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.

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Forex Fundamental Analysis

‘Productivity’ as a Fundamental Indicator & Its Impact On The Forex Price Charts

Introduction

Introduction

Introduction

Productivity is an important fundamental indicator that talks about the levels of the industrial output of a country. It is one of the leading indicators in the Forex market, which has a long-term impact on the currency’s value. The industrial output is linked to the theory of demand and supply, which means the availability of raw material and policies set by the monetary policy committee directly affects the overall output. Let us understand this concept in depth by looking at the definition of Productivity first.

What is Productivity?

Productivity is defined as the ratio of total output volume to the total input volume. The ratio is mentioned in the form of an average, which expresses the total output of a category of goods divided by the total input, say raw materials or labor. In simple words, Productivity measures how efficiently the inputs such as labor and capital are being used in a country to produce a given level of output.

Productivity determines economic growth and competitiveness and hence is the basic source of information for many international organizations for measuring and assessing a country’s performance. Analysts use ‘Productivity’ data to also determine capacity utilization, which in turn allows one to assess the position of the economy in the business cycle and to forecast economic growth.

Measuring Productivity

Before we see how Productivity is analyzed, we need to consider various methods of measuring the output and input components of Productivity and the limitation of using each of these estimates.

Output

When we are talking about output, the number of units produced of each category of commodity or service should be counted in successive time periods and aggregated for the company, industry, and the whole economy. This output should be measured in comparison to some other indicator of equal importance, usually cost or price per unit in a period. The changes in the price of the goods produced are observed for two or more periods that are said to influence the aggregate output volumes. Price deflation is usually employed to get the estimation of the real gross product by sector and industry. The obtained estimates will be used as numerators in the productivity ratios.

The limitation of using the above methods is that quantities and prices for many outputs of finance and service industries are deficient.

Input

Labor input is easy to measure, as it only involves counting the heads of persons engaged in production. But in fact, the number of hours worked is preferable to just the number of people. This dimension, too, is related to the compensation received per hour of work, also known as wage. The official estimates, however, do not differentiate among various categories of labor where they measure labor inputs by occupation, industry, and other categories.

The drawback of using this method for estimating the labor input is that it is difficult to find the relation between the number of hours worked and hours paid for during paid holidays and leaves.

Determinants of Productivity

Technology determines the maximum level of output that can be reached and the quality of output that is required. In this age of technological advancement, innovations and automates systems play a major role in carrying out the production activity. Technological changes are happening very fast in some industries while it is gradual in others.

The Skills of the workers matter a lot when determining Productivity on an individual level. For example, if an unskilled worker tries to carry out a task, he might make more mistakes and will not be able to optimize the time to work, whereas a skilled worker will need less time to do the same job.

Some other methods of attaining high Productivity are through adequate levels of earnings, high job security, quality education and training, good and safe working conditions, and an appropriate work-life balance.

The Economic Reports

The economic reports of Productivity are published every month for most of the countries. There is also the collective data that combines the monthly statistics of a country which is published on a yearly basis. The productivity data is maintained and provided by two big OECD (Organisation for Economic Cooperation and Development) databases, which are ISDB (International Sectoral DataBase) and STAN (Structural Analysis DataBase). At these sources, we can find the data from 1970 for countries like the United States, Japan, and other European countries.

Analyzing The Data

From a trading perspective, Productivity plays a vital role in the fundamental analysis of a currency pair. The productivity data shows the production capacity of a country. Using this data, various agencies decide which goods need to be imported and exported from the country. By comparing the data of two countries, one can determine which economy is stronger and has the potential to grow.

One thing to keep in mind when analyzing the data is to compare similar economies as different countries will have a different level of development. When looking at developed countries, it is fair to expect the productivity ratios to be in triple digits, and for developing economies, it could be in two digits.

Impact on the currency

The impact due to Productivity on the currency is split into two different categories, i.e., the ‘traded’ and the ‘non-traded’ sector of the economy. The ‘traded’ sector is made up of industries that manufacture goods for import to foreign countries and hence have a presence in the foreign exchange market. The ‘non-traded’ sector is comprised of industries that produce goods for the domestic market only.

So, as the prices of goods of the ‘traded’ increase, the currency of that country is set to appreciate and thereby increasing the inflow of funds into the country. In the case of ‘non-traded’ sector goods, an increase in the price of such goods is not good for the economy as this would make the products costlier and people will have to spend more to purchase them. This would negatively impact the currency, and institutions will not be willing to invest in such countries.

Sources of information on Productivity

Productivity data is available on the most prominent economic websites that provide a detailed analysis with a comparison chart of previous data. Using this information, a trader can analyze and predict the future data of the economy. Here is a list of major countries of the world with their productivity stats.

GBP | AUD | USD | EUR | CHF | CAD | NZD | JPY  

Higher Productivity has an impact on the profit of a company and the wages of the employees. High profits due to high Productivity generate cash flow, increase loan provision from banks, and, most importantly, attract investment from foreign investors. Due to this, companies can afford to pay more wages to their employees without losing market share.

Impact Of Productivity News Release On The Price Charts 

Productivity is one of the most important economic indicators that measure the annualized change in the labor efficiency of the manufacturing sector. As Productivity plays a major role in an economy, it is necessary to analyze the impact of the same on the currency. The below image shows that Productivity is not a crucial factor for forex traders, which means the Productivity data might not have a long-lasting effect on the currency. However, one should not forget the data that affects the manufacturing sector and hence indirectly impacts the GDP. Therefore, we should not underestimate the figures.  

To explain the impact, we have considered the NonFarm Productivity of the US, which is released by the Bureau of Labor Statistics of the US Department of Labor. A ‘higher than expected’ reading should take the currency higher and is said to be positive for the economy, while a lower than expected reading is considered to be negative for the economy and should take the currency lower. The latest figures show that there has been a 1.4% rise in Productivity levels from the previous quarter. Let us find out the impact on the US dollar.

NZD/USD | Before the announcement | 5th March 2020

The above chart is of the NZD/USD currency pair before the Productivity numbers are announced. What we essentially see is a strong down move that has resulted in a reversal of the uptrend. The volatility is high even before the news release. The reason behind this move is much greater expectations of Productivity than before, which is making traders buy US dollars. Now, if the Productivity numbers were to be lower than before, we can expect a reversal of the downtrend, but it might not be sustainable as it is not a high impactful event.

NZD/USD | After the announcement | 5th March 2020

After the Productivity data is announced, volatility further increases on the downside, and the market moves much lower. What we need to observe is that even though the market goes lower, it fails to make a ‘lower low.’ This is because the productivity data is not of much importance to traders, and hence the impact will not last long. Therefore, the market respects the news for just a couple of candles and later takes support at the lowest point and goes higher. From a trading point of view, the only way to trade Productivity news release in this pair is by going ‘short’ after the news outcome and exit at the nearest opposing point.

GBP/USD | Before the announcement | 5th March 2020

GBP/USD | After the announcement | 5th March 2020

The above images represent the GBP/USD currency pair, where the characteristics of the chart are totally opposite to that of the NZD/USD chart. Here, the uptrend seems to be dominating, which is also confirmed by the moving average indicator. The forecasted productivity data is not having any impact on the pair before the news announcement, which means the data is relatively weak against British Pound. After the announcement is made, we see the market moves up as the data was no better than the forecasted data. The ‘news candle’ leaves a wick on the top since the data was mildly positive for the US dollar but has no significance. Therefore, the volatility increases on the upside with a minor impact, and the market continues its uptrend. In this pair, we don’t really see a point of ‘entry’ as we don’t have technical factors supporting the trade and hence should be avoided.

USD/CHF | Before the announcement | 5th March 2020

USD/CHF | After the announcement | 5th March 2020

The above chart of USD/CHF is similar to that of GBP/USD pair, but since the US dollar is on the left-hand side, the chart is in a downtrend. Here too, the US dollar is showing a great amount of weakness before the news announcement, which means even a positive Productivity data is less likely to result in a reversal of the trend. After the news announcement, we see that the price suddenly shoots up, and the price closes as a bullish candle. As the impact of Productivity data is less, the sudden rise in volatility shouldn’t last, and hence this could provide an opportunity for joining the trend. When volatility increases on the downside, we can take ‘short’ positions in the market with a stop loss above the ‘news candle.’ This is how we need to analyze such news outcomes.

That’s about Productivity and its impact on the Forex market. If you have any doubts, please let us know in the comments below. Cheers.

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Forex Fundamental Analysis

The Impact Of ‘Cash Reserve Ratio’ On A Country’s Currency

Introduction to Cash Reserve Ratio

Introduction to Cash Reserve Ratio

Introduction to Cash Reserve Ratio

The cash reserve ratio (CRR), also called the reserve ratio, is the minimum amount of deposits of the clients that are to be held by the commercial banks as cash or deposits with the central bank of the country. It is expressed in terms of a percentage. However, the rest can be used for investment and lending purposes. This is primarily done for two reasons; one, to maintain liquidity in the banks, and two, to not let the banks go bankrupt when they need to pay their depositors when demanded.

The amount deposited by the commercial bank into the central bank is unlike depositing into debt and equity funds. That is, the central banks will not pay any interest to the commercial banks for it.

How is the Cash Reserve Ratio Calculated?

The Reserve Requirement times the Bank Deposits yields the Cash Reserve Ratio.

Cash Reserve Ratio = Reserve Requirement x Bank Deposits

Where,

Reserve Requirement is a percentage value determined the central banks by considering factors such as supply and demand, inflation rate, spending rate, trade deficits, etc.

Bank Deposits is the Net Demand and Time Liabilities (NDTL), which is the deposits made by the customers into commercial banks.

To understand this clearly, let’s take an example. Let’s say a depositor deposits the US $5000 into his bank account. This amount is referred to as Net demand and Time Liability (Bank Deposits). Also, consider the reserve ratio (reserve requirement) to be 6%. Now, the bank will have to hold 6% of the depositor’s amount (the US $5000) as reserves; that is, US $300 is given to the central bank as cash reserves. The leftover amount (US $4700) can be used for investment as well as for lending loans. If we were to assume that the lost out of $4700, then the bank will have will still $300 safe with the central bank.

The Measure and Impacts of Cash Reserve Ratio 

The Cash Reserve Ratio is an important tool in the monetary policy. As its primary use, the reserve ratio is used to control the money supply of an economy. It also regulates inflation rates and keeps in the liquidity flowing in the markets.

The Reserve Ratio typically measures the change in the interest rates and inflation in an economy. Now, let’s vary the CRR and check on the changes in the inflation rates, interest rates, and the money supply.

Case 1: Decrease in the Cash Reserve Ratio

The CRR is the part of deposits of the customers that are held by the central banks. Now, if there is a decrease in the CRR, the amount held by the central banks is lesser, which implies that the commercial banks will have more amount in their hands. In such scenarios, the banks typically reduce the interest rates on loans they provide. Also, the decrease in the reserve ratio increases the money supply in an economy, and this, in turn, increases the inflation rate.

Case 2: Increase in the Cash Reserve Ratio

The implication when the CRR increases is the opposite of the above case. An increase in the CRR means that the amount held by the central banks is higher, which reduces the amount held by the commercial banks. Now since they have less money in hand, they compensate it by increasing the interest rates on the loans they provide. The money supply, in this case, decrease, which drops the inflation rates as well.

Impact of Reserve Ratio on the Currency

The Reserve Ratio does have an impact on the currency, but indirectly. It does help in determining the demand for the currency. In the previous section, we saw that an increase or decrease in CRR affects inflation and interest rates. As a matter of fact, an increase in the interest rate increases the demand for the currency, given all other factors are kept in favor of the currency. Also, the increase in the interest rates attracts more foreign investors, which creates more demand for the currency. On the other hand, the decline in the interest rates, in general, brings down the demand for that currency. Foreign investors, too, don’t have their eyes here anymore.

Note that, Reserve Ratio or the interest rate for that matter alone does not determine the demand for that currency. There are several other considerations that must be made along with this—for instance, the relationship between interest rates and inflation. Higher interest rates with a decent and feeble increase in inflation can prove a positive effect on the currency.

Cash Reserve Ratio: The Stats

There are portals over the internet where one can find the historical data as well as the forecast data. One can also analyze them by the different types of graphical representations they provide.

India | Brazil | China | Russia

How often is the data released?

The frequency of release of the reports is the same for most of the countries. In countries such as China, Malaysia, Russia, Brazil, etc. the data released every month, while it is released daily in India.

Effect of Cash Reserve Ratio on the Price Charts

Now that we’ve fairly got an idea about the reserve ratio, let’s see how the prices are affected after these reports are out. Precisely, we will see how the volatility of the market has changed as well as the effect in volume.

