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Forex Fundamental Analysis

How The New Announcement Of ‘GDP Per Capita’ Indicator Affects The Forex Market?

Introduction

Introduction

Introduction

GDP per capita is the primary economic indicator in macroeconomics to measure the standard of living and economic prosperity. While GDP indicates the economy’s size in terms of economic output, it does not reveal for what populace the output is divided. Hence, GDP per Capita is more suited to assess the wealthiness of the country’s population. 

Every nation strives to improve its standard-of-living by increasing the wealth of the population beyond just meeting daily needs. Hence, GDP per Capita becomes an important economic indicator for countries’ comparison of how well-off their people are.

What is the GDP per Capita?

GDP 

GDP is the measure of a country’s total economic output. It is the total monetary value of all the goods and services produced within the country regardless of citizenship (resident or foreign national). It is the market value of all the finished goods and services within a nation’s geographical borders for a given period. The period is generally a quarter (3 months) or a year. The commonly used term “size of the economy” refers to this economic indicator. The USA is the world’s largest economy, and it means it has the highest nominal GDP or highest economic output.

GDP Per Capita

It is a metric that is obtained by dividing a country’s GDP by its population count. Here, “per Capita” translates to “per average head” or “for one individual.” Hence, GDP per Capita is the measure of economic output per person. 

If we want to compare GDP per Capita amongst countries, we use the Purchasing Power Parity (PPP). Through PPP measure, we can compare countries on equal terms, as many countries have different currencies, comparing economic output becomes difficult. Hence PPP measures everything in the United States dollar terms, thus creating a base standard for comparison.

How can the GDP per Capita numbers be used for analysis?

Since GDP is the total economic output, countries with lower economic output than other countries may not necessarily be poorer. On the contrary, it could be wealthier. For example, Qatar has only 19 billion US dollars GDP in comparison to the USA, which has 20.54 trillion US dollars. But Qatar is the number one ranked the country as per GDP per Capita. It has 126,898 US Dollars compared to the United States that has only 62,794 US Dollars. Hence, the people of Qatar are wealthier than those in the United States. 

Here, we have to understand GDP per Capita is a function of the population. Higher population results in higher GDP prints but also distributes the GDP amongst more people. Qatar is a prosperous country with sizeable natural oil resources, which is not a labor-intensive task to extract and export. Hence, the high GDP through Crude Oil exports is divided amongst a few populace of 2.7 million people compared to the United States 328 million. The USA is the third most populous country after China and India.

Overall, small and prosperous countries and developed industrial nations tend to have high GDP per Capita. The wealthiest and most impoverished countries are also assessed based on the GDP per Capita as a primary metric.

The income per capita and GDP per Capita are the two most common tools for measuring economic wealth and prosperity. GDP per capita is more popular and widely used as it is more regularly tracked and maintained on a global scale by most countries. It, in turn, helps in ease of calculation, usage, and comparison amongst countries.

It tells us how much economic output is attributed to a citizen. Hence, it is a measure of national wealth. On the other hand, it can also tell us the economic productivity of the people. Productive and talented groups of people will contribute more value to the GDP prints.

GDP per capita is used alongside GDP and other GDP related metrics like the GDP Growth Rate, Real GDP, by policymakers to assess the economic health and take necessary actions to drive the economy in the right direction. When the GDP prints are consequently decreasing for two quarters, Central Authorities intervene through monetary and fiscal levers to counter deflation and stimulate economic growth through inflationary pressures. 

GDP metrics are closely watched by investors (domestic and foreign alike) to make investment decisions. Declining GDP holds off investments from investors, due to decreased confidence and vice-versa.

Impact on Currency

GDP metrics are used in a variety of ways by a variety of people. Economists and Central Authorities primarily use GDP per Capita to understand the economic wellbeing of its people. GDP Growth Rate is primarily used by Traders, Business people, and Investors to make business decisions.

GDP per capita would likely be more useful for Policymakers, and Business people. Business people can use this as a wealth metric and consequently decide the products that would suit the budget of people. The higher the wealth of the individual citizen, the costlier products and services they can afford. Hence, business decisions can also be impacted.

It is a proportional high impact indicator. Fluctuations in the GDP metrics bring a lot of volatility in currency markets. Falling GDP metrics are terrible for the economy, its businesses, consumers, and the Government. GDP impacts everyone. Hence, Central Authorities are committed to maintaining GDP Growth and take the necessary actions to avoid deflation. Businesses also hold off investment decisions in the stagnating economy and vice-versa.

Higher GDP per Capita is good for the currency and the economy and vice-versa. Although for trading decisions, GDP Growth Rate serves as a more relevant metric for comparisons amongst different currency countries. 

Economic Reports

For the United States, the Bureau of Economic Analysis releases quarterly GDP figures from which we can obtain our statistics on its official website every quarter. The release schedule is already mentioned on the website and is generally released one month after the quarter ends. 

Major international organizations like the World Bank, International Monetary Fund, OECD, etc. actively maintain track of GDP figures of most countries on their official website:

Sources of GDP per Capita

For the United States, the BEA reports are available here.

The St. Louis FRED keeps track of all the GDP and its related components in one place on its official website. You can find this information in the below-mentioned sources. 

GDP & GNP – FREGDP per Capita

Real GDP per Capita – FRED

GDP per Capita – World Bank

Impact of the “GDP per Capita” news release on the Forex market

In the above section of the article, we saw the definition of GDP Per Capita and understood how it differs from the nominal GDP. Per Capita GDP is calculated by dividing GDP over the entire population of the country. GDP Per Capita is a universal measure used by most economists to gauge the prosperity of nations.

It provides insight into the economic prosperity and economic development across the globe. Countries with high technological progress see a significant increase in GDP Per Capita. It is also a significant indicator of comparing the economic growth between the two countries. GDP Per Capita if often analyzed alongside GDP. GDP Per Capita considers both the GDP and its population.   

In today’s lesson, we will analyze the impact of GDP on the value of the currency and observe the variation in volatility due to the news announcement. In this regard, we have collected the year-on-year GDP of Japan, where the below image shows the GDP measured in the last fiscal year. Let us find out the reaction of the market to this data.

USD/JPY | Before the announcement:

We shall start with the USD/JPY currency pair to observe the impact of GDP data on the Japanese Yen. We can see in the earlier image that the market is in a downtrend with a large bearish candle visible a few minutes before the news release. As the market is very bearish, we will look to the currency pair after a price retracement to a technically significant level. At this point, we cannot take any position in the market. 

USD/JPY | After the announcement:

After the news announcement, we see that the price moves lower, resulting in further strengthening of the Japanese Yen. As the GDP data was very close to market expectations, traders comprehended this data to be positive for the economy and bought Japanese yen by selling the currency pair. In terms of positioning ourselves in the market, once should not go ‘short’ in the market soon after the news release as this would mean chasing the market, which is very risky.     

NZD/JPY | Before the announcement:

NZD/JPY | After the announcement:

The above images represent the NZD/JPY currency pair, where we see that the market has crashed recently, and the price is at the same level since then. This means there is extreme optimism in the market concerning the Japanese Yen. As the price is meager, we need a pullback before we can take a ‘short’ trade in the currency pair. Until then, we will watch the impact of GDP on the currency.

