the announcement

Let us start our analysis with the USD/JPY currency pair and analyze the reaction of the market. The above image shows the daily time frame chart of the forex pair before the news announcement, where we see that the market is moving in a ‘range’ with the price at the top of the range. We will look to take a ‘short’ trade once we get confirmation from the market.

USD/JPY | After the announcement

After the news announcement, volatility increases to the downside, and the price falls drastically. The market reacted positively to the news data, where we see that the Japanese Yen gains strength after the news release. As the corruption index score was positive, traders strengthened the currency, as indicated by the large bearish ‘news candle.

GBP/JPY | Before the announcement

GBP/JPY | After the announcement

The above images represent the GBP/JPY currency pair, where we see that before the announcement, the market is in a strong uptrend, and recently the market has shown signs of reversal. We should be looking to sell the currency pair if the market is not able to move higher. However, we should wait for the news release to get a clear idea of the direction of the market.

After the news announcement, the market reacts similarly as in the previous currency pair, where the price moves lower and volatility expands to the downside. As the CPI data came out to be positive, traders sold British Pound and bought Japanese Yen, thereby strengthening the currency. At this moment, one can take risk-free ‘short’ trade with a stop loss above the ‘news candle.’

AUD/JPY | Before the announcement

AUD/JPY | After the announcement

Lastly, we will find out the impact on the AUD/JPY currency pair. The first image shows the characteristic of the chart before the news announcement, where it appears that the price is moving in a channel. One needs to be cautious before taking a ‘short’ trade as the price is at the bottom of the channel.

After the news announcement, the market gets a little volatile where we see that the price moves in both directions and finally closes near the opening. The overall reaction was bullish for the currency due to the healthy CPI data. The ‘news candle’ is not enough to confirm that the market is going lower as it has lower wick on the bottom, indicating buying pressure.

We hope you understood what ‘Corruption Index’ is and the impact on the Forex market after its news announcement. Cheers!

Categories
Forex Fundamental Analysis

Ease of Doing Business – Comprehending This Macro-Economic Indicator

What is the ‘Ease of Doing Business Index?’

What is the ‘Ease of Doing Business Index?’

What is the ‘Ease of Doing Business Index?’

The ease of doing business index was created jointly by two leading economists, namely Simeon Djankov and Gerhard Pohl from the Central and Eastern sector of the World Bank Group. It is an aggregate number that includes different parameters that define the ease of doing business in a country. The ease of doing business (EODB) measures the country’s position in offering the best regulatory practices. Though the World Bank started publishing the reports in 2003, the ranking only started only in 2006.

The EODB study captures the experience of small and medium-sized companies in a country with their regulators and the relationship with their customers, by measuring time, costs, and red tape they deal with. The goal of the World Bank is to provide an objective basis for understanding and to improve the regulatory environment for businesses worldwide.

Methodology

The survey consists of a questionnaire made by a team of experts with the assistance of academic advisors. The questionnaire consists of feedback on business cases that cover topics such as business location, size, and nature of its operations. This survey’s motive is to collect information that is affecting their business and not to measure conditions such as the nation’s proximity to large markets, quality of infrastructure, interest rates, and inflation.

The next step of the data-gathering process involves over 12,500 expert contributors such as lawyers and accountants from 190 countries in the survey to interact with the Doing Business team in conference calls, written reviews, and visits by the global team. Respondents fill out the surveys and provide information relevant to laws, regulations, and different fees charged.

A nation’s ranking is decided after assessing the following factors:

  • Starting a business – idea, time, procedure, and capital required to open a new business
  • Construction permits – permissions, land, and cost to build a warehouse
  • Electricity access – procedure, time and cost needed to obtain an electricity connection from the electricity board
  • Property registration- procedure, time, and cost required to register the warehouse with the local government body
  • Getting credit and loan – the process involved in getting credit from banks, and depth of credit information index
  • Investor protection – the extent of disclosure, liability, and ease of shareholder suits
  • Payment of taxes – tax filing process, preparation of tax filing and number of taxes paid
  • Cross border trading – number of documents required, and cost for import and export
  • Enforcing contracts – procedure, time, and cost to impose debt contract
  • Insolvency process – time, cost and recovery rate under a bankruptcy proceeding

Based on the score obtained in the above sub-indices, a country is assigned a rank in the ease of doing business index. The ease of doing business report is a complete assessment of competitiveness or the business environment. Still, rather it should be considered as a proxy of the regulatory framework faced by the private sector before starting a new business.