For our example, we will be taking the Indian Rupee into account to analyze the charts. The frequency of release of data of Reserve Ratio in India is daily. The reports are published by the Reserve Bank of India.

Note that the Cash Reserve Raito data has a feeble impact on the currencies. Since the CRR is indirectly impacted on the currency, the level of impact is pretty low compared to other fundamental indicators such as interest rates, GDP, inflation, etc.

Consider the below announcement made by the Reserve Bank of India. We can that the announcement was made on February 6th at 6:15 AM GMT, and the value reported was 4%, which was the same as the previous month as well as forecasted value.

Now, since the actual values are the same as the previous and the forecasted value, we cannot expect any high volatility or a shoot up in volume as such. However, let’s analyze a few charts and see its impact.

USD/INR | Before the Announcement – (February 6, 2020)

Below is a chart of USD/INR on the 15min timeframe just before the news was released.

USD/INR | After the Announcement – (February 6, 2020)

Consider the chart of USD/INR on the 15min timeframe after the release of the news. The news candle is represented as well. We can see that the news favored the US dollar but not the Indian Rupee. However, the movement wasn’t as gigantic as such. The volatility was above the average, and the volume was quite low. From this, we can conclude that the reports didn’t have any massive impact on the USD/INR.

EUR/INR | Before the Announcement – (February 6, 2020)

EUR/INR | After the Announcement – (February 6, 2020)

Below is the chart of EUR/INR in the 15min timeframe. The news candle has been marked in the box, as shown. We can clearly infer that the news candle barely made a drastic move in the market. Nonetheless, the volatility was above the average mark. So, news traders cannot expect any high volatility during the release of the news. And traders who stay away from the markets during the news can now trade fearlessly as the news doesn’t have a major impact on the currency.

GBP/INR | Before the Announcement – (February 6, 2020)

GBP/INR | After the Announcement – (February 6, 2020)

Below is the chart GBP/INR on the 15min timeframe after the release of the news. The news candle is illustrated in the box, as shown. Similar to the USD/INR and the EUR/INR, this pair, too, has not shown any rise in the volatility as such. In fact, the volatility of this pair is at the average line. So, with this, we can conclude that the Cash Reserve Ratio barely has an impact on the currency.

Conclusion

The Cash Reserve Ratio is the amount of money that is deposited by the commercial banks into the central banks. This is primarily done to maintain the volatility in the banks. The reserve ratio is an important monetary policy tool. Moreover, it determines and maintains the interest rates, inflation, as well as the money supply of an economy. A rise or fall in the CRR brings a change in the previously mentioned indicators. Hence, this is a vital and very helpful fundamental indicator for both economists and investors. But comparatively, it is less helpful for the day traders, as the impact is feeble.

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Forex Fundamental Analysis

Understanding ‘Core Inflation’ & It’s Impact On The Forex Price Charts

Introduction

Introduction

Introduction

Core inflation is the change in the price of the goods and services that do take food and energy into account. It is referred to as ‘core’ because it represents the most accurate illustration of the underlying inflation trends. The reason for the exclusion of food and energy is due to its high volatility. They change so often that they may depict an inaccurate reading of the inflation rate. And the commodity market is the sole cause behind the volatility, as it extensively traded all day.

Why Exactly Food and Energy are Excluded

As already mentioned, Food and Energy are exempted from the calculation of core inflation because the volatility in these markets is too high. This reduces the accuracy of the core inflation rates. Food and energy are considered as the most necessary staples; that is, their demand does not change even if there is a price hike. For instance, let’s say the gas prices rise due to the rise in oil prices. But this rise will hardly affect you as you’ll still need to fill up your tank in order to drive your vehicle. Similarly, you will not become hesitant to go to the grocery store because the prices have risen.

Oil and gas are commodities that are traded on the exchange market where people can buy and sell them. The commodity traded bid on the oil prices when they suspect a fall in supply or a rise in demand. Also, the thick that war will bring down the supply of oil. With this assumption and analysis, they buy at the present price and anticipate a higher price in the future. And this is enough to pump up the oil prices in the market. And if things don’t go as per the plan, the prices fall when they sell. Hence, this creates high volatility in the market.

The food prices are dependent on the prices of gas. The food prices tend to rise along with the gas prices because transportation of the food is dependent on trucking. When the oil prices rise, the effect can be seen in the gas price a week later. And if the gas prices maintain its uptrend, the effect of it can be observed on the food prices a few weeks later.

Measuring Core Inflation

The core inflation is measured by both the Consumer Price Index (CPI) and the core Personal Consumption Expenditure Index (PCE). The PCE is the depiction of the prices of goods and services purchased by consumers in the United States. Also, since inflation determines the trend in trend in the rising prices, the PCE is a vital metric in assessing inflation. However, both PCE and CPI are considered to be very similar as both help in determining the inflation in the economy.

CPI and PCE – Which is the Preferred Measure?

It is observed that PCE tends to provide inflation rates that are less affected by the short-term price changes, which is why the Federal Reserve prefers the PCE index over the CPI. The Bureau of Economic Analysis (BEA), a division of the Department of Commerce, measures the rates by using the existing gross domestic product (GDP) data, which helps in determining the overall trend in the prices. The GDP gives the measure of the total production of goods and services. In addition, BEA takes in the monthly Retail Survey data and compares it with the consumer prices generated by the CPI. In doing so, the data irregularities are removed, which helps in providing long-term trends.

Why is Core Inflation Important?

It is important to asses core inflation because it determines the relationship between the price of the goods and services and the level of the consumer income. If there is an increase in the price of the goods and services and no proportional increase in consumer income, consumer buying power will decrease. So, we can conclude that inflation causes the value of money to depreciate compared to the prices of goods and services.

However, if the consumer income increases, but the price of the goods and services remains unchanged, consumers will theoretically have money buying power. Moreover, there will be an increase in the investment portfolio, which leads to asset inflation. And this can generate additional money for consumers to spend.

Core Inflation and its Impact on the Economy and Currency

Core inflation has both a subtle and destructive effect on economic growth. It is said to be subtle because an increase of one or two percent takes quite a while. However, this can have a positive effect at this rate as well. People purchase goods and services beforehand, knowing that price will rise in the near future. Hence, this increase in demand stimulates economic growth. And since currency depends directly on the economy, the price of the currency rises as well.

Inflation can have a negative effect on the economy, as well. That’s because people will have to spend how much ever high price on food and gas, as they are the essentials. This brings down other consumer sectors in the market because people tend to spend less here. Their businesses are less profitable now. This imbalance in the market lowers the economic output.

Reliable sources of data for Core Inflation

The core inflation rate is released by the countries’ statistics board. For most countries, it is released on a monthly basis. And the reports are in terms of percentages. Below is a list of sources of core inflation data for different countries.

EUR | USD | AUD | GBP  For other world countries, you may access those reports here.

How does Core Inflation Affect the Price Charts?

Until now, we understood the definition of Core inflation and its impact on the economy and the currency. Here we shall see the immediate effect of the currency pair when the reports are released. For our example, we will be taking the U.S. dollar for our reference. The core inflation rate in the U.S. is released by the U.S. Bureau of labor statistics. The frequency of the announcement of data is monthly.

Below is the core inflation data released by the U.S. Bureau of labor statistics for the month of February. But, the data for it is announced in the first week of March. We can see that the core inflation has turned to be 2.4 percent, which is 0.1 percent higher than the previous month and the forecasted value. Now, let’s see how this value has affected the U.S. Dollar.

EUR/USD | Before the Announcement – (March 11, 2020 | Before 12:30 GMT)

Below is the chart of the EUR/USD on the 15min timeframe just before the release of the news.

EUR/USD | After the Announcement – (March 11, 2020 | After 12:30 GMT)

Below is the same chart of EUR/USD on the 15min timeframe after the release of the news. The news candle has been represented in the chart as well. It is evident from the chart that the news did not have any effect on the currency pair. Though the reports showed an increase in the core inflation, there was hardly any drastic pip movement in the pair. Also, the volatility was below the average, and the volume was low. With this, we can come to the conclusion that the core inflation rate did not impact the EUR/USD.

GBP/USD | Before the Announcement – (March 11, 2020 | Before 12:30 GMT)

GBP/USD | After the Announcement – (March 11, 2020 | After 12:30 GMT)

Consider the below chart of GBP/USD on the 15min timeframe. We can see that the news candle was a bearish candle. That is, the news was positive for the U.S. Dollar. However, if we were to check on the volatility of the market, the volatility when the news came out was at the average value. Seeing the volume bar corresponding to the candle, it wasn’t high as such. Hence, the core inflation did not impact the GBP/USD.

Traders who wish to trade this pair can freely go ahead with their analysis as the news has a very light impact on the USD.

USD/CAD | Before the Announcement – (March 11, 2020 | Before 12:30 GMT)

USD/CAD | After the Announcement – (March 11, 2020 | After 12:30 GMT)

Below is the USD/CAD candlestick chart on the 15min timeframe after the release of the news. The news showed an increase in the core inflation rate by 0.1 percent. In the chart, we can see that the report turned out to be positive for the USD. In fact, the news candle actually broke the supply level and went above it. Compared to EUR/USD and GBP/USD, the core inflation had a decent impact on USD/CAD. However, the volatility was at the average mark, and the volume didn’t really spike up.

Conclusion

Core inflation is an economic indicator that measures the inflation of an economy without considering food and energy. This is because of the high volatility in the food and energy market. The core inflation rates are usually taken from the CPI or the PCE. This is an important indicator as it determines the relationship between the price of goods and services and consumer income.

It also gives an idea of the current economy of a nation. However, when it comes to its effect on the currency, there is not much impact on it. So, conservative traders can trade the markets without fearing the release of the news, as there is no drastic rise in the volatility of the markets.

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Forex Fundamental Analysis

‘Labor Force Participation Rate’ & It’s Impact On The Forex Market

What is the Labor Force Participation Rate?

What is the Labor Force Participation Rate?

What is the Labor Force Participation Rate?

Labor force participation rate can be defined as the group of the population who are between the age of 16 and 64 in the economy that is currently employed or unemployed (seeking employment). The other set of the population, including the ones who are still undergoing studies, people who are above the age of 64, and the housewives, do not fall into the labor force participation rate. As far as the formula for this concerned, it is the sum of all the employed people and the people seeking employment divided by the total noninstitutionalized, civilian working-age population*.

LFPR = Labor Force / Civilian Non-Institutionalized Population

Where Labor Force = Employed + Unemployed

Working-age population – this is the population of people in an area that is considered to be capable of working in a predetermined age range criterion.

More about Labor Force Participation Rate

The LFPR is a measure to evaluate the working-age population in an economy. This working-age population is a dataset of only those people who are between the age of 16-64.

Since the LFPR involves the calculation of the number of employed and unemployed people, this indicator is closely related to the unemployment rate. The LFPR is a vital metric when the economy is under recession or is slowing down. This is when the people get their eye caught into the unemployment data.

When the market is under recession, the labor force participation rate tends to go down. The reason to account for it is simple. At the time of recession, the economic activity is feeble, which results in fewer jobs across the nation. This, in turn, discourages the people from focusing on their employment and hence leads to a lowering of the participation rate. In addition, the participation rate is an important factor in understanding the unemployment rate.

The group of people who are not interested in working or are in some sort of insignificant type of job is not included in the participation rate. But, when it comes to the understanding of the unemployment rate in detail, we do take the participation rate into account. A population that has a majority of them who are aging, it can have a negative impact on the economy of any country. And this is when the labor participation rate comes into play. If the value is on the higher side, this is a good sign for the economy. But, for smaller values, the countries need to be cautious of their economies. This is the reason, both participation rate, as well as the unemployment rate, must be looked carefully into and simultaneously to get a clear understanding of the overall employment status in the economy.

What do the trends have to say?

Consider the above chart representing the labor force participating rate in the U.S. for two over two decades from 2000 to the present year. Defining as per the chart, the labor force participation rate is the population of people who are able to work as a percentage of the total population.

Going behind the specified period, the rate increased from 1960 to 2000, as women came into the picture of the workforce. At the beginning of 2000, the rate peaked at 67.3 percent. But, due to the recession that happened the very next year, the rate dropped to 65.9 percent by April 2014. Similarly, the recession in 2008, lowered the labor force participation rate even more to 62.3 percent by October 2015. In the coming years, though there wasn’t any significant financial crisis, the rate had risen only to 62.9 percent.