After the news announcement, the volatility expands on the downside, and the price sharply lower. The market reacted positively to the GDP data since it was measured to be nearly the same as before. This proved to be bullish for the Japanese Yen, where traders bought the currency and took the price lower.   

EUR/JPY | Before the announcement:

EUR/JPY | After the announcement:

The above images are that of EUR/JPY currency pair where we see that again, the market is in a downtrend, but in this pair, we notice a strong bullish candle from the lowest point, which has taken the price higher. This means the Japanese Yen is not as bullish as it was in the above two pairs. Since the market is not expecting a fall in the GDP, aggressive traders can take a ‘short’ position with a strict stop loss.

After the news announcement, the price moves lower and closes with a large bearish candle. This increases the volatility to the downside and strengthens the Japanese yen. Therefore, it clear that the GDP data had a hugely positive impact on all the currency pairs.    

We hope you understood the concept of ‘GDP per Capita’ and how the Forex price charts get affected after its news release. All the best. Cheers!

Categories
Forex Fundamental Analysis

What Is ‘GDP From Public Administration’ Forex Fundamental Driver All About?

Introduction

Introduction

Introduction

Public Administration is a critical aspect that drives overall economic growth. GDP from Public Administration can give us insights into the strength of the current central authorities’ efficiency in governance. Public Administration is the levers to the economic engine, and it can put brakes or accelerate the economy to sink into a recession or propel to economic growth. Hence, understanding Public Administration and its contribution to GDP will help us better understand its role in society’s functioning as a whole.

What is GDP from Public Administration?

Gross Domestic Product

GDP is the measure of a country’s total economic output. It is the total monetary value of all the goods and services produced within the country regardless of citizenship (resident or foreign national).

It is the market value of all the finished goods and services within a nation’s geographical borders for a given period. The period is generally a quarter (3 months) or a year.

The commonly used term “size of the economy” refers to this economic indicator. The USA is the world’s largest economy, and it means it has the highest nominal GDP or highest economic output.

Public Administration

It is the implementation of government policies. Public Administration is a part of every economy. Policies can be either monetary policy or fiscal policy.

Public Administration is concerned with the operations of government that run the nation. It is centered around the structuring of the Government policies and programs and government officials’ conduct to implement the same.

Public Administration’s definition and goals are vast subjects. In our analysis, we will only focus on the economic impact of Public Administration. 

How can the GDP from Public Administration numbers be used for analysis?

An analogy to understand the importance of Public Administration would be if an economy or nation is viewed as a car or engine. Public Administration would be the brake, gear, and acceleration levers. Levers determines whether the car moves forward or backward, and also the pace of movement.

Similarly, Public Administration determines what direction the economy’s growth is going towards and at what rate. Monetary policy is associated with the Central Bank of a nation. Fiscal Policies are associated with the Central Government. 

Officials working as per the Public Administration policies are called Civil Servants, together the Governing body and its policy determine how effectively the opportunities are maximized to satisfy the public demands and lead to overall economic wellbeing.

Policy reforms and effective Administration can reduce economic disparity amongst different classes of people, increase employment, wages, and business prosperity. Government Spending, Tax programs, Outlays, allowances, funding programs are all part of the Government policy. Public Administration determines how effectively such policies are implemented.

Public Administration provides the foundation for economic activity through laws and as a catalyst to economic wellbeing through its services. 

Without firm laws and regulations and active civil servants, the nation is in jeopardy. Weak governance and policy can sink the nation where corruption, political instability, riots, public protests, etc. can creep in. 

Services like transportation, maintaining law and order, road construction, police, jails, tax exemptions, medicare, social security, etc. directly may or may not generate revenue for the government but indirectly helps other sectors to boost overall economic prosperity.

When a nation’s government fails to stimulate the economy, there is a probability that it will continue for its elected period. Hence, International Investors can glean such clues from GDP from Public Administration figures. They can understand the behavioral nuances of the government and its probable impact in the upcoming quarters.

The government impacts the people and the business. On an absolute basis, the government has complete control over the nation for the elected period. It can bring about any policy reforms they see fit. It can help businesses or impede businesses. It can control money flow through the economy, and how much people pay taxes.

It is also essential to perceive that the GDP from Public Administration is only part of the government’s revenue. It assists in the functioning of other sectors through its public services that are not accounted for in the GDP. 

Hence, GDP from Public Administration itself does not tell us the real contribution of Public Administration in growth. The functions of a government span across various sectors and vary from region to region based on the economic region’s requirements.

Impact on Currency

The GDP from Public Administration is a low impact indicator, as the broader measures like Real GDP and GDP Growth Rates are more important for the Currency Markets. 

GDP from Public Administration does not paint the full picture of the economy, but it tells us the effectiveness of the current government and its policies. Still, for the International Currency Markets, it does not serve as a useful indicator.

It is a proportional and lagging indicator. Higher GDP from Public Administration is good for the economy and its currency, and vice-versa.

Economic Reports

For the United States, the Bureau of Economic Analysis releases quarterly GDP figures on its official website every quarter. The release schedule is already mentioned on the website and is generally released one month after the quarter ends.

In the full report, we can extract the GDP from Public Administration figures. We can also go through GDP by Industry to get the Public Administration performance in the report. Below is a sample of the same:

World Bank actively maintains track of GDP by Sector figures of most countries on their official website. Public Sector 

Sources of GDP from Public Administration

For the United States, the BEA reports are available here.

We can use the GDP by Industry to see the government’s contribution to GDP here. 

Different metrics like Public Debt, Expenditure, etc. are all categorically available here.

We can also find GDP from Public Administration for different countries here.

Impact of the ‘GDP From Public Administration’ news release on the price charts 

In the previous section of the article, we understood the importance of Public Administration in an economy and how it impacts economic growth. It plays an essential role in overseeing and shaping new impact market strategies. It is the responsibility of public administrators, whether policymakers or non-profit executives, to make use of the opportunity to ensure that the economy flourishes.

Profound policies are needed to facilitate private-sector investment in socially beneficial concerns. All this is in the hands of public administrators and the government. Therefore, the department has a fair amount of contribution to the GDP and the economy. When it comes to investing based on this information, investors do not make investment decisions based on the contribution from different sectors. They look at the final GDP and take a position in the currency.

In today’s lesson, we will analyze the impact of GDP on different currency pairs and see the volatility created after the news release. The below image shows the first-quarter GDP data of Singapore, where we see a significant drop in the GDP value compared to the previous quarter. Let us find out the reaction of the market to this data. 

USD/SGD  | Before the announcement

 

Let us start with the USD/SGD currency pair, where the above image shows the state of the chart before the news announcement. We see that the market is moving in a small ‘range,’ and just before the release, the price is at the top of the ‘range.’ This means we can expect selling pressure from this point that can take the price lower. However, it is better to take a position based on the volatility caused by the news announcement. 