The Economic Reports

The ease of doing business reports is an annual report published by a team led by Djankov in 2003. The report is then elaborated by the World Bank Group that basically measures the costs firm is incurring for business operations. The World Bank report is, in fact, an important knowledgeable product in the field of private sector development. It has also motivated the design of various regulatory reforms in developing countries. The study presents a detailed study of costs, time, and procedures that a private firm is subject to before opening the company. This then creates rankings for a country.

Impact on Currency

The Doing Business report is used by policymakers, politicians and development experts, journalists, and, most importantly, the fund managers to understand the easiness of starting a business in the country. More companies mean more jobs, and more jobs mean faster development. Growth in the economy is directly related to the companies’ performance and the opening of new businesses. Therefore, when regulations are eased for starting a business, it contributes to the GDP of the country longer and increases the value of the currency in the international market.

Sources of information on Ease of Doing Business 

The ease of doing business report is one of the most sought reports in the finance industry, so many financial institutions and economic websites give mention ranking of a country after collecting the data from official sources. However, the data published by the World Bank is the most reliable and factual.

Sources

GBP (Sterling) – https://tradingeconomics.com/united-kingdom/ease-of-doing-business

AUD – https://tradingeconomics.com/australia/ease-of-doing-business

USD – https://tradingeconomics.com/united-states/ease-of-doing-business

CAD – https://tradingeconomics.com/canada/ease-of-doing-business

CHF – https://tradingeconomics.com/switzerland/ease-of-doing-business

JPY – https://tradingeconomics.com/japan/ease-of-doing-business

NZD – https://tradingeconomics.com/new-zealand/ease-of-doing-business

Ease of Doing Business report is one of the most discussed issues around the world. The report that is issued by the World Bank gets a lot of attention from the government around the world. For country authorities, it sheds light on regulatory aspects of their business climate. For business representatives, it helps initiate debates and dialogue about reform.

The private sector creates pressure on the respective government to ensure required reforms to indirectly improve the country’s rank in the EODB index. Investors take the decision of investment in a country based on the ranking of that country in the ease of doing business report. From the World Bank’s point of view, it demonstrates an unconditional ability to provide knowledge and resource information. This exercise by the World Bank generates information that is useful and relevant.

Impact due to news release

In the previous section of the article, we understood the definition of ‘Ease of Doing Business’ and the methodology used for ranking a country. Now we will extend our discussion in identifying the impact of the news announcement on the value of a currency. Many case studies tell correlation exists between ease of doing business and FDI flows.

One study finds that judicial independence and labor market flexibility are significantly associated with FDI flows. The number of procedures required to start a business and strength of the arbitration regime both have a significant and robust effect on FDI. Due to these reasons, foreign investors always invest in an economy where business activities can be carried out without any obstructions.

In today’s lesson, we will analyze the impact of ‘Ease of Doing Business’ on different currencies and analyze the change in volatility due to its news release. The below image is a graphical representation of Switzerland’s rank in 2018 and 2019. We see that the country had shown improvement in it’s ranking by two places. Let us find out the reaction of the market to this announcement.

USD/CHF | Before the announcement

Let us start with the USD/CHF currency pair to analyze the impact of the ‘Ease of Doing Business’ announcement. The above image is the daily time frame chart of the currency pair, where we can see that the pair is moving within a ‘range.’ Presently, the price is at a resistance area, which means sellers can push the price lower anytime soon. Therefore, we should be cautious before taking a ‘buy’ trade in this pair.

USD/CHF | After the announcement

After the news announcement, a slight amount of volatility is witnessed, which takes the price higher that results in the formation of a bullish ‘news candle.’ Since the Swiss Franc is on the left-hand side of the pair, a bullish candle indicates bearishness for the currency, and that is becoming weak. We can say that the news announcement a slight negative on the currency.

CAD/CHF | Before the announcement

CAD/CHF | After the announcement

The above images represent the CAD/CHF currency pair, where it appears that the market is moving in a channel before the news announcement. We should be looking to sell the currency pair as the price is at the top of the channel. However, the news announcement shall give us a clear direction of the market. We will not be taking any position before the news release as the news release has a moderate to high impact on the currency pair.

After the news announcement, the price moves a little higher and closes with some amount of bullishness. As the ‘ease of doing business’ was not so encouraging for the economy, traders went ‘short’ in Swiss Franc right after the news release. However, the effect does not last long, and the market collapses a couple of days later.