The primary implication to drop could be the falling of the supply of workers. So now, fewer works should manage to negotiate for higher wages. But things turned out to be different. The income inequality increased, and as a result, the average income workers were hit hard. And understandably, they could not put up a competition with robots. Moreover, businesses replaced capital equipment instead of hiring more labor as they found it be cost-effective.

The consistent falling rates of the labor force participation can be boiled to the four points listed below:

  • An aging population
  • Long-term unemployment, leading to structural unemployment
  • Increased opioid dependency
  • Sickness to the extent that they cannot work

How the ‘Labor Force Participation Rate’ Impacts the Economy?

The countries whose population has a skilled and mobile labor force that can adapt to the changing business needs, tend to have a good labor force and stable participation rate.

Investment in human capital plays a role in the valuation of the LFPR. When countries invest more in human capital and stand better than the crowd (rest of the countries), their economy tends to stay above the average mark.

Labor mobility acts as a great add-on to the labor force as well as the economy. The nations with mobile workers have the skill set to negotiate workers, change employers, and start new businesses. The U.S. is one such example of the same. They are much better than other developed countries when it comes to moving to find a job.

Impact of Labor Force Participation Rate on the Currency

The labor force participation rate determines the population in an economy who are employed and unemployed in a certain predefined age range. And this goes hand in hand with the unemployment rate of an economy. Hence, we can conclude that the impact of the currency from LFPR correlates with the unemployment rate.

A rise in the labor force participation rate implies an increase in the participation rate. And this is a positive sign for the economy of a country. Thus, an increase in the participation rate can lead to an appreciation in the value of a currency.

Contrarily, a downfall in the labor force participation rate implies that the labor force is dropped due to the bad performance of an economy. This typically happens during recession times. Therefore, to sum it up, a decline in the LFPR could indicate a negative effect on the currency.

Reliable Sources for Statistics on Labor Force Participation Rate

Firstly, the frequency of release of reports on the Labor Force Participation Rate is 30 days. All the data is expressed as a percent.

Below is a list of links through which one can access the participation rate data for different countries. The information that can be retrieved from the sources are as follows:

  • Actual, previous, highest, and lowest data
  • Graphical statistics for a period of more than 25 years
  • Forecast

USD | GBP | EUR

For the rest of the countries, you may click the link here to access the reports.

Impact of Labor Force Participation Rate Announcement on the Price Charts

Now that we’ve understood pretty much on the theoretical concepts of Labor Force Participation Rate, let’s get a little technical and see how the reports of this economic indicator affect the prices of the currency. Basically, we will be seeing the movement in the charts before the release of the news and then observe its effects after the release of the news.

As already mentioned, this data is released on a monthly basis for most of the countries. For our discussion, we shall be considering the LFPR of the United States. That is, we will be analyzing how the LFPR affects rates of the U.S. Dollar.

Consider the below report released by the U.S. Bureau of Labor Statistics. The Labor Force Participation Rate in the United States has remained unchanged at 63.4 percent in February 2020. Note that, though the data is released in March, in reality, it is the reports for the month of February.

Now that we know the actual value is the same as the previous data, as well as the forecasted data, let us examine how it has affected the prices of the U.S. Dollar.

EUR/USD | Before the Announcement (March 6, 2020)

Consider the EUR/USD chart on the 15min timeframe. At this point in time, we can see that the market is in an uptrend and is presently moving sideways. Let’s see how the price is affected when the news comes out the next candle.

EUR/USD | After the Announcement (March 6, 2020)

Below is the same chart, but after the announcement of the news. The news candle is clearly represented in the chart as well.

We can see that after the news was released, the candlestick left a small wick on the top and a long wick on the bottom and closed a few pips below the open price. We can infer that the news didn’t much create a drastic move in the market. This is because the actual rate was the same as the previous rate. However, the volatility of the market showed an increase. The ATR indicator indicated that the current market volatility was ten pips. But, the volatility after the news release jumped to 27 pips. The volume too increased after the release of the news, which can be seen at the bottom of the chart.

This also means that the news could not really affect the current trend of the market. So, traders can still look out to buy entries after the release of the news. For instance, the wick in the bottom could be interpreted as the strength of the buyers in the market.

GBP/USD | Before the Announcement (March 6, 2020)

Below is the chart of GBP/USD on the 15min timeframe. The market is in an uptrend and currently is at the support (black line). We need to see if the news will respect the support or will break through it.

GBP/USD | After the Announcement (March 6, 2020)

Below is the same chart of GBP/USD after the announcement of the news. We can see that the news was positive for the USD. However, the USD wasn’t strong enough to break below the support. And this was because the actual value was the same as the previous value.

Coming to the volatility, the average volatility was ten pips, and when the news came out, the volatility increased 16 pips, which was decently above the average value. There was a slight increase in the volume as well.

As far as trading this pair is concerned, we can prepare to go long when a doji-like candle was formed at the support area.

Conclusion

Labor Force Participation rate is that economic indicator that measures the workforce of a country by considering a specific age group. As mentioned, the LFPR and the unemployment rate are closely related to each other. That is, for assessing the unemployment rate, having an idea about the participation rate is quite vital. The labor force participation rate has a good weightage in the valuation of the economy of a nation. It has its effects on currencies as well. So, this indicator turns to be handy for economists as well as traders and investors.

Categories
Forex Fundamental Analysis

Impact of Unemployment Rate On A Nation’s Economy & It’s Currency

Introduction

Introduction

Introduction

The unemployment rate is a fundamental indicator of macroeconomics. Before getting into defining the unemployment rate, let’s first understand what even unemployment is. Later, we shall get deep into understanding the unemployment rate and its effects on the economy and the currency (using price charts).

What Is Unemployment?

To put it in simple terms, Unemployment is a scenario where a person is constantly looking for work but is unable to find it. So, works are considered to be unemployed if they do not work but are capable and are willing to do so. This is a great factor in determining the health of the economy. And the measure of unemployment is what is termed as the unemployment rate.

Understanding Unemployment Rate

The unemployment rate can be defined as the percentage of unemployed workers in the total labor force, where the total labor force comprises of all the employed and unemployed citizens within an economy. Mathematically, it is the number of labor force divided by the number of unemployed people. And as mentioned, to be considered unemployed, the person must have an active history of them looking for jobs. So, if you’ve given up looking for a job or work, you will not be considered unemployed.

More about Unemployment

Unemployment is a vital economic indicator as it indicates the inability of the workforce to obtain work to contribute to the productive output of the economy. The simple implication of unemployment would be less total production than that could have been possible. Also, an economy with high unemployment would have lower growth output with disproportional fall in the requirement for basic consumption.

On the flip side of things, a low unemployment rate implies that the economy is producing goods almost at its full capacity, having a commendable output, and rising standard living standards. Talking it further, an extremely low unemployment rate would mean an overheating economy and signs for inflationary pressures. It could be a hard time for businesses that would be in need of additional workers.

Types of Unemployment

Now that the definition of unemployment is clear, let us go ahead and understand how economists have classified unemployment. Unemployment is broadly classified into two types, namely, voluntary and involuntary. Voluntary unemployment is the case when the person has quit the job voluntarily in search of another job. But, in the case of Involuntary unemployment, the person has been fired by the organization. Now, the person must look for other employment. Voluntary and involuntary unemployment can be further divided into four types.

  • Frictional Unemployment
  • Cyclic Unemployment
  • Structural Unemployment
  • Institutional Unemployment
Frictional Unemployment

Frictional Unemployment is the most obvious type of unemployment. This occurs when a person is in between jobs. When a person quits a company, it takes some time to search for a new job. However, this unemployment is typically short-lived. Moreover, this type of unemployment does not really cause problems for the economy. Frictional unemployment is something natural, as ideally, it is not possible to find a job right after a person leaves a job.

Cyclic Unemployment

Unemployment varies based on the cycles of the economy is termed as cyclic unemployment. During the course of economic growth and declines, there is variation in the number of unemployed workers. For example, during economic recessions, unemployment rises, and during economic growth, unemployment decreases.

Structural Unemployment

This type of unemployment causes due to the advancements in the technology, or the structure through which the labor markets operate. The technological advancements could be the automation of manufacturing or the use of automobiles in place of horse-drawn transport. Such things lead to unemployment because there is no requirement of labor for it.

Institutional Unemployment

The consequence of permanent or long-term institutional factors and incentives in the economy could be unemployment. Such unemployment is called institutional unemployment. Some of the factors leading to institutional unemployment include

Government policies
  • High minimum wage floods
  • Generous social benefit programs
  • Restrictive occupational licensing laws
Labor market phenomena
  • Efficiency labor
  • Discriminatory hiring
Labor market institutions
  • A high rate of unionizations

How the Unemployment Rate Affects the Economy

We know that the unemployment rate is a vital indicator, as it gauges the joblessness in an economy. This, in turn, gauges the economic growth rate as well.

The unemployment rate economic indicator is a lagging indicator. This indicator does not predict that the market is going to rise or go under recession, but it measures the effect of the economic events. Based on the event, this indicator makes a move. For example, the unemployment rate does not rise until the recession has officially begun. But, a point to note is that the unemployment rate continues to rise even after the recession starts to fade away.

There are two reasons for it. One of them is that the companies are reluctant to lay off their people when the economy takes a downside. For large companies, it might take a few months to come up with a layoff plan. Secondly, the companies are more reluctant to hire new workers until they have a confirmation that the economy has stepped into the expansion phase of the business cycle.

For example, during the well-known financial crises that happened in 2008, the recession actually began during the first quarter of the year. The US GDP had 1.8 percent. Until May 2008, the unemployment rate was 5.5 percent. But, when the recession came down, and the economy started to do well, the unemployment rate hit 10.2 percent in October 2009.

So, with this, we can entitle the unemployment rate as a powerful confirmation indicator rather than a lagging indicator. For example, if the other leading indicators are already showing an expansion in the economy, and the unemployment rate has started to decline, then you are confident that the companies are yet again going to hire people.

Unemployment Rate and its Impact on the Currency

As already discussed, unemployment signals the economic growth of a country. If the economy is doing is bad, then then the unemployment rate rises. And if the economy is growing fairly, the unemployment rate declines. When it comes to currency, it is proportional to the economic growth of a country. This, in turn, implies that unemployment is inversely proportional to the value of the currency.

Frequency of the release of the Unemployment rate

The unemployment rates are released by the Bureau of Labor Statistics on Friday of every month. Typically, the present values are compared with the previous month’s values. Sometimes, a year-to-year comparison is made as well.

Dependable Sources of Information 

With the list of sources mentioned below for different countries, one can obtain valuable statistical information on the unemployment rates. Specifically speaking, one can get a visual representation of the historical values over a period of as high as 25 years. Apart from that, users get access to information regarding the actual, previous, highest, lowest unemployment rates as well.

USD | CAD | CHF | AUD | JPY | EUR | GBP

How the ‘Unemployment Rate’ News Release Affects the Price Charts?

Now that we have a good amount of theoretical information on the Unemployment rate, let’s get a little technical. In this section, we shall analyze how the prices of the currencies are affected after the release of the reports.

As mentioned, the reports on the unemployment rate are released by the Bureau of Labor Statistics on a monthly basis, typically on Fridays. As a usual effect, it is said that the actual data less than the forecasted data is good for the currency.

Also, note that, as per sources (Forex factory), this news is expected to have a high impact on the currency. For our illustration, we have taken into account of the Unemployment rate of the US released on 7th February.

In the below image, we can see that the Actual percentage is 3.6%, which is 0.1% higher than the forecasted percentage (3.5%). Also, it is higher than the previous month’s value. So, we can conclude that the unemployment rate in the US has increased in February compared to January.

When it comes to the effect on the forex exchange market, we can expect the US dollar to drop as the unemployment rate has increased (which is not good for the economy).

Now, let’s see its effect on few USD charts by pairing it with other major currencies.

USD/CAD | Before Announcement – 7th February

Below is the candlestick chart of USD/CAD on the 15min timeframe. If we were to look at the recent trend, we could see that the market is in an uptrend. Now, we need to see if the trend continues after the release of the news or reverses its direction.

USD/CAD | After Announcement – 7th February

Below is the candlestick chart of USD/CAD on the 15min timeframe after the release of the news. The news candle is indicated as shown. We can see that when the news was released, the market just plunged down. Here, we can infer that the market moved as the way we expected it to move. Also, the volatility surged up when the news came out. If you look at the volume indicator as well, we can see that the volume shot up high.

However, in hindsight, the market recovered from the drop and left a wick on the bottom. With this, we can conclude that the drop in price was consumed by the strong buyers. The buyers did not let sellers reverse the market.