USD/SGD  | After the announcement:

After the news announcement, we see that the price moves lower, and the market falls considerably. The market reacted oppositely to what was expected as it resulted in the strengthening of the Singapore dollar even though the GDP data was negative. The volatility increased to the downside, and eventually, the market turns into a downtrend.    

SGD/JPY | Before the announcement

SGD/JPY | After the announcement:

The above images are that of the SGD/JPY currency pair, where we see that the price is precisely at the ‘support’ before the news announcement. There is a high chance that the buyers might come back in the market and go ‘long’ in the currency pair. Since economists forecast a lower GDP for this quarter, it is advised not to take a ‘short’ position before the news release.

After the news announcement, the price initially moves higher, but this gets immediately sold into, and the candle closes with a large wick on the top. We witness a fair amount of volatility in the currency, and finally, it gets extended to the downside. One can take a ‘short’ position in the currency after noticing trend continuation patterns in the market and after confirmation from technical indicators.     

GBP/SGD | Before the announcement

GBP/SGD | After the announcement:

The above images represent the GBP/SGD currency pair, where we see that before the news announcement, the market has reversed to the upside, and currently, the price has reacted strongly from the ‘demand’ area. This indicates a high amount of bullishness in the currency pair and weakness in the Singapore dollar since it is on the left-hand side of the currency pair.

After the news announcement, the market falls lower, and the volatility slightly increases to the downside. The Singapore dollar gets more influential after the news release, despite reporting weak GDP data. Thus, we can conclude that there is some confusion in the market and hence it moves in both the directions. Traders should technically analyze and take positions accordingly. 

That’s about ‘GDP From Public Administration’ and its impact on the Forex market after its news release. In case of any questions, let us know in the comments below. Good luck!  

Categories
Forex Fundamental Analysis

‘GDP From Manufacturing’ – Understanding The Macro Economic Indicator & Its Impact

Introduction

Introduction

Introduction

GDP from Manufacturing is significant for many developing economies. It is their primary driver for economic growth to improve the standard of living and generate wealth. Manufacturing Sector has supported a large share of jobs in the economy. 

Manufacturing Sector has helped many economies to come out of underdeveloped status to developing nation status. Hence, understanding GDP from Manufacturing has varying significance in different countries is suitable for macroeconomic view in the international markets.

What is the GDP from Manufacturing?

Gross Domestic Product

GDP is a basic measure of a country’s total economic output. It is the total monetary value of all the goods and services produced within the country regardless of citizenship (resident or foreign national).

It is the market value of all the finished goods and services within a nation’s geographical borders for a given period. The period is generally a quarter (3 months) or a year. The commonly used term “size of the economy” refers to this economic indicator. The USA has the world’s largest economy, and it means it has the highest nominal GDP or highest economic output.

Manufacturing

It is producing goods for use or sale labor, processing equipment, or machinery. It is a process that could be physical, chemical, or mechanical. The manufacturing sector mainly uses raw materials to make finished goods for consumption by end customers or intermediate goods for other manufacturing industries. For example, a car Manufacturing company could import raw iron ore metal, and process it to produce metal car body parts.

In the lifecycle of a finished good, the Manufacturing comes in as the second stage in the supply chain right after the source of raw materials. The manufacturing sector includes plants, factories, mills, and generally use power-driven machinery in their process. The manufacturing sector can also include small businesses, or home startups like bakeries, candy stores, or custom tailors, etc.

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

Manufacturing is an essential component of GDP. In the United States, it contributed 11.6% of total GDP. Manufactured products make up half of the total United States exports. In the United States alone, the Manufacturing Sector has 12.85 million jobs, about 8.5% of the total workforce. The importance of the Manufacturing Sector is evident from the rapidly developing economies like China, Japan, and India. 

The industrialization has been the main propellent for economic growth in these countries that put them back on the map. With export-led growth, China has primarily used Manufacturing Sectors to achieve growth rates of 10% and above to catch up with the advanced economies like the United Kingdom, and the United States. Manufacturing Sector is a labor-intensive sector, and it requires skilled labor. Despite the advent of modern technologies, equipment, and automated machinery, it still requires skilled laborers to fill the gaps.

Developing economies do not have a competitive edge over the developed economies in the services sector. But they do have the advantage in the Manufacturing and Industrial Sectors due to the availability of cheap labor. The low costs associated with a low standard of living and maintenance attracts business to establish their production centers in such countries. For example, an autoworker in Detroit makes 58 dollars an hour compared to 8 dollars in Mexico.

With an improved standard of living in developed economies like the United States, the cost of labor is high in comparison. It is the primary reason for the decline in the Manufacturing Sector growth in the developed economies for over two decades, paired with rapid growth in developing economies during the same period. 

With many developed economies transitioning more into the services sector, the Manufacturing Sector has lost its fair share in developed economies while developing ones like China have significantly increased their Manufacturing Industry production levels. 

About Thirty percent of the GDP of China comes from the Manufacturing Sector alone. Hence, we can understand that the Manufacturing Sector is the primary source of growth for many developing countries. The above plot shows the increase in Manufacturing Production in China. It is steady and steep growth. The vertical axis is plotted in CNY HML (Chinese Yuan Hundred Millions).

As the countries develop, they start to get involved in the Service sector by investing the wealth generated from the Manufacturing Sector to come on par with developed economies and establish a total equilibrium. But there is a long way to go before all developing economies become developed.

Impact on Currency

The GDP from Manufacturing in itself is not a high impact indicator, as the broader measures like Real GDP and GDP Growth Rates are more important for the Currency Markets. GDP from Manufacturing does not paint the full picture of the economy. It can be an essential tool for the Central Authorities to keep track of Manufacturing Sector performance and its implications to the economy.

As established, the Manufacturing Sector is a significant contributor to economic growth for developing economies. Hence, changes in this sector widely affect the overall economic health, and all the dependent industries therein. It is a proportional and lagging indicator. Higher GDP from Manufacturing is good for the economy and its currency, and vice-versa.

Economic Reports

For the United States, the Bureau of Economic Analysis releases quarterly GDP figures on its official website every quarter. The release schedule is already mentioned on the website and is generally released one month after the quarter ends.

In the full report, we can extract the GDP from Manufacturing figures. We can also go through GDP by Industry to get the Manufacturing Industry performance in the report. The World Bank actively maintains track of GDP by Sector figures of most countries on its official website.

Sources of GDP from Manufacturing

For the United States, the BEA reports are available below: 

World Bank also maintains the Manufacturing Sector’s contribution as a percentage of GDP on its official website, as given below for reference. ‘GDP From Manufacturing’ of various economies can be found here.

Impact of the ‘GDP from Manufacturing’ news release on the price charts

The manufacturing sector is crucial for the development of a country. The growth of machinery output and technological improvements are the main drivers of economic growth. The service sector, too, is dependent on most of the manufactured goods. Manufacturing also revives the economy by creating tens of millions of new jobs, eradicating recession.

Therefore, the manufacturing sector contributes a significant part of the GDP of a country. When we drill down to the fundamental analysis of the currency, investors do not look at the manufacturing sector’s contribution alone but consider the distinct GDP as the leading indicator of economic growth.