CHF/JPY | Before the announcement

CHF/JPY | After the announcement

The above images are that of the CHF/JPY currency pair, where we see a strong move to the upside before the news announcement, and currently, the price is at the resistance turned support area. There is a high chance of buyers becoming active at this point; hence, sell trades should be avoided.

After the news announcement, we witness some volatility in the market that takes the price lower but not by a lot. The impact was not great on this currency pair as the country slipped below by two places in the ‘ease of doing business’ ranking. When the impact of news settles down, one should start analyzing the pair technically and take the position accordingly.

That’s about the ‘Ease of Doing Business’ as an economic indicator and its relative impact on the Foreign Exchange market. Cheers!

Categories
Forex Daily Topic Forex Fundamental Analysis

Understanding The Importance Of ‘Terms Of Trade’ As A Macro Economic Indicator

Introduction

Introduction

Introduction

Terms of Trade is a direct and useful measure of an economy’s International Trade health and gives us a good measure of how fast capital is moving in or out of the country. Terms of Trade make analyzing Balance Of Payments and, more specifically, Current Account Balance easier. Understanding of Terms of Trade can help us better analyze the current liquidity of the economy and its changes in a more crude way.

What are Terms Of Trade Indices?

Terms of Trade is the ratio of its Export Prices and Import Prices. It is the ratio of money received on exports to money spent on imports. If there is an individual’s analogy to be made, then it would be the ratio of an individual’s monthly income to his monthly expenses. Mathematically, it would be the number of export goods that can be purchased per unit of import.

Terms of Trade ratio expressed in percentages, and hence the ratio is multiplied by a hundred. A TOT figure above100 indicates that the country is receiving more on its exports than on its income and vice-versa.

When a country has a TOT figure of more than 100, it means that it is receiving more capital on exports compared to sending capital out on imports. Hence, on an overall basis, capital is flowing into the country. Higher the ratio, the faster the rate at which capital flows into the country. It ultimately translates to the pace at which a country is becoming wealthy and liquid.

When a country has a TOT figure less than 100, it means capital is flowing out of the economy, and its import expenses exceed that of its export revenue generated. Continued periods of TOT figures less than 100 will drive the economy to a vicious debt cycle from which recovery may be difficult. The ratio will tell us how fast the capital is depleting from the economy and is nearing a financial crisis. Countries prefer to have a ratio above 100.

The ratio tells us the rate at which the economy is accumulating capital. On the global market place and International Trade, the ratio will determine what portion of the world’s wealth goes to each country. In other words, based on the demand and supply on the international markets, the ratio will tell us how profits from international trade will be distributed amongst the participating countries.

How can the Terms Of Trade numbers be used for analysis?

Since TOT is a ratio change in TOT, figures can imply multiple things. An improvement in TOT figure could mean:

  1. Export prices have increased in contrast to Import prices being stagnant or dropped.
  2. Export prices would have dropped but not as sharply as import prices. Both dropped but not to the same degree.
  3. Export prices would have stayed the same while Import prices would have dropped.

All the above scenarios can lead to an improvement in the TOT figure. Hence, simple changes in TOT figures cannot be directly used to draw economic conclusions. It is crucial to understand the factors that have resulted in a change in TOT numbers. It is crucial to know whether the change is a consequence of a short-term shock or development or a consistent long-term trend that will persist throughout the coming periods.

TOT is susceptible to multiple economic factors, some of which are:

Exchange rate: A decrease in exchange rate adversely affects imports and benefits exports and vice versa. Imports become costly, and exports become cheap, adversely affecting TOT.

Inflation: The inflation rate across different economies and different sectors affect different economies having different export and import portfolios. For example, a sharp increase in Iron Ore prices can greatly benefit Australia, whose chief exports are Iron Ore, while it can affect importing countries like China and Japan adversely. So inflation across sectors have different impacts across economies and within the country amongst different sectors.

Demand and Supply: Increase in demand, coupled with the availability of those resources also affects TOT as exports and imports are a function of demand and supply. Scarcity increases prices and oversupply decreases the same.

Quality of Produce: Size and quality affect the pricing of products. A high-quality product is likely to cost more and benefit the exporter more. Hence, the portfolio of the country’s exports and imports determines the TOT fluctuations of different product grades.

Trade Tariffs: Protectionist strategies from Governments lead to putting trade barriers on imports. The political and trade ties between countries can also affect the long term trend of TOT figures for a given economy.