EUR/USD | Before Announcement – 7th February

In the below chart of EUR/USD, we can see that the market is in a downtrend, where the purple line represents the support and resistance line. Currently, before the release of the news, the market is in the S&R area. We need to see how the market will react after the news.

EUR/USD | After Announcement – 7th February

When the news was announced, we can see that the market went up, came down, and closed below the open price. There was strength from both sides, and the volatility was pretty high. If you look at the volume bar corresponding to the news candle, we can see that the volume too was high at that point in time.

In this currency pair, EUR is the base currency, and USD is the quote currency. According to the impact of the news, the market was supposed to shoot up. The market did try to go higher but got rejected by the sellers. So, basically, the seller’s market was more dominated than the news in this case.

 GBP/USD | Before Announcement – 7th February

GBP/USD | After Announcement – 7th February

Below is the chart of GBP/USD on the 15min timeframes after the release of the news. We can see that this chart is very similar to the EUR/USD chart. The news candle initially shot up, but came down and closed red. The volatility during this time was quite high, which can be inferred from the corresponding volume bar below. And according to the news, the market was supposed to go north, but the market continued its downtrend.

Bottom line

The unemployment rate, though a lagging indicator, should not be taken for granted. It is as vital as the other economic indicators such as GDP, inflation rate, interest rate, etc. Employment is one of the primary reasons for the economies do well. Economies with high unemployment rates are being hit hard. Coming to the investors’ and traders’ point of view, one must keep an eye on the rate of this indicator and treat it as a powerful confirmation tool rather than just a lagging indicator.

Categories
Forex Fundamental Analysis

What Is Balance Of Trade & What Impact Does It Have On The Forex market?

Introduction

Introduction

Introduction

The Balance Of Trade AKA. BOT is essentially the difference or variance in a nation’s export and import. When understood correctly, this indicator can help us in evaluating the relative robustness of any given economy compared to the other ones. 

Understanding Balance Of Trade

In the simplest of analogies, consider a scenario where a rice seller sells $1000 worth of rice to other grain sellers in the market over a month. Within that month, if he had purchased $800 worth of goods like vegetables, fruits, etc. from the other vendors, his Balance Of Trade would be $200.

Here, in this example, the market is the entire world, and the rice seller is equivalent to a nation. $1000 is the net worth of the exported goods and services that went out of the country, whereas the $800 is the net worth of the imported goods and services that came into the country. In this case, $200 is the trade surplus that the country is having.

Therefore, Balance Of Trade can be considered as a difference between what goes out (exports) and what comes in (imports) over a given time frame. And depending on whether exports or imports are greater, a nation is said to be running a Trade Surplus or Trade Deficit, respectively. Fundamentally, an Export is when a foreign resident or nation purchases an in-country produced good or service, and an Import is when an in-country citizen purchases goods or services from foreign.

How is the Balance Of Trade calculated?

In the previous article, we understood the formula of a country’s current account. That is, Current Account = (Exports – Imports) + Net Income + Net Current Transfers.

In the above formula, (Exports – Imports) is the Balance of Trade.

How Can This Economic Indicator Be Used For Analysis?

Investors can use Balance Of Trade numbers to ascertain whether the overall economic activity of a nation has grown or slowed down concerning the previous month’s/quarter’s/year’s numbers. For example, a country which has seen a trade surplus for let’s say over ten years, and due to some calamities, its exports got hit. The nation might enter into a trade deficit or a reduced trade surplus. Such a relative comparison can help investors to ascertain whether a country’s economy is booming or slowing down.

In an absolute sense, a Trade surplus or Trade deficit, as discussed, cannot tell in entirety. But it will definitely give us a macroeconomic picture of an economy’s health and what the nation has undergone in the present business cycle. Let’s assume a country is a major exporter of oil for which it receives a majority of its income. If the production of oil is doubled, automatically there will be an increase in the demand for that currency worldwide. This will result in an appreciation of that country’s currency.

Not just this, but the Balance Of Trade can also point towards many things like an increase in employment or an oncoming expansion or recession when viewed with correct perspective and analysis.

Impact of Balance Of Trade on Currency

By simply looking at the BOT numbers, we cannot conclude whether a nation is experiencing growth or slow down straight away. Because the Balance Of Trade only projects a partial picture and not the whole picture.

A developing country might want to import more goods and services from abroad, which increases the competition in their respective markets. Thereby they keep the prices and inflation low. During these periods, that country will have a Trade Deficit. To an outsider, it will only look like the country is consuming more than it is producing. So this scenario can be wrongly assumed as the country’s economy is slowing down. But in reality, what if the country is experiencing a trade deficit for the first six months and a trade surplus for the next six months?

Developed nations like the United States and the U.K. have experienced long periods of trade deficits against developing and emerging economies like China and Japan, who have maintained trade surpluses for long times. Hence, the time frame, business cycles, the relative situation with other countries all factor in to give a correct interpretation to the BOT.

But in general, most of the time, an increase in the Balance of Trade number is good for Currency. It is a proportional indicator, meaning. Lower or negative Balance of Trade numbers relative to previous periods signals currency depreciation and vice versa.

Balance of Trade & Balance of Payments

BOT is a major component of a Nation’s BOPs, i.e., Balance Of Payments. Balance Of Payments, ideally, should always equate to zero, giving us a complete account of all things traded in and out of an economy. A nation can have a surplus while having a trade deficit. This happens when other components of Balance Of Payments like Financial Account or Capital Account run into large surpluses.

But in general, countries prefer to have a trade surplus, and it is obvious. A country in net terms receiving a gain or profit for their goods and services would mean that the people of that country will experience higher wealth, and it would automatically result in a higher standard of living. And also, by continually exporting, they would develop a competitive edge in the global market. This would also increase employment within the nation, which, in general, is favorable for the nation. But as said, it is always not necessary for this condition to be true. It depends on what goals the country has in mind for future short term deficits also matters.

Hence Balance Of Trade is one of the important indicators for analysts to ascertain a country’s economic activity and current health of an economy.

Economic Reports

Since the Balance of Trade is about imports and exports, data for the same is publicly available on a monthly basis for all the countries. The reports are released in the United States by the U.S. Bureau of Economic Analysis and the U.S. Census Bureau. The units would be typically in millions of dollars for most reports and for most nations. The popularly used reports are typically seasonally adjusted to give a more accurate report.

Sources of Balance Of Trade

To get the latest information about this economic indicator for the United States, you can refer to this link. To know all the diverse components involved in Balance Of Payments and International Trade, you can refer to this page from The Bureau Of Economic Analysis.

Impact Of ‘BOT’ News Release On The Price Charts

Now that we know the meaning of trade balance and how it affects the economy, we shall extend our discussion and understand how it impacts any of the currencies after the news announcement is made.

As we can see in the below image, the Trade Balance indicator has the least effect on currency (yellow indicator implies the least impact on currency). Hence, this might not cause extreme volatility in the currency pair after the news release. It is still important to understand the effect and look at how we can position ourselves in the market in such scenarios.

For illustration, we have chosen the New Zealand Dollar in our example, and we will analyze the latest’ Trade Balance’ data of the same. The data shows that Trade Balance was increased by 44M as compared to the previous reading, which is said to be positive for the currency. But let us see how the market reacted to this data after the announcement was made.

NZD/JPY | Before The Announcement - (Feb 26th, 2019)

The below chart shows that the overall trend is down, which means the New Zealand dollar is very weak. As said in the above paragraph that changes in Trade Balance of a country do not have much impact on the currency, so better than expected data can only cause a reversal of the trend. However, if the data is retained at previous reading, we can expect a continuation of the downtrend, and volatility will be more on the downside. We will be looking to trade the above currency on the ‘short’ side if the Trade Balance data is bad for the country since even positive data cannot push the currency higher.

NZD/JPY | After The Announcement - (Feb 26th, 2019)

After the news announcement, we see that the price crashed below the moving average, reacting to the not-so-good numbers of Trade Balance for New Zealand. The market participants were expecting much better Trade Balance data, but after seeing that it was increased by mere 44M, they were disappointed and hence sold New Zealand dollars. We can take advantage of this change in volatility by taking risk-free ‘short’ positions in the pair soon after the market falls below the moving average. We can hold on to our trade as long as the price is below the moving average and exit once we see signs of reversal.

GBP/NZD | Before The Announcement - (Feb 26th, 2019)

Here we can see that the New Zealand dollar is on the right-hand side, and since the market is in a downtrend, the currency is strong. In this situation, a risk-free way to trade this pair is by going ‘long’ if the Trade balance numbers are not good for the pair and after trend reversal signals. Since the downtrend is not very strong, we can take ‘short’ positions only if it breaks the recent ‘lows’ and shows signs of trend continuation.

GBP/NZD | After The Announcement - (Feb 26th, 2019)

After the numbers are out, we see the positive reaction for the New Zealand dollar as the numbers were better than last time, but it could not take it lower. Since the data was weak, we can ‘long’ positions in the pair once the price makes a ‘higher low’ after crossing above the moving average.

EUR/NZD | Before The Announcement - (Feb 26th, 2019)

The above chart represents the currency pair of EUR/NZD, which shows similar characteristics as that of the NZD/JPY pair but in reverse as the New Zealand dollar is on the right-hand side. In this pair, the New Zealand dollar is extremely weak, and we also the price is above the moving average showing the strength of the uptrend. Therefore taking’ short’ positions in this pair is not advisable even if the Trade Balance data is good for the New Zealand economy, as it is a less impactful event, and the reversal might not last. A better option would be to go ‘long’ in this pair.

EUR/NZD | After The Announcement - (Feb 26th, 2019)

After the news announcement, we see a red candle, and the price bounces off the moving average, continuing its uptrend. Since the data was not very positive, the market continues its uptrend, and thereby the New Zealand dollar weakens further. This could be the perfect setup for a ‘buy’ since all parameters are in our favor. The volatility here expands on the upside, after the news release.

That’s about the Balance of Trade and its impact on the Forex currency pairs. We just wanted to show how the markets get impacted after the news release. It is always advisable to combine these fundamental factors with technical analysis as well to ace the Forex markets. Cheers.

Categories
Forex Fundamental Analysis

Comprehending ‘Current Account to GDP Ratio’ Economic Indicator

Introduction

Introduction

Introduction

The Current Account balance represents one half of the nation’s Balance Of Payments. This number typically ranges in billions and trillions. When trying to comprehend such big numbers, a strong understanding of what do these numbers represent in actuality is paramount.

What is the Current Account Balance?

The equations given below represent what Current Account balance is composed of and how it contributes to the nation’s Balance Of Payments

The current account balance is the sum of the Balance Of Trade, Net Income, and Net Current Transfers. Fundamentally, the Balance Of Trade represents the difference between total exports and imports of goods and services for that nation.

Balance Of Trade: The Balance Of Trade is the difference between the revenue generated by export and the expenditure incurred by the imports. A nation that exports more than what it imports is said to be running a trade surplus. Conversely, a country whose imports exceed its exports is said to be running a trade deficit. A country that is having a trade deficit is said to have a negative Balance Of Trade, and a trade surplus country is said to have a positive Balance Of Trade.

Net Income: It represents the income received by a country for its investments in areas like real estate or holding in foreign shares, etc.

Net Current Transfers: The net current transfer represents one-directional transfer between one Nation to another without any equivalent financial item in return. This may take the form of worker remittances, charitable fund transfer, or even relief funds, etc.

All these three components are combined to form what is called the current account balance of a nation.  A country with a negative current account balance is a net borrower from the rest of the world, and that which has a positive current account balance is a net lender to the rest of the world.

For example, the United States, which is running a negative current account balance, indicates that the nation is importing or consuming more than it is exporting or producing, thereby sending trillions of dollars out of the nation in exchange for equivalent goods and services.

Current Account & Capital Account

The Capital Account reflects the opposite of what current account balance shows. If a country is importing commodities by sending out money, it must receive an equivalent amount of money in one form or another from a certain set of sources. The Capital Account reflects those sources.

A country receives capital when its domestic assets are purchased by foreign bodies. The same country also spends money when it purchases foreign assets using domestic currency. The total of these both may result in a positive or negative capital account. A country running a negative current account balance must have, by definition, a positive equivalent capital account as the total of the entire Balance Of Payments should equal to zero.

How is the Current Account Balance to GDP calculated?

The current account balance, which often ranges in billions and trillions, is expressed as a percentage of GDP. The Bureau of Economic Analysis releases the current account balance quarterly, semi-annually, and annually. The World Bank publishes current account balance as a percentage of GDP for all the nations.

Below is the snapshot of the current account balance as a percentage of GDP for the United States published by the World Bank on their official website.

How can the Current Account Balance to GDP be Used for Analysis?