For example, we will be analyzing the influence of GDP on various currency pairs and see the impact it makes on the value of a currency. The below image displays the previous and latest GDP in the United Kingdom released in May, where we see a significant drop in the GDP compared to the previous month. Let us find out if the market reacts positively or negatively to the news release.  

GBP/USD | Before the announcement:

We shall start our analysis with the GBP/USD currency pair, where the above image shows the properties of the pair before the news announcement. We can see in the above image that the market is in a downtrend, and recently the price has been moving within a ‘range.’ Since the GDP announcement is a high impact event, we should wait for the news release to clarify the direction of the market.  

GBP/USD | After the announcement:

After the news announcement, we witness a slight amount of volatility in the currency pair where the price initially goes up, and later it closes with a wick on the top. We do not observe the kind of impact that was expected due to the news release may be because the market had already priced in a negative outlook. Since the impact was less, we should look to trade the currency pair based on technical indicators and chart patterns.     

GBP/CAD | Before the announcement:

GBP/CAD | After the announcement:

The above images represent the GBP/CAD currency pair, where we see in the first image that the market seems to be resuming the downtrend after a price retracement to the resistance. Given that the impact of GDP announcement is high, we will look to take a ‘short’ only after confirmation from the market. There is a probability that the market may turn to the upside from this point if the news comes out to be positive for the British Pound.

After the news announcement, we see that the price rises above the moving average, and it closes with some bullishness. Even though the GDP data was fragile, traders bought British Pound and strengthened the currency. One of the reasons could be that the market has factored in the negative expectations, which led to a positive reaction after the news release. One should analyze the pair technically before taking a position in the currency.  

EUR/GBP | Before the announcement:

EUR/GBP | After the announcement:

The above images are of the NZD/GBP currency pair, where we see that the market is in a steady uptrend before the news announcement, signifying the enormous amount of weakness in the British Pound. Ideally, we will be looking to buy the currency pair after a suitable price retracement to the ‘support’ or ‘demand’ area. By the way, we should also not forget that the news release can reverse the trend.

After the news announcement, we see that the market reacts negatively to the news release but positive for the British Pound since it is on the right-hand side of the currency. The volatility slightly increases to the downside, which is evident from bearish ‘news candle.’

That’s about ‘GDP from Manufacturing’ and its influence on the Forex market after its news release. If you have any questions, please let us know in the comments below. Good luck!

Categories
Forex Fundamental Analysis

What Is ‘Services PMI’? How Important Is It In Assessing A Nation’s Economy?

Introduction

Introduction

Introduction

The Services Purchasing Manager’s Index is an excellent leading or advanced macroeconomic indicator, which is used widely to predict economic expansion or contractions. It has various applications for economists, investors, and traders. This indicator predicts inflation, GDP, and the unemployment rate of an economy. Hence, understanding of Services PMI can be hugely beneficial for a trader’s fundamental analysis. 

What is Services PMI?

The Services Purchasing Manager’s Index, also called the Non-Manufacturing Index (NMI), is a survey of about 400 largest non-manufacturers in the United States of America. The word non-manufacturing here implies that the study is associated with the industries that do not produce physical goods; instead, they provide services. Non-physical goods mean the services provided by the IT and software giants like Microsoft and Google etc. The services PMI has fewer survey questions than the manufacturing PMI as some questions, such as inventories, not being relevant to many service providers.

The Services PMI was born more out of a need to accommodate the changing world due to the technological advancements in the last few decades. For most developed nations like the United States, the Service sector contributes more than the Manufacturing industry due to which it had to be taken into account to predict economic trends more accurately.

Purchasing Managers in a company are the purchasing and supply executives associated with procuring the required goods and services that are necessary for running the company. For example, A software company’s Purchasing Manager would typically be in charge of contacting and getting the best internet service provider for the entire company at the lowest or best prices from the market.

They may also be responsible for tie-ups with fellow software companies to get the required software to run their operations. The purchasing Managers have a decent idea of what a company needs, and during what periods these requirements change.

How is the Services PMI calculated?

The Services PMI hence is a compilation of the survey answers given by the Purchasing Managers of the largest 400 non-manufacturing companies of about 60 sectors in the USA. The questions typically asked in the study are related to month-over-month changes in the Business Activity, New orders, Deliveries, and Inventories with equal weightage, as shown in the table below:

All the four categories, as seen when putting together, form the NMI. These four components are enough to ascertain a growth or contraction in the business activity of that company.

The rating of Services PMI range between 0-100. A score > 50 indicates an expansion of economic activity in the non-manufacturing sector. Likewise, a score < 50 indicates contraction.

How can the Services PMI be Used for Analysis?

The data of ISM NMI Reports on Business goes back to 2008 due to which the levels of confidence in the data set may be lower than that of Manufacturing PMI; nonetheless, it is no less effective in ascertaining economic figures like GDP, inflation and employment, etc.

The Non-Manufacturing sector of the United States makes up 80% of the total GDP, and hence the Services PMI is a significant economic indicator in that regard. The Non-Manufacturing sector primarily drives the macroeconomic numbers like the GDP. Together the NMI and PMI cover more than 90% of the industrial sectors that contribute to GDP; hence Services PMI is a must for fundamental analysis.

The correlation between the ISM NMI Data and real GDP is about 85%, which is pretty good. The main advantage of studying Services PMI is that it is an advanced economic indicator. It predicts the real GDP a year ahead, which is commendable.

Below is a snapshot of Services PMI plotted against the real GDP growth rate historically, and we can see the strong correlation existing between them. This explains the importance of these leading indicators in the fundamental analysis of traders.

Impact on Currency

The impact of Services PMI on the currencies is as same as the impact of Manufacturing PMI. You can find this information here.

Sources of Services PMI Reports

We can monitor the NMI reports on the official website of the ISM official website. We can also go through the NMI of other countries from the IHS Markit official website on a subscription basis.

Impact of the ‘Services PMI’ news release on the price charts

The Flash PMI, like Manufacturing PMI, measures the activity level of purchasing managers but that in the services sector. This report is based on surveys taken by the officials covering 300 business executives in the private sector services companies. Traders keep a close watch on the services PMI data as the decisions of Purchasing managers give early access to data about the company’s overall performance, which in turn acts as an indicator of the economy.

Since the services PMI only gives an insight into the performance of the service sector, it does not directly affect the economy. Therefore, the impact of the data on currency is quite less. But traders, build and liquidate some positions in the market based on the PMI data.

The below image shows the previous and latest Services PMI data of Australia, where we see a decrease in the value of the same for the month of February, and now we will analyze the impact it created on the Australian dollar. A higher reading than forecasted is considered to be bullish for the currency while a reading lower than what is forecasted must be considered negative.

AUD/JPY | Before the announcement:

We begin with the AUD/JPY currency pair, where, in the above image, we see that pair is an uptrend before the news announcement. The volatility is high, and the price is making a new ‘higher high.’ As the impact of the PMI data is less, positive data should take the currency higher, and negative PMI data might result in a short-term downtrend. It is preferable to trade the above pair if we come to encounter the second situation as it could essentially result in a retracement of the uptrend, which can be used to join the trend.