Portfolio of Exports and Imports: What types of Goods and Services a country exports and imports also matter. Countries that export goods and services that are more of primary importance (ex: food and energy) tend to always have high demand and TOT ratio more than 100 both within the economy and on the global economy.

Impact on Currency

When the TOT figure is above a hundred, it implies domestic currency is flowing into the country and creating a deficiency in the global market. Hence, higher TOT figures will increase its currency demand and thereby leading to currency appreciation. On the other hand, a continued TOT less than 100 indicates the world is being supplied with domestic currency and therefore leads to currency depreciation.

It is a coincident indicator and is more useful as a long-term trend indicator rather than short-term changes. The indicators affecting TOT would have been identified through Trade agreements or other media sources in general and hence, is a mild-impact indicator.

Economic Reports 

The Bureau of Economic Analysis publishes its TOT figures in the National Income and Product Accounts every quarter of the year on its official website. Below is a figure for an illustration of the same:

We can also find the aggregated TOT reports for the OECD countries on the official website. The World Bank also aggregates and maintains TOT data for most countries on its official website.

Sources of Terms Of Trade

For the US, we can find the Terms of Trade in their National Income and Product Accounts here:

BEA – National Income and Product Accounts

OECD – Terms Of Trade

World Bank – TOT

We can also find Terms of Trade Index for many countries categorized here.

Impact of the ‘Capacity Utilization’ news release on the price charts

In the previous section of the article, we learned the Terms of Trade economic indicator and understood its significance in an economy. The ToT Index measures the ratio of an export to the price of an import, per commodity. A country that heavily relies heavily on exports, this number gives an important hint of the nation’s growth. Even though the Terms of Trade is useful in determining the balance of trade in a country, it does not have a major influence on the GDP of the economy. Therefore, investors don’t give much importance to the data during the fundamental analysis of a currency.

Today, we will be analyzing the impact on Terms of Trade on different pairs and witness the change in volatility due to the news release. The below image shows the latest Terms of Trade data of New Zealand that indicates an increase in the value compared to the previous quarter. A higher than expected reading is considered to be positive for the currency while a lower than expected reading is considered as negative. Let’s see how the market reacted to this data.

NZD/USD | Before the announcement:

We shall start with the NZD/USD currency pair to examine the impact of Terms of Trade on the New Zealand dollar. In the above price chart, we see that the market is in a strong downtrend before the news announcement with increased volatility. Currently, the price is at a key technical area, which is known as the ‘demand’ area, and hence we can expect buyers to come in the market at any moment. Thus, once needs to be cautious before taking a ‘short’ trade.

NZD/USD | After the announcement:

After the news announcement, the market moves lower and volatility increases to the downside. The Terms of Trade data showed an increase in the total percentage, but this was not good enough for the market players who apparently took the price down and weakened the New Zealand dollar. Although the ‘News Candle’ closes in red at the time of release, it gets immediately taken over by a bullish candle, as this was a ‘demand’ area.

NZD/JPY | Before the announcement:

NZD/JPY | After the announcement:

The above images represent the NZD/JPY currency pair, where we see that the characteristics of the chart are similar to that of the above-discussed pair. Before the news announcement, here too, the market is in a strong downtrend, and the volatility appears to be high on the downside. One thing that is different in this pair is that the price is presently at its lowest point and seems to have made a ‘lower low.’ This means New Zealand is weaker in this pair.

After the news announcement, market crashes and the price drops sharply. The Terms of Trade has a similar impact on the pair, where we see a further increase in volatility to the downside. Again. the weakness does not sustain, and the price shows a large bullish candle after the ‘news candle.’

NZD/CAD  | Before the announcement:

 

NZD/CAD  | After the announcement:

Lastly, we shall discuss the impact on the NZD/CAD currency pair and observe the change in volatility. Here, we see that the market is continuously moving lower before the news announcement indicating a great amount of weakness in the New Zealand dollar. Just before the news release, the price seems to be approaching the ‘demand’ area, which can possibly change the trend for a while by initiating some bullishness in the pair.

The Terms of Trade news announcement gets lukewarm from the reaction where the price initially moves higher little and finally closes forming a ‘Doji’ candlestick pattern. The news release leads to further weakening of the currency where the volatility expands on the downside.

That’s about ‘Terms Of Trade’ and its impact on the Forex market after its news release. If you have any questions, please let us know in the comments below. Good luck!