The current account balance is an entire country’s economic figure, and when calculated as a percentage of the Gross Domestic Product GDP, we can draw a lot of conclusions about the current economic situation within the nation.

We have to also keep in mind that simply a negative current account balance or its percentage does not mean that the economy is stagnating nor a positive current account balance indicates a growing economy. The United States has been running in a negative current account balance since 1980.

The current account balance is one part of the Balance Of Payments, and when we look in the absolute sense, we will not be able to assess the nation’s economic situation properly. Instead, if we look at the percentage concerning the previous number, we might be able to know whether the economic conditions have improved or declined concerning earlier periods.

For example, in the US, a $1.1 billion reduction of the current account deficit in the third quarter of 2019 concerning the previous quarter was mainly due to increased income and reduced goods deficits, as mentioned by the Bureau of Economic Analysis.

Impact On The Currency

The Current Account balance reflects the overall economic activity and the revenue circulation in and out of the country. As a percentage of GDP, it can give us a relative comparison on a global scale with other competing nations. In general, it is a proportional indicator. Meaning, an increase in the results in currency appreciation on a relative basis with previous periods and vice-versa.

On a relative basis, the measured changes in the percentages can help us understand which country’s economic activity has grown or contracted. Such macro-economic indicators are very useful for many people. For instance, Governments can take policy decisions or put appropriate pressure or give support to certain businesses, either increase or decrease economic activity.

Traders can also use these indicators to predict currency movement and may decide to invest. Large and unpredictable movements in the current account balance can shake the confidence of investors in either direction, i.e., positively or negatively.

Sources of Current Account Balance to GDP

The United States Bureau of Economic Analysis releases quarterly reports of the Current Account Balance numbers. It can be found here.

Also, the World Bank releases Current Account Balance as a percentage of GDP on its official website for many countries. Those numbers can be found here.

Impact Of ‘CA To GDP’ Announcement On The Price Charts

In this section of the article, we shall see how the Current Account % of GDP will impact the currency and cause a change in the volatility. We will be analyzing the Current Account % of GDP data of New Zealand by observing the changes in the data from previous reading to the current reading.

The Current Account % of GDP data is released every quarter, and thus we will have four readings in a year. The latest data available to us is of the 3rd quarter released in the month of December and the 4th quarter data will be released in March. As we can see below, this indicator has the least impact on the currency (Yellow Implies Least Impact), and we should not expect much volatility after the news announcement.

Below is the Current Account % of GDP of December quarter, which is released by the ‘Statistics New Zealand’ agency, which collects information from people and organizations through censuses and surveys. It is also known as ‘Stats NZ’ and is a government department. The data shows that the Current Account % of GDP was increased by 0.1%, which we will now see what impact it created on the charts.

NZD/CAD | Before The Announcement - (Dec 17th, 2019)

Before the news announcement market is in a clear downtrend and is attempting for a pullback. When we are talking about the impact of the news, we know that since it is a less impactful event, a better than expected result would mean a partial reversal of the trend. If the numbers are not that good for the ‘New Zealand Dollar’ we should expect a continuation of the current trend.

Thus, from a trading point of view, it is better to join the current downtrend if the Current Account % of GDP is maintained somewhere around the previous reading. We should not be going ‘long’ in the market even if the data is good for ‘New Zealand Dollar’ since the impact of the indicator is not high, and then the rally will not last.

NZD/CAD | After The Announcement - (Dec 17th, 2019)

The Current Account % to GDP was increased by 0.1%, which is mildly positive for the New Zealand Dollar. We see the initial reaction of the market where the candle barely closes in green. The volatility witnessed is also very less due to the above-mentioned reason.

Therefore, we can trade this currency pair on the ‘short’ side, after the price goes below the moving average line, which will our confirmation sign for the trend continuation. Since the news outcome was not good for the New Zealand Dollar, the downtrend could continue further, and we should be able to easily make a profit on the downside.

NZD/CHF | Before The Announcement - (Dec 17th, 2019)

  

NZD/CHF | After The Announcement - (Dec 17th, 2019)

The above chart represents the currency pair of NZD/CHF, which shows similar characteristics as that of the NZD/CAD currency pair. In this pair, we can notice that the news release did not even take the price above the moving average line, which means the data is very weak when compared to Swiss Franc. The market became volatile after the news release and took the price down. Thus, this is a much better pair for taking a ‘short’ trade with an amazing risk to reward ratio. We can also continue to hold on to our profits as long as the price is below the moving average.

EUR/NZD | Before The Announcement - (Dec 17th, 2019)

EUR/NZD | After The Announcement - (Dec 17th, 2019)

In this currency pair, the New Zealand Dollar is on the right side, so we see an uptrend illustrating the weakness of the currency. Since the Current Account % of GDP data was slightly positive for the New Zealand Dollar, we see a red candle after the news announcement, but later it was fully overshadowed by the green candle. This means the Current Account numbers were not good enough to take the currency lower.

What we see after the news release is a ‘Bullish Engulfing’ candlestick pattern, which is essentially a trend continuation pattern. Thus, once the price goes above the moving average line, we can enter for’ longs’ in this pair with a stop loss below the red candle and aiming for a new ‘higher high.

That’s about the Current Account To GDP ratio Economic Indicator and its impact on the Forex market. If you have any questions, please let us know in the comments below. All the best.

Categories
Forex Fundamental Analysis

How ‘Government Debt to GDP Ratio’ Impacts The Forex Market

‘8765Introduction

‘8765Introduction

‘8765Introduction

Government Debt to GDP is one of the main indicators which points towards the current health of an economy and its probable future monetary prospects. For a long time, analysts have used Government Debt to GDP ratio as one of the reliable indicators in ascertaining a country’s economic health and its resultant country’s currency worth.

What is the Government debt-to-GDP ratio?

The debt-to-GDP is the proportion of a country’s total public debt to its GDP (Gross Domestic Product). In simpler words, it is the ratio of what a country owes to what a country earns. The debt-to-GDP ratio of a country compares its sovereign money owed to its total economic output for the year. Here the output is measured by gross domestic product.

Why is the Government debt-to-GDP ratio important?

When we contrast what a nation owes against what it outputs, the debt-to-GDP ratio assuredly indicates a nation’s potential to repay its dues. The Government debt to GDP in many places is conveyed as a percentage. This ratio can also mean the time required by a nation to repay and close off the owed sum where we assume if GDP is entirety used for its debt repayment.

The Government debt-to-GDP ratio is a beneficial indicator for analysts, economists, investors, and leaders. It enables them to ascertain a country’s potential to repay its owed debt. An excessive debt to GDP ratio tells that the country isn’t generating enough output to be able to repay its debt. A small ratio means there is enough income to pay off the interest on its debt.

To elaborate in layman terms, consider this analogy where a nation is like an employee, and GDP is like his/her income. Financial Institutions will be willing to give a bigger loan if they earn a higher salary. In the same way, investors would come forward to take on a country’s debt if it generates more revenue.

If investors start to lose confidence in repayment by a country, they will tend to expect a higher return in the interest rate for their lent money for the higher defaulting risk. That results in the rise of the country’s cost of debt. It means the debt itself becomes more expensive in the sense that more money goes on in just paying interests only. Such situations can quickly become a financial crisis and thereby resulting in depreciation on their credit score. That will, in turn, impact their money lending capacity and credibility in the future.

How can Government debt-to-GDP ratio be Used for Analysis?

If a Government has spent more in the past than they have received in tax revenues, it means they are injecting more money into the economy than they are withdrawing and vice versa. In general, injections are inflationary and withdrawals deflationary. The higher the percentage of Debt to GDP a Government has, the more they have to spend to maintain inflation or GDP growth or risk defaulting on their debt.

As the debt to GDP ratio increases, Economic growth becomes more dependent on Public Spending. If the Government decides to cut public spending, then this would mean if all things being equal, reduce the debt to GDP ratio and be deflationary. The thing we need to notice here is that a higher debt to GDP ratio means there is more pressure to inflate. The only choices are to deflate (which is not desirable), default on the debt (not desirable), or to inflate further.

Historically 80% level of debt to GDP is usually seen as the trouble zone. The default zone is above 100%, where it means that what country earns is less than what country owes. Interest rate suppression is necessary to keep interest bill on Government debt to a minimum. At levels of 100%+ Debt to GDP Ratio, Governments have no choice but to continue to inflate further.

Impact on Currency

If a country’s debt-to-GDP ratio increases, it often points towards an oncoming recessionary period. When a country’s GDP decelerates during a contraction, it causes federal revenue, in the form of taxes and federal receipts, etc., declining.  This results in currency depreciation. In this type of situation, generally, the government tends to increase its public spending to spur growth in the economy. If this spending produces the desired effect, the recession will waive off. Taxes and federal revenues will again increase, and the debt-to-GDP ratio should accordingly return to normal.

When the entire world’s economy keeps on improving, investors will tolerate a higher exposure on their lent money because they seek higher returns. The returns on U.S. debt will increase as requests for U.S. Debt depreciates. If a particular country’s interest rate returns are higher than usual, we also need to keep in mind the fact that the probable reason for such high rates are either because the nation is already in a lot of debt, so it is very likely to default, and it certainly is in less demand in the market.

The country has to give out larger sums of interest to get them to purchase its bonds and lend their money to the Government. Hence, Investors generally choose developed nations or nations with a proven track record of repayment. In general, a decrease in the Debt to GDP number indicates a growing economy, which ultimately results in strengthening the currency.

Economic Reports

To calculate the debt-to-GDP ratio, we have to know mainly two things: the country’s current owed sum and the country’s generated revenue, i.e., its real Gross Domestic Product. This data is publicly available, and it is released quarterly. The majority of economic analysts, professional traders, look at total overall debt, but some institutions, like the CIA, only consider the total public debt to publish in their publishes.

Sources of Government Debt to GDP

The Research Division of St. Louis FRED is in the top 1% of all economics research departments worldwide. St. Louis Fed publications provide analysis, information, and instruction for the journalists, the general public, and students. These outlets allow us to effectively address economic trends, explore historical trends, and current data for economic policy.

For the United States, we can get a comprehensive analysis of Federal Debt, Total Public Debt, and Total Public Debt as a Percentage of Gross Domestic Product, Federal Surplus or Deficit. All of these details with illustrative historical analysis and many more subcategories of the same can be found in the St. Louis website.

Inflation Rates of some of the major economies can be found below.

United Kingdom | Australia | United States | Switzerland | Euro Area | Canada | Japan 

How ‘Government Debt to GDP Ratio’ News Release Affects The Price Charts?

After understanding the Government Debt to GDP economic indicator, we will now see how a currency is affected after the news announcement is made. To understand the effect, we have chosen ‘Brazilian Real’ as the reference currency, as the data available is appropriate for analyzing the impact made by the news.

The Debt-to-GDP ratio data has the least importance and does not cause much volatility in the currency pair after the news release. This is the reason why most countries do not announce the data every month and review the GDP ratio on a yearly basis. But Brazil is one country where the government releases the data on a monthly basis. Let us analyze the lastest Debt to GDP ratio of Brazil.

The Debt to GDP ratio of Brazil is released by the Brazilian Institute of Geography and Statistics (IBGE), which is the official agency responsible for the collection of various information about Brazil. We see that the Debt to GDP ratio was reduced by a mere 1.5% from the previous January’s ratio. Let us find out how the market reacted to this.

Note: The ‘Brazilian Real’ is an ’emerging currency’ which is not traded in high volumes and hence can appear to be illiquid at times.

USD/BRL | Before The Announcement - (Feb 28th, 2020)

In USD/BRL, the market before the news announcement is in an uptrend showing the weakness of the ‘Brazilian Real.’ The price, just before the data is about to release, has broken the moving average line, which could be a sign of reversal. As we mentioned in the previous section of the article, lower than expected reading is taken as positive for the currency and should strengthen the currency.

Hence if the data is much lower than 55.7%, we can take a ‘short’ trade and expect a trend reversal. In this case, we will also have a confirmation from the MA. Whereas if the data is maintained around the previous reading or increased, it is bad for the currency, and we need to wait for some trend continuation signs to join the uptrend.

USD/BRL | After The Announcement - (Feb 28th, 2020)

After the news announcement is made, traders see that there was not much change in the Debt to GDP ratio, where was it was reduced by just 1.5%. This is the reason why USD/BRL did not collapse, which would strengthen the ‘Brazilian Real.’ The price did go down for a while but later created a spike on the bottom and closed above the opening price.

This spike could be a sign of trend continuation, and one can go ‘long’ in the market with a stop loss below the ‘low’ of the spike and targeting the recent high. We are essentially taking advantage of the increase in volatility after the news announcement.