AUD/JPY | After the announcement:

After the PMI data is released, owing to a decrease in the PMI number and this immediately is followed by some buying pressure. This is where we can understand the impact of the indicator on a currency where initially due to poor PMI data, the price falls, but it could not even go below the moving average. Thus, one can take this opportunity to join the major trend by trading the retracement, which was brought in due to the bad news. Since the uptrend is strong, one can hold on their trades as long as the market shows signs of reversal.

EUR/AUD | Before the announcement:

EUR/AUD | After the announcement:

The above images represent the EUR/AUD currency pair, and the reason why the chart is going down is that the Australian dollar is on the right-hand side. The chart characteristics almost appear to be the same as in the above pair, but the volatility on the downside is more violent and strong, indicating more strength in the Australian dollar. The only way to trade the pair is the market pulls back and gives us an opportunity to enter, which is the typical way of trading a trend.

After the news release, volatility expands on the upside due to weak PMI data, and the market moves higher. This change in volatility can be used as an opportunity to enter for a ‘sell’ expecting a continuation of the downtrend. This is how the impact of the news can be used to our advantage.

AUD/HKD | Before the announcement:

AUD/HKD | After the announcement:

The next currency pair we will be discussing is the AUD/HKD, and since the Australian dollar is on the left-hand side, the market should move up if the currency gets strong. But here the market is more range-bound, and there is no clear trend. Before the news announcement, price is exactly at the ‘resistance’ area, and soon after the outcome, the price could either try to break out or fall from the ‘resistance.’

After the news announcement, we see that volatility increases on the downside, and later it slows down. This low impact could be signing that traders may not sell at the ‘resistance,’ and thus, it can breakout. If you are an aggressive trader, consider going ‘long’ in the market with a tight stop loss below the recent ‘low.’

That’s about ‘Services PMI’ and the relative impact of its news release on the Forex market. Good luck!

Categories
Forex Fundamental Analysis

Significance Of ‘Wage Growth’ As A Forex Fundamental Driver

Introduction

Introduction

Introduction

Wage Growth is an essential fundamental indicator that influences the GDP of a country, where the income of people of the country has a major say in the GDP calculation. So, even if Wage Growth does not directly affect the economy but shows its importance by affecting other economic indicators. In today’s article, we will understand how Wage Growth is measured and how it impacts the value of a currency indirectly.

What is Wage Growth?

Wage Growth is referred to the rise in wages of employees that is inflation-adjusted and is often expressed in percentage. It is a macroeconomic concept that determines the economic growth of a country in the longer-term, as it reflects the purchasing power of people in the economy and the living standards. A high wage growth implies price inflation in the economy, and low wage growth indicates deflation. A low wage growth scenario requires intervention from government agencies such as the Reserve Bank, which will stimulate the economy through changes in the fiscal policy.

One of the important ways of maximizing wage growth is through the re-skilling process and investing in the development of the skills of employees. When skilled workers are involved in the decision-making process, it leads to the growth of business and industry as a whole. Hence, more financial compensation can be given for skilled workers who not only lift wage growth but also stimulate competitiveness in the economy. This leads to higher productivity and, thus, GDP per worker.

Measuring Wage growth

The key drivers of Wage Growth are productivity and inflation expectations. Wage Growth that is relative to the increase in prices of commodities in the economy—also known as real wage growth—reflects labor productivity growth as well. However, there are several other factors in a business cycle that results in wage growth diverging from production growth.

There are two different ways of measuring real wages. One is from the producer perspective, while the other is from the consumer perspective. Producers fix their labor costs by calculating them relative to the price of their outputs. Consumers measure wage growth by comparing their income with the cost of goods and services they purchase. Thus, most countries examine real wage growth by adjusting it with the rate of inflation. In Australia, for example, real wage growth is determined by considering three parameters, including inflation, hourly wages, and the average number of working hours.

Factors affecting Wage Growth Rate

Today, wage payment is a crucial factor in influencing labor and management relations. Workers are worried about the annual rise in their wages as it affects their standard of living and purchasing power. Managements in some companies are not concerned about higher wages to their employees as they feel the cost of production will go up and their profits will decrease. Let us see some other factors that affect wage growth.

Demand and Supply

The labor market operates on the forces of demand and supply. When demand for a particular type of skilled workers is more, and there is less number of people skilled in that job, the wage growth rate will be high.

Government Regulation

In countries where the wages are very low, the government may pass legislation for fixing the minimum wages of workers. This will also ensure a minimum level of living. This is especially the case in underdeveloped countries where the bargaining power of laborers is weak.

Training and Development Cost

Before handing over the projects to employees, it is necessary to train them enough, so they are capable of doing the job with high skill. This process usually takes time and money, which the company has to bear. Hence this has an effect on the annual growth in wages of employees.

The Economic Reports

The Wage Growth Rate Reports are released annually and on a quarterly basis that covers the review of the data from the previous quarter to the current quarter. All the major economies of the world and some developing countries publish this data on a quarterly and yearly basis that money managers use for evaluating various performance metrics.

Analyzing the DATA

The Economic Data of Wage Growth is a major determiner of the GDP of a country and, thus, the economy. The GDP, as we know, is a key measure in determining the strength of a country’s economy and, thereby, the value of the currency. By comparing the year on year wage growth, we can predict the growth of the economy and improvements in the standard of living. One can also compare the Data of two countries and analyze why the country with higher Wage Growth has been able to achieve it. The monetary committee can note down the differences in the policies.

Impact on Currency

There is an indirect relation between Wage Growth and the value of a currency. When we see a growth in the wages of workers, this is said to increase industrial growth and overall productivity, which in turn improve the GDP of the country. Higher levels of GDP will generate a higher demand for the currency and will increase the economic activity of the country. However, when wages are stagnant and do not show any rise, this will decrease consumer spending and leads to lower living standards. Due to this, the GDP will be affected and will drive the currency lower.

Sources of information Wage Growth

Most countries release Wage Growth data on a quarterly and yearly basis, and countries like the United States and Australia provide a detailed analysis of the same. The reports are published by the respective governments on their ‘Treasury’ website, which includes the International comparison of wage growth rates, Trends in wage growth, and more. 

Links to Wage Growth Information Sources   

AUD- https://tradingeconomics.com/australia/wage-growth

CAD- https://tradingeconomics.com/canada/wage-growth

EUR- https://tradingeconomics.com/euro-area/wage-growth

JPY- https://tradingeconomics.com/japan/wage-growth

CHF- https://tradingeconomics.com/switzerland/wage-growth

GBP- https://tradingeconomics.com/united-kingdom/wage-growth

USD- https://tradingeconomics.com/united-states/wage-growth

The growth in demand for goods and services depends on the spending power and the income that flows to the population, a significant portion of which comes from wages. Companies and government need to understand that growth in wages is not just a cost of production but are also a source of spending and thus of revenue and profit for the business.

Impact of the ‘Wage Growth’ news release on the price charts

After understanding the significance of Wage Growth in an economy, we shall extend our discussion and find out the impact of Wage Growth data on currency pairs. From the below image, we can infer that the Wage Growth may not cause a drastic change in volatility of a forex pair as the level of importance assigned to it is very low. Wage Growth numbers are announced on both a monthly and yearly basis, but to estimate the degree of change in volatility, we will be analyzing the year-on-year numbers of the same. A reference currency that we have chosen for this purpose is the Russian Ruble (RUB).            

Below is an image showing the latest, estimated, and previous Wage Growth data of Russia, where we see that there has been a decrease in Wages by 0.4% from the previous year. A higher reading than before is said to be positive for the currency while a lower than before data can negatively impact the currency. The Wage Growth data is officially released by the ‘Russian Federation Federal State,’ which is responsible for maintaining the fundamental information of Russia. Since the impact of the Wage Growth news announcement is least, let us look at the reaction of the market.

USD/RUB | Before the announcement:

We shall first look at the USD/RUB currency pair and analyze the impact of Wage Growth on this pair. In the above chart, we see that the market is a strong downtrend and recently we see a retracement from the lowest point. Since economists have forecasted a much lower wage growth than before, it is not prudent to take ‘long’ positions in the market as, technically speaking, this would mean we are trading against the trend. Therefore, a risk-free approach would be to wait for the news announcement and then trade based on the change in volatility.

USD/RUB | After the announcement:

The above chart shows the market reaction to the Wage Growth news announcement where the data came was beyond expectations and mildly lower than the previous year’s numbers. Since the data was robust, the price goes down, and the Russian Ruble strengthens. As the difference between the forecasted to actual data was huge, the volatility increases a lot on the downside, and the market seems to continue its downtrend. After the clarification of Wage Growth data and confirmation signs from the market, we can enter the market by ‘shorting’ the currency pair with a stop loss above the ‘news candle.’

EUR/RUB | Before the announcement:

EUR/RUB | After the announcement:

The above images represent the EUR/RUB currency pair, which is similar to that of the USD/RUB pair in terms of price behavior. However, the downtrend here is more resilient and stronger than in the above pair. The pullback, too, has been very little, which shows the strength of the Russian Ruble. Therefore, an above-average Wage Growth data should take the currency much lower while below-average data can result in a rally for a small duration of time, but not a trend reversal.

After the news announcement, we see that the price falls and leaves a wick on the bottom. This wick is due to the reaction at the support area, but this shouldn’t scare us, and we can confidently take ‘short’ positions in the market with a compulsory stop loss.

GBP/RUB | Before the announcement:

GBP/RUB | After the announcement:

The above charts are that of the GBP/RUB currency pair, where we see that the characteristics of this pair are totally opposite to that of the above-discussed pairs. Before the news release, we witness a strong uptrend, and the price is currently at a resistance area. We have two options at this point in time, one, to ‘long’ in the market as Wage Growth data is expected to be very bad and second, to wait for the news announcement, and if the numbers are weak, go ‘short’ in the market.

After the release of Wage Growth data, the price initially goes down as the numbers were better than expectations, but later, the candle closes in green. The volatility increases on both sides, but the numbers were not good enough to strengthen the Russian Ruble. Therefore, the only way to trade this pair is to wait for a breakout above the resistance area and then trade the retracement of it -using the Fibonacci tool.

That’s about ‘Wage Growth’ and its impact on the Forex market after its news release. In case of any queries, let us know in the comments below. Good luck!

Categories
Forex Fundamental Analysis

‘Employed Persons’ – Impact Of This Fundamental Driver On The Forex Market

Introduction

Introduction

Introduction

The number of people who hold a legal job, or conversely, the percentage of unemployed people is a direct gauger for a country’s economic health. It is one of the most obvious and direct reflectors of a nation’s health. Common people often misinterpret the rate of employment or unemployment as we will see next, Due to which a good background understanding of what such numbers reflect is paramount for economic analysis.

What is Employment?

An individual who gets paid for a certain work he/she performs is said to be “Employed.” People work to earn a living and make ends meet at the most basic level and once these requirements are met people work to improve their standard of living through more work or better work or switching place of work etc.

There are a variety of modes through which an individual within a nation can find work. For example, an individual can be a freelancer or a regular employee in an organization or even run his or her own business and be called self-employed.

How is the Employed Persons’ Statistic calculated?

In this regard, The Bureau of Labor Statistics (BLS) has left no stone unturned. The range of data that is available with them regarding the employment situation is huge. BLS surveys and tracks monthly employment and unemployment situation within the country and classifies them based on geographical region, sex, race, industry, etc.

The technique employed by BLS is called the Current Population Survey (CPS). Since asking every individual in the country every month about his employment status and verifying those details is an impractical task Government employs CPS to survey the data.

CPS survey takes in about sixty thousand eligible households. The selected households, going to be surveyed, are representative of all geographical locations within the nation hence making it a miniature version of the country’s population. The authorities also take care of not repeating the same surveyed members in succession and make sure that no one household is survey consecutively more than four times.

Neither the surveyor nor the surveyed person does not directly ask or get to decide their employment status. The surveyors ask a specific set of questions which and the responses to these questions are decoded by computer algorithms to determine the status of the individual automatically. Once the data is collected and calculated, based on a wide variety of factors, like race, ethnicity, age, gender, and residing state, they are categorized.

Why is the Employment Situation important?

The Employment Situation report published by the Bureau of Labor Statistics in the United States goes as far back as the 1940s. Hence, there is good confidence in the data set due to its range and good accuracy in assessing and predicting economic activity within a nation.

The importance of employment rate, employment-to-population ratio, unemployment rate, or any other employment metric is understood when we understand the interaction of various economic factors on each other and how one coherently affects the other.

If the number of employed people within a country increases, it means the number of people who are getting paid is more, which means more money is in circulation in the economy;  This means that more people now have the purchasing power to procure produces and thereby increasing the overall consumption of goods and services within the nation. When the consumption is on the rise, it means the demand is on the rise, which makes the business flourish, which in turn can increase the need for more employment or give the industries a good push towards growth. Overall, either more people will be employed, and some of the currently employed sections of people may enjoy better pays over time due to flourishing business.

We understand here there is positive feedback within an economy where one section feedback into other sections of the society and growth compounds and macroeconomic metrics like Gross Domestic Products reflect these positively, giving further confidence to policymakers, investors, and foreign businesses.

Here we have seen above how such a simple statistic can imply such big macroeconomic conditions of a nation. No wonder why BLS has such a diverse set of employment survey statistics released every month, which receives such huge media attention. For instance, Every month, when the nonfarm payroll numbers also are released, it is closely watched by many analysts, people in business, investors, and traders all over to make critical decisions. Employment reports based on industrial sectors can also give investors a good idea of different sector’s performances and help them make informed investment decisions.

How can the Employed Persons’ Report be Used for Analysis?