EUR/BRL | Before The Announcement - (Feb 28th, 2020)

EUR/BRL | After The Announcement - (Feb 28th, 2020)

The EUR/BRL currency pair shows similar characteristics as that of the USD/BRL pair but with a major difference that the price remains below the moving average most of the time. Even though a wonderful rejection is seen at the time of news announcement, it is advised to go ‘long’ in this pair with a smaller position size and taking profit at the earliest. The debt to GDP ratio was not reduced much to create an impact on the pair, which can be seen from the ranging nature of the market after the news release.

GBP/BRL | Before The Announcement - (Feb 28th, 2020)

GBP/BRL | After The Announcement - (Feb 28th, 2020)

In the above chart, we can see that the currency pair is already in a downtrend, showing the strength of the ‘Brazilian Real.’ Since the pair is in a strong downtrend, not so good news for the Brazilian Real would mean no reversal of the current trend. However, this currency pair could prove to be the best pair for trading among all other pairs if the news outcome is positive for the Brazilian Real as we will be trading with the trend.

After the news announcement is made, the market barely goes above the moving average, which means going ‘long’ in this pair can be very risky. Therefore, the only way to trade in such scenarios is when the news outcome is positive for the currency pair on the right-hand side and profit on the downside.

That’s about Government Debt To GDP Ratio and its impact on some of the Forex currency pairs. In case of any queries, let us know in the comments below. Cheers.

Categories
Forex Fundamental Analysis

What Is ‘Inflation Rate’ & Why Is It One Of The Most Important Fundamental Indicators?

Introduction

Introduction

Introduction

Based on the current inflation rate and future monetary policies, we can effectively gauge the current economic situation of a country. Using the Inflation rate data, we can also get an insight into the current currency’s value and in which direction the economy is heading towards. Hence we must look at this key indicator in its depth to solidify our fundamental analysis.

What is Inflation?

In Economics, Inflation is the increase in the prices of goods & services, and the resultant fall in the purchasing power of a currency. What this means, in general, is that when a country experiences Inflation, the prices of the most commonly used goods & services by the citizens of a country increase. Because of this, the average person has to spend more money to buy the same amount of goods which cost less in the previous period.

For instance, if John went to a grocery store to purchase his monthly groceries, and it cost him 100$ in 2018. Next year, i.e., in 2019, John goes to the same store to buy the same set of goods, and it had cost him 105$. Now John either has to remove some items or pay more to make the same purchase. Here John has experienced Inflation of 5%.

What is Inflation Rate?

The percentage increase in the price of goods & services over a period (usually monthly or yearly) is called the Inflation Rate. In our previous example of John, we see we have an inflation rate of 5%.

Inflation Rate is compounding in nature, i.e., it is always calculated with reference to the most recent statistic and not any particular base year or a base inflation rate. For example, if John were to buy the same goods in 2020, if it costs him 110$, then John has experienced 4.54% of Inflation and not 10% inflation.

Why is Inflation Rate important?

Inflation, in general, when kept in check, is good for an economy as it fuels growth. The increase in the prices of common goods and services means people have to compete and work better to earn more to meet their needs. But as in any case, excess or high Inflation can be crippling for an economy.

Because the citizens of the country get poorer when the purchasing power of the currency falls due to a high increase in prices, inflation Rates can be used to gauge the current financial health of an economy and what the citizens of a country are currently experiencing.

How does Inflation Occur?

A general view in the economic sector is that steady Inflation occurs when the money supply in the country outpaces economic growth. It means more currency is being circulated into the economy than its equivalent activity (revenue-generating practices). Inflation occurs mainly due to the rise in prices. But in brief, Inflation can occur due to the following situations:

Demand-Supply Gap: When the demand for a particular good is higher than the supply or production of the same, then there is a natural surge in the price of that good.

Increased Money Supply: When more money is in circulation in the economy, it means an individual has more disposable cash. This increases consumer spending due to a positive future sentiment resulting in increased demand, which ultimately increases the price of goods.

Cost-Push Effect: When the cost of inputs to the process of manufacturing good increases, it coherently increases the overall cost of the finished good. This results in a higher selling price of goods, which ultimately results in Inflation.

Built-In: Built-in inflation happens when there is a sort of feedback loop in the prices of goods and incomes of people. As people demand higher wages to meet the needs, it results in higher prices of goods and services to fund their demand and vice-versa. This adaptive price and wage adjustment automatically feed off each other and result in an increase in prices.

How is Inflation measured?

Based on different sectors, the costs of different sets of goods & services are used to calculate different inflation indexes. However, there are some most commonly used inflation indices in the market, like the Consumer Price Index (CPI) and Producer Price Index (PPI) in the United States.

Consumer Price Index (CPI): The Bureau of Labor Statistics (BLS) surveys the prices of 80,000 consumer items to create the Index and publishes it on a monthly basis. It is a measure of an aggregate price level of most commonly purchased goods and services like food, shelter, clothing, and transportation fares. Service fees like water and sewer service, sales taxes by the urban population, which represent 87% of the US population, are weighted into the percentage, based on their importance in terms of need.

Changes in CPI are used to ascertain the retail-price changes associated with the Cost of Living, and hence it is used widely to assess Inflation in the USA. In this Index, there are many subcategories wherein certain goods are either included or excluded to give a more accurate picture of Inflation in absolute or relative terms. For example, Core CPI strips away food, gas, and oil prices from the equation whose prices are volatile in nature.

Producer Price Index (PPI): It measures the average change in the selling prices received by domestic producers for their output over a period of time (usually monthly). Unlike CPI, which measures retail prices from the viewpoint of end customers who purchase the items, PPI measures the prices at which goods and services are sold to outlets from the manufacturer. PPI measures the first commercial transaction, and hence it does not include the various taxes and service costs that are associated and built into the CPI.

PPI vs. CPI

PPI measures the change in average prices that an initial-producer or manufacturer receives whilst CPI estimates the change in average prices that an end-consumer pays out. The prices received by the producers differ from the prices paid by the end-consumers, on the basis of a variety of factors like taxes, trade, transport cost, and distribution margin, etc.

Sources of Inflation Indexes

The US Bureau of Labor Statistics releases all the above-mentioned indexes here:

Consumer Price Index | Producer Price Index 

Inflation Rates of some of the major economies can be found below.

United Kingdom | Australia | United States | Switzerland | Euro Area | Canada | Japan 

How ”Inflation Rate” News Release Affects The Price Charts?

In this section of the article, we shall find out how the Inflation rate news announcement will impact the US Dollar and notice the change in volatility after the news is released. As discussed above, CPI is a well-known indicator of Inflation as it measures the change in the price of goods and services consumed by households. Therefore, the data which we should be paying attention to is the CPI values and analyze its numbers. We can see that the Inflation Rate does have a high impact on the currency of the respective country.

Below, we can see the month-on-month numbers of CPI, which is released by the US Bureau of Labor Statistics. The data shows that the CPI was increased by 0.1% compared to the previous month, which is exactly what the analysts forecasted.

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

USD/JPY | Before The Announcement - (Feb 13th, 2020)

On the chart, we have plotted a 20 ”period” Moving Average to give us a clear direction of the market. From the above chart, it is clear that the US Dollar is in a strong downtrend, which is also evident from the fact that the price remains below the ”Moving Average” throughout. Just before the news announcement, we see a ranging action, which means the market is in a confused state.

Now we have two options with us, one, to ”long” in the market if there is a sudden large movement on the upside and, two, to take advantage of the volatility in either direction by trading in ”options.” We recommend to go with the first option only if you have a large risk appetite, else choose the second option by not having any directional bias. Let us see which of the above options will be suitable after the news announcement is made.

USD/JPY | After The Announcement - (Feb 13th, 2020)

After the CPI numbers are announced, we see that the price does not go up by a lot, and it creates a spike on the top and falls below the moving average. It is very apparent that the news did not create the expected volatility in the above currency pair. From the trading point of view, in the two options discussed above, the first one is completely ruled out as the market did not show a strong bullish sign, and if we had gone with the second option, we would land in no-loss/no-profit situation.

The reason for extremely low volatility after the news announcement can be explained by the fact that the CPI numbers were merely increased by 0.1%. Since an increase in CPI is positive for the US Dollar, the market does not fall much and continues to hover around the same price.

AUD/USD | Before The Announcement - (Feb 13th, 2020)

AUD/USD | After The Announcement - (Feb 13th, 2020)

The above charts represent the currency pair of AUD/USD. Here since the US dollar is on the right side, we should see a red candle after the news release since the CPI data was good for the US dollar. By looking at the reaction of the market, we can say that the volatility did increase after the news announcement, which means AUD/USD proved to be better compared to USD/JPY.

A mere rise in the CPI number was good enough for the currency pair to turn into a downtrend from an uptrend. One can also see that the price goes below the moving average indicator. This means that the Australian Dollar is a very weak pair compared to the US dollar, the reason why the US dollar became so strong after the news release. Hence one can take a ”short” trade in the currency pair after the price breaks the MA line.

NZD/USD | Before The Announcement - (Feb 13th, 2020)

NZD/USD | After The Announcement - (Feb 13th, 2020)

The above charts represent the currency pair of NZD/USD. It shows similar characteristics as that of the AUD/USD pair before and after the news announcement. The CPI data caused the US dollar to strengthen against the New Zealand dollar, where the volatility change can be seen when the market turns into a downtrend.

The CPI data did have a positive impact on the currency pair, but the pair did not collapse. This means the data may not be very positive against the New Zealand dollar, where the price just remains on the MA line after news release and does point to a clear downtrend. Hence, all traders who went ”short” in this pair should look to take profits early in such market conditions as the market can reverse anytime.

That’s about Inflation Rates and its impact on some of the major Forex currency pairs. If you have any queries, please let us know in the comments below. Cheers.

Categories
Forex Fundamental Analysis

Understanding ‘Interest Rate’ & It’s Impact On Various Currency Pairs

Introduction

Introduction

Introduction

Economic indicators measure how strong the economy of a country is. They `can measure specific sectors of the economy, such as housing or manufacturing sector, or they give measurements of the country as a whole, such as GDP or Unemployment. The following article will explain one such crucial economic indicator that drives the value of the currency – Interest Rate.

What is Interest Rate?

The interest rate is a fee we are supposed to pay for the money we borrow from the bank. It is generally expressed in terms of a percentage on the principal amount borrowed. The Bank’s primary source of income comes from the difference in the interest rate they charge to the borrowers and the lenders. They operate and profit from the difference between these rates.

When interest rates are high in a country, banks find it difficult to pass on such rates to consumers as it corresponds to fewer loans and more savings. This reduces spending in people, which will have an impact on the economy. Also, raising the interest rates curbs inflation and thus improves the economy.

Types of Interest Rates

The interest rate is frequently used by money managers while making investment decisions, and they look at different types of rates. The different kinds of Rates are Nominal, Real, and Effective interest rates. These are classified on the basis of critical economic factors that can help investors become smarter consumers and better investors. Let’s understand each of these types below.

Nominal Interest Rate

Nominal Interest Rate is the rate that is stated on a loan or bond. It signifies the actual price which the borrowers need to pay lenders in order to use their money. For example, if the nominal rate on loan is 10%, borrowers can expect to pay $10 of interest for every $100 they borrow from the lenders. This is referred to as the coupon rate because it used to be stamped on coupons that were redeemed by bondholders.

Real Interest Rate

It is named this way because, unlike the Nominal Interest Rate, it considers Inflation to give investors an appropriate measure of the consumer’s buying power. If an annually compounding bond gives an 8% Nominal yield and the inflation rate is 4%, the real rate of interest is only 4%. This can be put in the form of an equation as:

Real Interest Rate = Nominal Interest Rate – Inflation Rate

There are other pieces of information that the above formula provides in addition to the Real Rate. Borrowers and investors make use of this info to make informed financial decisions. They are:

  • When the Inflation Rates are negative, Real Rates exceed Nominal Rates, and the opposite is true when Inflation Rates are favorable.
  • There is one theory that suggests that Inflation Rate moves alongside the Nominal Interest Rate over time. Therefore, investors who have a long time horizon will be able to get investment returns on an Inflation-adjusted basis.
Effective Interest Rate

This type of Interest Rate takes the concept of compounding into account that the investors and borrowers need to be aware of. Let us understand how Effective Interest rate works with an example. If a bond pays 8% annually and compounds semi-annually, an investor who invests $1000 in this bond will receive $40 of interest payments for the first six months and $41.6 of interest for the next six months. In total, the investor gets $81.6 for the year. In this example, the Nominal Rate is 8%, and the Effective Interest Rate is 8.16%.

Economic reports & Frequency of the release 

Federal Open Market Committee (FOMC) members vote on where to set the Target Interest Rate. Later, they release the reports on the same with the actual rate and analysis. The policies of Central Banks also have an impact on the Interest Rates of a country. The Reserve Bank members hold meetings eight times a year and once every six weeks to evaluate the Interest Rates. These economic reports are published on a monthly and quarterly basis, and investors can compare the previous Interest Rates to Current Rates and analyze how they changed over time.

Impact on Currency

Investors are always interested in countries that have the highest Interest Rate, and they are more likely to invest in that economy. The demand for local currency is expected to increase, which leads to an increase in value.

High-Interest Rate means residents of that country get a higher rate of return on the deposit they made in banks and on capital investments. So obviously, investors will invest their capital in countries where they get a higher rate of return for holding their money.

Under normal economic circumstances, when investments increase in a country, the value of the currency appreciates and thus attracting the traders across the world.

Sources of information on Interest Rate

The Interest Rate data of some of the major economies can be found in the below references. The Rates of the respective countries are also available on the Reserve Bank website. However, the FOMC makes an annual report on the Interest rate that can be found here.

Authentic Sources To Find The Info On Interest Rates 

GBP – https://tradingeconomics.com/united-kingdom/interest-rate

AUD – https://tradingeconomics.com/australia/interest-rate

USD – https://tradingeconomics.com/united-states/interest-rate

CHF – https://tradingeconomics.com/switzerland/interest-rate

EUR – https://tradingeconomics.com/euro-area/interest-rate

CAD – https://tradingeconomics.com/canada/interest-rate

NZD – https://tradingeconomics.com/new-zealand/interest-rate

JPY – https://tradingeconomics.com/japan/interest-rate  

Interest Rate is one of the crucial factors that impact the currency of a country. It is especially crucial for traders who prefer taking trades on Fundamental analysis. But it is advised not to trade just based on this fundamental indicator alone. It is always better to combine the fundamental factors with proper technical analysis to get an edge over the market.

How ‘Interest Rate’ News Release Affects The Price Charts?

It is important to understand how the new releases of macroeconomic indicators like interest rates have an impact on the price charts. Below, we have provided some of the examples to demonstrate the impact of Interest Rates news release on various Forex markets. There is a reliable forum where all the government news release date is published, and it is known as Forex Factory.  Here, we can find all the present and historical information regarding most of the fundamental indicators like GDP, Interest Rates, Inflation Rate, etc.

Below we can see a snapshot taken from the Forex Factory website. FOMC (Federal Open Market Committee) is a branch of the Federal Reserve Board that releases the Interest Rate data according to the predetermined frequency. On the right, we can see a legend that indicates the level of impact the Fundamental Indicator has on the corresponding currency.

Below, we can see the latest figures for Interest Rate data released by FOMC. We can see that the rate hasn’t changed from the previous release (both Actual and Previous being 1.75%)

 

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

USD/JPY | Before The Announcement - (Jan 29th, 2020 | Just Before 2:00 PM)

From the above chart, it is clear that before the news releases, the market was in a consolidation state (observe the last few candles.) Most of the Fundamental traders and investors must be waiting for the latest Interest Rate numbers. We have also plotted an MA on the chart to identify the market direction, and we can see the MA also being flat before the news release.

USD/JPY | After The Announcement - (Jan 29th, 2020 | Just After 2:00 PM)

Right after the release, we can observe a Bullish candle, which shows the initial reaction to the Interest Rate. It seemed to be positive for the US dollar, but later the market collapsed. The Interest Rates remained unchanged and were maintained the same as before, which should be positive for the US dollar. Hence, we see that initial reaction.

But why did the market collapse after a few minutes? This is because the market was expecting a rise in the interest rates, but FOMC kept a neutral stance and did not raise the rates. This explains the reason why the market fell after the announcement. The MA, too, does not rise exponentially, which shows the weakness of the buyers.

Since the market moved quite violently, later, the news release could prove to be profitable for the option traders who did not have any directional bias. There will be many traders who would want to take advantage of the market volatility right after the news release. So, even before the news is out, they employ various options strategies and make a profit. This requires a high amount of experience and knowledge of options and is not recommended for beginners. Now, let’s quickly see how this new release has impacted some of the other major Forex currency pairs.

USD/CAD | Before The Announcement - (Jan 29th, 2020 | Just Before 2:00 PM)

USD/CAD | After The Announcement - (Jan 29th, 2020 | Just After 2:00 PM)

From the above charts, it is clear that the USD/CAD pair shows similar characteristics as that of our USD/JPY example. The last few candles before the news release portray a bit of consolidation prior to the news release, followed by a spike during the news announcement and then finally a collapse. One can take short trade in this pair and make a profit on the downside. Make sure to combine this with technical analysis for extra confirmation.

 AUD/USD | Before The Announcement - (Jan 29th, 2020 | Just Before 2:00 PM)

AUD/USD | After The Announcement - (Jan 29th, 2020 | Just After 2:00 PM)

Since the US dollar is on the right side in this pair, ideally, we should see a bullish momentum after the news release. We can see that right after the release, the market prints a spike on the downside and forms a ‘hanging man’ pattern, which could be a sign of trend reversal. It can be clearly observed that the news had a significant impact on this pair as it reversed the trend almost completely.

Bottom Line

All we wanted to say is that the major Fundamental Indicators do have a significant impact on the price charts. At times we can see that these news releases can increase the market volatility significantly and even change the direction of the underlying trend. When we combine these Fundamental Factors with the Technical Analysis, we will be able to predict the market accurately and take trades with at most accuracy. Cheers!

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

Categories
Forex Economic Indicators Forex Fundamental Analysis

How the Trade Balance Affects the Forex Market

 

 

 

We can define Trade Balance as the difference in value between exported and imported goods and services for a designated time period. It can also be referred to as trade deficit/surplus. A trade deficit occurs if more products and services are imported than exported. A trade surplus happens if there are more goods and services which are exported than imported.

Every country produces goods and services. These can be consumed locally or exported to other countries for foreign exchange earnings. No country is entirely self-sufficient. Therefore it will also import goods and services that are beneficial to their economy from other countries, thus, paying the cost using foreign exchange. That is is the trade process that countries engage in. The Trade Balance is the comparison between the amount earned from the exports and the amount spent on foreign exchange for its imports. This can also be referred to as the balance of trade.

 

What factors affect the Trade Balance

Factors affecting the balance of trade include:

  1. a) Production costs, which includes land, labor, capital, taxes, incentives, etc. in the exporting country and the same applies to those in the importing economy;
  2. b) The cost and availability of resources which include raw materials, intermediate goods, and other inputs;
  3. c) Fluctuations in the exchange rate;
  4. d) Taxes and limitations on trade;
  5. e) Non-tariff barriers such as health, safety standards and environmental;
  6. f) The availability (or lack of it) of foreign currency to pay for imports; and
  7. g) Prices of domestic manufactured goods.

 

Why are Trade Balance Figures Relevant to Forex Traders?

Manufacturing, employment, and consumption are what make up international commerce and trade. Imports and exports attract demand and, as a result, are directly linked to the need for both local or foreign currencies. A country should use international currency reserves when they conduct international trade, and the dynamics between imports and exports will dictate which side employment will be generated. Consumer spending and habits will be affected by the kind of goods imported into a country and which are manufactured in a country for local consumption or export.

The Trade Balance report carries a high market impact as manufacturing, employment, and consumer spending/consumption are factors that significantly affect the state of a countries economy. Also, the trade balance has a direct impact on a country’s Gross Domestic Product (GDP).

 

How does a Trade Balance report influence the respective currencies?

Net Importers – A net importer country has more imports than exports. Therefore it will need access to a large amount of foreign currency to fund the cost of its imports. An increased supply of the local currency coupled with a growing demand for foreign money will lead to a depreciation of the local currency.

An imbalance in the Balance of Trade which sways towards importation will lead to layoffs in

the manufacturing sector and thus increase unemployment and will cause a depreciation in the value of the local currency.

Net Exporters – A country that is a net exporter will export more goods than they import and have a demand from foreign sources for the cost into the local currency. Increased demand in export will also lead to increased manufacturing, which creates jobs and drives consumer spending and consumption and will cause the value of the local currency to appreciate.

Summary

  • Increased deficit, when imports exceed exports, is bad for the local currency.
  • Increased surplus, when exports exceed imports, is good for the local currency.

The Trade Balance report

The Trade Balance report is issued on a monthly basis, and covers the period of the previous month, which is under review. The most important reports are released from the US, Canada, Australia, New Zealand, United Kingdom, European Union countries, and China. Below you can peruse the various data from the major players.

 

GBP (Sterling) – https://tradingeconomics.com/united-kingdom/balance-of-trade

AUD – https://tradingeconomics.com/australia/balance-of-trade

USD – https://tradingeconomics.com/united-states/balance-of-trade

CHF – https://tradingeconomics.com/switzerland/balance-of-trade

EUR – https://tradingeconomics.com/euro-area/balance-of-trade

CAD – https://tradingeconomics.com/canada/balance-of-trade

NZD – https://tradingeconomics.com/new-zealand/balance-of-trade

JPY – https://tradingeconomics.com/japan/balance-of-trade

 

In conclusion

It is important to keep an eye o Trade Balance reports, as they show the overall health of the respective country. A country that is facing a high rate of unemployment and falling into a bad state of affairs in manufacturing will benefit from a positive trade balance report more than a country where these are not huge concerns. The trade balance report is a crucial piece of fundamental analysis for a trader to use in order to maximise the effectiveness of his trades.

 

Categories
Forex Economic Indicators Forex Fundamental Analysis

What you should know about Government Debt to GDP

What is the Government Debt to GDP?

What is the Government Debt to GDP?

What is the Government Debt to GDP?

The government Debt-to-GDP ratio is simply the ratio between the country’s total GDP (Gross Domestic Product) to its total debt. It is computed by dividing the total debt the nation has in a particular year to that of the GDP figure for that year.

As it is a ratio, this indicator is represented in percentage. The debt-to-GDP ratio indicates the country’s capability to repay its debts. If the debt-to-GDP ratio of a country is high, it means that the country might struggle to pay back the debt it has incurred. If this ratio is nominally high, then there is a high likelihood that the country is more likely to default on payments and fail to repay the debt. If the debt-to-GDP ratio is low, then the country is in a stable financial position to repay the debt.

This ratio is also useful to help determine the number of years that a country would need in order to pay back the debt if the total GDP is solely dedicated to the repayment. The debt-to-GDP ratio also measures the financial leverage of an economy.

 

What Does the Debt-to-GDP Ratio Tell You?

A financial panic in domestic and international markets is triggered when a country is unable to repay its debt. Governments will strive to lower their debt-to-GDP ratios. However, this can be difficult during periods of unrest or when the country is in an economic recession. When this occurs, governments like to increase borrowing in an attempt to stimulate economic growth.

Some economists adhere to the modern monetary theory (MMT), which argues that sovereign nations that are capable of printing their own money can’t go bankrupt as they can simply print more fiat currency to cover their debts. However, the nations of European Union (EU), who have to rely on the European Central Bank (ECB) to issue euros, do not apply to this rule because they do not control their own monetary policies.

A  recent study by the World Bank found that countries whose debt-to-GDP ratios exceed 77% for extended periods will experience a slowdown in economic growth. It is important to note that every percentage point of debt above this level costs countries 1.7% in economic growth and is even more pronounced in the emerging markets, where each additional percentage point of debt over 64%, annually slows growth by 2%.

Sources of information on ‘Debt to GDP Ratio’ for Major currencies:

In the sources below, there is a lot of information with respect to the Debt to GDP ratio. You can acquaint yourself with the Debt to GDP ratio for the respective country in addition to the historical data related to that country’s Debt to GDP ratio. This graphical representation of the historical Debt to GDP ratio data will leave you with a clearer understanding of how these ratios can change over time.

World Bank – https://datacatalog.worldbank.org/dataset/quarterly-public-sector-debt

GBP (Sterling) – https://tradingeconomics.com/united-kingdom/government-debt-to-gdp

AUD – https://tradingeconomics.com/australia/government-debt-to-gdp

USD – https://tradingeconomics.com/united-states/government-debt-to-gdp

CHF – https://tradingeconomics.com/switzerland/government-debt-to-gdp

EUR – https://tradingeconomics.com/euro-area/government-debt-to-gdp

CAD – https://tradingeconomics.com/canada/government-debt-to-gdp

NZD – https://tradingeconomics.com/new-zealand/government-debt-to-gdp

JPY – https://tradingeconomics.com/japan/government-debt-to-gdp

 

Frequency of release

Public Debt figures are released quarterly by the World Bank and the International Monetary Fund (IMF), therefore, investors and agency ratings are able to compute this ratio on a quarterly basis.