As useful as the Employment reports that are released every month, they are equally tricky to understand. For example, below is a snapshot of “All Employees, Total Nonfarm (PAYEMS) ” from the St. Louis Federal Reserve Economic Data (FRED)

When we see the above graph, one might think that the nation’s economy has been continuously growing, but that is not the case as the employment graph here is simply a function of population. Certainly, the population has increased from 1940 to 2020; hence the graph may seem increasing, but it is not solely because of improvements in the economic conditions of the country. We should also pay attention as some of the statistics of employment are not seasonally adjusted values meaning that during certain months of the year employment is on the low, and conversely, there seems to be an increase in unemployment like in January and February where seasonal jobs like construction are on a slowdown. Hence low numbers during these periods do not signal an economic contraction or slowdown in the economy.

Unemployment rate statistics are also used by Policymakers to assess causes of unemployment and take the necessary action to rectify the same. Investors use to assess the performance of certain industrial sectors before deciding to invest within a particular sector of a country. Many people use different categories of employment and unemployment statistic to analyze which sectors are facing slowdowns, layoffs, and which sectors have possible employment opportunities.

Apart from all these media, institutions, economic analysts all use these statistics in its diverse forms for their specific purposes.

Sources of Employment Reports

The U.S. Bureau of Labor Statistics is responsible for releasing this data, and that data can be found here – Employment | Unemployment

You can also find the data related to Employed Persons on the St. Louis Fed website.

Impact of the ‘Bank Lending Rate’ news release on the price charts

Just as how the unemployment rate plays a major role in fundamental analysis and determines the state, the economy, employment level is an equally important fundamental indicator. The employment level measures the number of people employed during the previous quarter. It gives the number of jobs created in an economy during a quarter. We understood in the previous section of the article that Job Creation is directly related to consumer spending. Therefore, it is a high impactful event. Even though most countries release unemployment data on a monthly, there are few countries that announce the number of Employed Persons in a quarter.

In today’s article will be analyzing the 4th quarter employment data of Switzerland, which was released in the month of February. A forecasted data of Employment level is not available as investors rely more on the unemployment rate for making investment decisions. The Employment level of Switzerland is released by the ‘Federal Statistical Office.’ A higher than previous reading is taken to be positive for the currency, while lower than previous reading is considered to be negative.

EUR/CHF | Before the announcement:

We shall start with the EUR/CHF currency pair where, in the above chart, we see that before the news announcement, the market has shown signs of reversal and is getting ready for a major event. Technically, the chart is in a perfect spot for taking a ‘short’ trade as this is a perfect reversal pattern. Therefore, aggressive traders with large risk appetite can enter the market with bigger stop loss since there can be a sudden surge in volatility after the news release. However, conservative traders should wait for the announcement and then take a suitable position.

EUR/CHF | After the announcement:

As we can see in the above chart, the price quickly goes up until its most recent high but immediately gets sold. The reason behind this increase in volatility to the upside is a lower number of employed persons in the 4th quarter compared to the previous quarter. Since the data was weak, traders sold Swiss Franc and bought Euro.

But later we notice that the candle leaves a big wick on the top and closes near its opening price. This means the data was not hugely worse, and since it was close to the previous quarter’s reading, there is a shift in volatility to the downside. This wick is a confirmation sign of the reversal, and now we can enter the market with a lower risk.

USD/CHF | Before the announcement:

USD/CHF | After the announcement:

The above images represent the USD/CHF currency pair where before the news announcement, we see a ranging action of the market and presently approaching the support area. Since the market is already volatile here, a news release can essentially augment this volatility on either side. In such market situations, one should wait for the news release and then take a position based on the data. However, the ‘options’ market can offer an advantage of this volatility and hence can be traded by few.

After the news announcement, the currency moves similarly as in the above pair, where the volatility initially increases on the upside and later retraces back. An important thing we need to notice here is, we are very close to the support area, and hence going ‘short’ can be risky. This is how technical analysis can be useful.

GBP/CHF | Before the announcement:

GBP/CHF | After the announcement:

Before the news announcement, we see that the GBP/CHF currency pair is in an uptrend pointing towards the weakness of Swiss Franc. This chart seems to be behaving opposite to that of EUR/CHF, where the uptrend is very strong with no sign of reversal. One of the reasons for this trending nature could be due to the strength in British Pound with little influence of Swiss Franc.

After the news announcement, we observe that the Employment data has the least impact on this pair, and the price fails to fall below and remains above the moving average. Since we don’t witness a drastic change in volatility, the only way to trade this pair is by waiting for an appropriate retracement and using technical indicators to join the trend.

That’s about ‘Employed Persons’ and its impact on the Forex market after its news release. If you have any questions, please let us know in the comments below. Good luck!

Categories
Forex Fundamental Analysis

The Importance Of ‘Government Revenue’ As An Economic Indicator

Introduction

Introduction

Introduction

Government Revenue is one half of the Government Budget that will shape the economic growth for the fiscal year. It is closely watched statistic by traders and investors to analyze the policy maker’s behavioral trends, actions, and corresponding economic consequences for the current fiscal year.

What is Government Revenue?

Government revenue is the money received from tax receipts and other non-tax sources by a government that allows the Government to maintain the economy, finance its functions, and undertake government expenditures. The Federal Government receives income through a variety of sources which are as follows:

Taxes

Taxes are the most important source of Government revenue, with various forms of tax income coming to the Government. The personal individual income tax makes a significant part of the tax revenue of the Government. Other forms of tax like business or corporate tax, consumption tax, value-added land tax, tax on city maintenance and constructions, enterprise income tax, resource tax, etc. are other forms in which the Government collects taxes. Taxes are a compulsory payment from the consumers and businesses of the economy without any quid pro quo (i.e., getting nothing in return for tax payments from the Government).

Rates or Rental Incomes

These refer to local taxations. The rates are usually proportional to the rentable value of a business or domestic properties. It can take the form of Government-owned lands and buildings leased out for businesses or organizations.

Fees

These are the income the Government receives for its services. These could include services like public schools, insurance, etc.

License Fees

These are the payments received for authorizing permission or privilege. For example, issuing a building permit, or driving license, etc.

Public Sector Surplus

Revenue generated through sales of goods and services like water connection, electricity, postal services, etc.

Fines and Penalties

This is not intended to generate revenue but to make the public adhere to the law. Examples would include parking tickets or speeding tickets.

Gifts

These are the donations received from non-government members of the country and form a small portion of the Government’s revenue. These are usually received to help the Government during wars or emergencies.

Borrowing

This is the least preferred way to raise capital. The Government can borrow from investors in the form of bonds to finance its operations, and this method, although prevalent, is not preferable.

Below is a snapshot of the Federal Government’s Revenue from various sources:

(Picture Source – Fiscal Treasury)

How can the Government Revenues numbers be used for analysis?

The amount the Government receives in revenues determines how much it can spend. The revenue generated is directly correlated to the GDP. The GDP is directly influenced by how much the Government spends on the economy to spur growth. Both are linked in a feedback loop. By effectively drafting out the Federal Policy for a fiscal year, the Government can increase or decrease their tax revenues.