What do traders care about the Debt to GDP ratio and its impact on the currency?

As we already know, the government debt to GDP ratio indicates the ability of a country to repay its debt, and a higher Debt to GDP ratio for an extended period of time means that the country is more likely to get default on its debt. This leads the foreign banks and governments to lend more money to these countries, and they increase their interest rates to mitigate the high risk involved. Aa a result, the economy of the country will slow down when there is a high debt to GDP ratio. A weak economy can indicate that there may be depreciation of that currency. This is why this ratio will be an essential factor for forex traders to consider when they trade on the Forex market.

The bottom line

If a country has a high debt-to-GDP ratio for an extended amount of time, it can indicate a recession as a country’s GDP will go down in a recession. This will also affect the people living in that country as governments tend to increase taxes to keep up the revenue. The lending governments will have more faith in the county to repay their debts if there is a high return on the debt that is borrowed. If there is a high risk involved due to less return on the debt that is acquired, this will question the lenders. Another important factor to consider is that the lending institutions earn a high rate of interest on the debt that is provided, So they won’t mind the country in question not paying back their debt, as the lending country can earn high interest from the debts they have provided.

From a traders’ point of view, it is better to have an overall view on what the country’s debt to GDP ratio is and to forecast if the specific country is likely to repay their debts or default on payments. If this fundamental analysis indicator factor is ignored when doing your due diligence for long term trades, then there is a high probability of the specific currency to depreciate in the long run, if that country defaults on its debt.

 

 

Categories
Forex Economic Indicators Forex Fundamental Analysis

Forex Fundamental Indicator – What you need to know about the GDP & GDP Growth

There are several components that make up fundamental analysis, but one of the most influential indicators is The Gross Domestic Product and the GDP growth rate. GDP is a well-known metric of economics and is one of the most important components when doing your fundamental analysis due diligence of a currency pair.

There are several components that make up fundamental analysis, but one of the most influential indicators is The Gross Domestic Product and the GDP growth rate. GDP is a well-known metric of economics and is one of the most important components when doing your fundamental analysis due diligence of a currency pair.

There are several components that make up fundamental analysis, but one of the most influential indicators is The Gross Domestic Product and the GDP growth rate. GDP is a well-known metric of economics and is one of the most important components when doing your fundamental analysis due diligence of a currency pair.

What is GDP

The Gross Domestic Product is defined as a “monetary measure of the market value of all the final goods and services produced in a specific time period, often annually”- Wikipedia

This is the total economic activity generated by both private and public companies within a country in a specific time period.

Nominal GDP vs. Real GDP

Nominal GDP is the market value of all goods and services produced in an economy with inflation adjustments. Real GDP is the Nominal GDP, which has been adjusted for inflation.

Components of the GDP

The GDP is broken down into four components and is an indication of what a country is good at producing: Personal consumption expenditures of goods and services, business investments, government expending, and net exports of goods and services.

Personal Consumption expenditures

Consumer spending is one of the main contributors to production and is the best way to compare using data from different years. This is subdivided by the BEA into goods and services.

Goods are further subdivided into durable and non-durable goods. Durable goods are cars and furniture, for example, and have a lifespan of three or more years. Non-durable goods are fuel, clothing, food, etc.

Services include commodities that cannot be stored are consumed when purchased.

Business investments

This includes purchases that companies make to produce consumer goods, and not every purchase is counted as purchases must go to creating new consumer products. Again the BEA divides this component into two subcomponents;

Fixed Investment – It is a non-residential investment that consists of business equipment like software, capital goods, and manufacturing equipment, and this also includes commercial real estate construction and residential construction. This component is based on monthly shipment data from the BEA durable goods order report.

Change in private inventory – this is how many companies will add to their inventories of goods they plan to sell. As orders increase, companies may not have enough goods in stock and therefore order more to ensure supply and the increase in private inventories contributes to GDP. If there is a decrease in inventory orders, then companies will halt manufacturing, and if it persists, then staff reductions are next.

Government spending

This is an indication of the size of government across countries. There is a large variation in this indicator and highlights the countries’ approach to delivering public goods and services.

Net exports of goods and services

Imports and exports have an opposite effect on GDP as exports add to the GDP and imports subtract from the GDP data.

 

The economic reports

The economic reports of the GDP cover quarter or annual data periods, and this data is reviewed periodically until the final GDP data is released. There are some countries that release this data on a monthly basis, like the USA. However, the majority opt to release this data quarterly and annually.

Analyzing the DATA

The economic reports of the Gross Domestic Product are such an integral measure of economic activity that it is a vital component of fundamental analysis in a currency pair. The GDP data is a key measure in determining the strength of a country’s economy and hence the strength of its currency. By comparing the two sets of data on both currencies and comparing each set of GDP data to that of previous releases. This comparison helps to determine which of the two currencies is stronger, and enjoying a strong economy.

When analyzing this data, it is necessary to compare like for like economies as each country is at a different level of development. When we look at developing economies, we can anticipate seeing annual growth rates that exceed the norm, and for the emerging economies, annual growth rates can climb to double digits.

What is the GDP Growth Rate

The GDP growth rate measures how fast an economy is growing and is the next comparison, which is necessary in order to evaluate the previous years’ data is in line with the previous years for the same period. This collection of data shows the expansion or contraction of economic activity within a country.

What determines growth

A nation’s GDP growth rate determines its economic health. If the growth rate is positive, it indicates that the wealth of the nation is improving, and the economy is doing well. If the GDP growth rate is negative, meaning it has fallen below the previous period, it is a clear indication that the economy is declining. This decline in the GDP growth rate has serious ramifications as unemployment rises with the downturn of production.

Economic reports

The GDP economic reports are a vital measure of economic activity and integral to the fundamental analysis for any currency pair you wish to trade. This data is vital in determining the benefits of a particular economy and the strength of its currency. By comparing this data to previous years or periods, one is able to ascertain the progression of the expansion or contraction of the economic activity and thus evaluate if it is equivalent to the same period of previous years.

Impact on currency

The GDP growth rates are a massive driving factor in a currency’s performance because of the results that economic activity has on a currency. This means that higher levels of economic activity will generate a higher demand for a specific currency, and an increase in economic activity will also generate an increase in the total value of that economy.  The more value that a specific country’s economy has, the higher the value of its currency. What traders are looking at when analyzing this data is the difference found between the two currencies’ growth rates. As a rule of thumb, the currency which has a higher growth rate will generally experience an appreciation of its currency.

 

Sources of information on GDP

Most nations release their GDP data on a monthly, quarterly, and annual basis, and in the U.S., it is the Bureau of Economic Analysis (BEA) that publishes an advanced release of this data.

When one is contemplating doing their own fundamental analysis, it is imperative to take into account the effect that a country’s GDP will have on its currency strength and the importance of measuring the data rate from previous periods. The GDP data is closely monitored as it defines the movements of an economy is a straightforward way.

Links to GDP information resources:

IMF

https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/index.aspx

OECD

https://data.oecd.org/gdp/gross-domestic-product-gdp.htm

USA

https://www.bea.gov/data/gdp/gross-domestic-product

Europe

https://ec.europa.eu/eurostat/statistics-explained/index.php/Main_Page

UK

https://www.ons.gov.uk/economy/grossdomesticproductgdp

Canada

https://www150.statcan.gc.ca/n1/daily-quotidien/190531/dq190531a-eng.htm

Japan

https://fred.stlouisfed.org/release/tables?rid=269&eid=155790#snid=155791

China

http://www.stats.gov.cn/english/statisticaldata/Quarterlydata/

Australia

https://www.abs.gov.au/ausstats/[email protected]/mf/5206.0

New Zealan­­­­d

https://www.stats.govt.nz/indicators/gross-domestic-product-gdp

 

Categories
Forex Economic Indicators Forex Fundamental Analysis

Fundamental Analysis – A Brief Introduction

Most traders just focus and use technical analysis (TA) to make trade decisions, but they forget that trading is connected with value. The perceived value of an asset is what makes the market move up and down. And the perception of that value by the market is directly related to the fundamental information available.

Most traders just focus and use technical analysis (TA) to make trade decisions, but they forget that trading is connected with value. The perceived value of an asset is what makes the market move up and down. And the perception of that value by the market is directly related to the fundamental information available.

Most traders just focus and use technical analysis (TA) to make trade decisions, but they forget that trading is connected with value. The perceived value of an asset is what makes the market move up and down. And the perception of that value by the market is directly related to the fundamental information available.

Fundamental Analysis is simply a type of market analysis which involves studying the economic or political position of a country in order to be able to assess the relative value of currencies more effectively. In a nutshell, Fundamental analysis is the study of economic factors that influence foreign exchange rates to predict future prices.

Traders studying macroeconomic data of the major economies and try to interpret the economic events, news, and press releases with the aim of predicting future moves a currency can make. Traders must also take into account the microeconomics of a country, such as supply and demand, consumer expending, and unemployment to assess the macro trends in the currency markets and always be on the right side when trading.

Also, the different scheduled news releases that are the benchmark for fundamental analysis can create price shocks in the market when the figures do not match the analysts’ consensus. Therefore, it is critical, also, to keep track of the Economic Calendar to avoid the potential volatility the news event can produce.

So when embarking on doing your own fundamental analysis, there are a few economic indicators considered key underlying drivers. Let’s have a short glance at these basic economic indicators.

The Gross Domestic Product (GDP)

The GDP data is used primarily to gain insight into a country’s economic strength, is calculated annually, and the broadest measure of a country’s economy. It is a representation of the value of all goods and services produced within that country over a defined period of time. The GDP data is one of the Economic Indicators which is closely monitored as it represents a countries contraction or expansion in a straightforward way, allowing the Trader to see whether a country is experiencing rapid growth or going into recession. The GDP growth rates from quarter to quarter can be the driving factors in the performance of a given currency.

Interest rates

The interest rate is one of the most critical factors that drive the Forex market. The interest rate of a country helps us to determine how the central bank is responding to the economic factors present in that country at the time. When a country is experiencing consumer inflation, the central bank will increase interest rates to curb inflation. When a country’s growth weakens, it will reduce the interest rates to spur economic growth. When a central bank changes interest rates, it creates movement in the market. It causes volatility, and if you are armed with an accurate prediction can lead to a beneficial outcome on a specific trade.

Inflation rate

Another piece of fundamental analysis data that one needs to look at is the inflation rate. This is the rate at which goods and services are valued, which changes over time. We measure inflation at both the consumer level and producer level. The producer level is defined as wholesale companies, and the consumer level is defined as households and consumers. A high rate of inflation can cause a currency value to rise as traders anticipate a rise in interest rates. The central bank, to protect consumers from excessive inflation, tends to increase the interest rates. This reduces the spending power that consumers have and thus reducing the price of goods and services.

Unemployment Rate

The unemployment rate is an indication of that country’s workforce that is actively seeking employment or are currently unemployed. If a country has a high unemployment rate, then it would be considered a weakening economy and lead to the currency deprecating. Low unemployment rates indicate a strong economy and increase the demand for the currency.

The Debt-to-GDP Ratio

The debt to GDP ratio is the ratio of the public debt that a country has compared to its Gross domestic product. If a country is unable to pay back its debt, it will default, and a financial panic may erupt. The usual bar set for GDP growth is 77% if it exceeds this amount over an

Balance of trade (BOT).

The balance of trade is defined as the difference between the value of a country’s imports and exports over a set period of time. The BOT is used by economists to measure the strength of a country’s economy. A Sustained trade deficit is considered bad for the economy. Therefore, it will also hurt the valuation of its currency, whereas a strong surplus on the BOT will drive the price of the country’s currency higher.

Current account to GDP

Two components make up a country’s Balance of Payments, the current account, and capital account. The current account consists of the trade balance, the net factor income, and net cash transfers, which are all measured in the domestic currency.
When the account balance of a country is positive, that country is referred to as a net lender to the rest of the world. When the account balance is in the negative, then the country becomes a net borrower to the rest of the world. This ratio of the current account balance to the Gross Domestic Product (or % of GDP) provides the country’s ability to pay back its debt and is an indication of the country’s competitiveness in world markets.

In conclusion, when fundamental analysis data is used correctly, it is an invaluable resource for any forex trader. By looking at the bigger picture of how a country is performing, it gives an insight into how the market will move, allowing you to profit from your trades.