When the Government increases tax revenues, it may receive more than its fiscal expenditures, but that would burden the consumers and business. When taxes are increased, it leaves less money for people to spend, and people prefer to save than invest. It slows down the economy, and correspondingly a deflationary environment begins to start, and the economy risks going into a stagnation or worse a recession. During these times, the GDP will fall, and correspondingly the next fiscal year’s revenue would decline.

When the Government cuts back on taxes levied, the revenue decreases for the Government, but consumers and businesses would have more disposable income on their hand, which would encourage spending and thus stimulating the economy. It would keep the GDP growth positive and maintain a reasonable inflation rate. Consequently, this leaves little room for Government expenditures. When the expenditure is low, the stimulus is low, which results in a slowdown in the economic activity in the next business cycle.

Hence, Government Revenue and Government Expenditure both are two levers that have to be carefully adjusted to achieve an optimal balance for the healthy functioning of the economy. Too much spending with little revenue results in deficits that piles up debt burden in the long run. Too much revenue with little spending slows down the economy.

In recent times, most of the developed economies’ Governments have been failing to maintain steady growth without low tax and increased spending that has resulted in substantial deficits for the Government. Hence, monitoring Government revenue and its corresponding expenditures in the fiscal policy has become essential for traders and investors in the recent times, as the deficits increase Sovereign Credit Risk (defaulting on debt), or threaten the economy into a recession.

Impact on Currency

In an ideal situation, where a Government has zero debt and has a balanced budget (taxes and spending equal) would contribute to a steady and stable economy. An increase in tax revenues would indicate high GDP prints indicating a growing economy.

But in the real world, most of the Governments are debt-ridden, and an increase in tax revenues means the burden on the citizens and businesses,  which deflates the economy as it takes money out of the economy the currency appreciates and vice versa. Hence, Government revenue is a proportional indicator where decreased revenue deflates the economy and currency appreciate in the short-run (for the fiscal year) and vice versa.

More importantly, Government Revenue is half of the equation, what the Government spends on is the second half. It is, therefore, beneficial to keep both figures in consideration to assess economic growth in the near term.

Economic Reports

For the United States, the Treasury Department releases monthly and annual reports on its official website. The treasury statements detailing the Fiscal Policy containing Government revenue and expenditures are released at 2:00 PM on the 8th business day every month. The World Bank also maintains the annual Government Revenue and Spending data on its official website, which is easily accessible.

Sources of Government Revenues

United States Monthly Fiscal Policy statements can be found below.

Monthly Treasury Statement – United States & Government Revenue as a percent of GDP

We can find Government Revenues for the OECD countries below.

Government Revenues – OECD & World Bank – Government Revenue data

We can find the monthly Government Revenue statistics of world countries here –

Trading Economics – Government Revenues

Impact of the ‘Government Revenues’ news release on the price charts

After getting a clear understanding of the Government Revenue economic indicator, we will now extend our discussion and find the impact it makes on various currency pairs. The revenue of a government is used for multiple reasons, that directly or indirectly facilitates the growth of the country. Revenue is basically the amount of money that is brought into the Government’s kitty through various activities.

These revenues are received from taxation, fees, fines, inter-government grants or transfers, security sales, resource rights, as well as any other sales that are made. However, investors believe that the data does not have a major impact on the currency and is not of great value when it comes to fundamental analysis.

Today, we will be analyzing the impact of Government Revenue data of Brazil on the Brazilian Real. We can see in the snapshot below that the Brazilian Government received less revenue in the month of March compared to its previous month. A higher than expected reading should be taken as positive for the currency while a lower than expected reading is taken as negative. Let us find out the reaction of the market.

Note: The Brazilian Real is an illiquid currency, and hence there will be lesser price movement on charts. 

USD/BRL | Before the announcement:

We shall start with the USD/BRL currency pair to examine the change in volatility due to the announcement. The above image shows the characteristics of the chart before the news announcement, where we see that the market is in a strong uptrend with gap ups every subsequent day. This means the Brazilian Real is extremely weak, and there is no price retracement until now. Technically, we will be looking to buy this currency pair after the price retraces to a key ‘support’ or ‘demand’ level.

USD/BRL | After the announcement:

After the news announcement, the market moves higher and volatility expands on the upside. The Brazilian Real weakened further as a result of weak Government Revenues data where there was a reduction in net revenues for the current month. Traders bought U.S. dollars after the news release, which took the price much higher. The bullish ‘news candle’ is an indication of the continuation of the trend, but still, we need to wait for a retracement to enter the market.

EUR/BRL | Before the announcement:

EUR/BRL | After the announcement:

The above images represent the EUR/BRL currency pair that shows the state of the chart before and after the announcement. In the first image, it is clear that the market is again in a strong uptrend, and the price has recently broken out of the ‘range.’ Since the market is violently moving up, we should wait for the price to pull back near a ‘support’ area so that we can join the trend. We should never be chasing the market.

After the news announcement, the market reacts positively to the news data, and the price closes as a bullish candle. The increase in the volatility to the upside is a consequence of the poor Government Revenue data, where the Government collected lesser revenue in that month. The news release has a fair amount of impact on the pair that essentially weakened the currency further.

BRL/JPY | Before the announcement:

BRL/JPY | After the announcement:

The above images are that of the BRL/JPY currency pair, where we see that the market is a strong downtrend before the news announcement and is currently at its lowest point. Since the Brazilian Real is on the left-hand side of the pair, a down-trending market signifies a great amount of weakness in the currency. We need to wait for the price retracement to a ‘resistance’ area so we can take a ‘short’ trade.

After the news announcement, the volatility expands on the downside, and the market moves further down. The ‘news candle’ closes with signs of bearishness, and later too, the price continues to move lower. This was the impact of the news on this pair. We should wait for the price to retrace to join the downtrend.

That’s about ‘Government Revenues’ and its impact on the Forex market after its news release. If you have any questions, please let us know in the comments below. Good luck!

Categories
Forex Basic Strategies Forex Daily Topic

How ‘External Debt’ Presents A More Clear Picture Of A Nation’s Economy

Introduction

Introduction

Introduction

External Debt, unlike regular Government Debt, is typically more objective oriented and is indicative of future development plans for which the loan was taken. In this sense, understanding the source and size of External Debt can help us deduce the upcoming economic developmental changes occurring in the borrowing nation and corresponding benefits that could be derived by the lending party, be it a foreign Government or Banks.

What is External Debt?

It is the part of a country’s Debt that was borrowed from a source outside the country. External Debts are usually taken from Foreign Governments, Banks, or International Financial Institutions. The External Debt must be paid back in the currency in which the loan was initially taken and usually corresponds to the currency of the Foreign Government’s local currency. It puts a de facto obligation on the borrower to either hold those currency reserves or generate revenue through exports to that specific country.

External Debt is sometimes also referred to as Foreign Debt and can be procured by institutions also apart from the Government. Typically External Debt is taken in the form of a tied loan, which means the loan taken must be utilized or spent back into the nation financing the Debt.

For example, if country A takes an External Debt from country B for developing a corn syrup factory, then it may purchase the raw materials required for construction and raw input like corn from the lender itself. It ensures that the lender benefits to a greater extent apart from the interest revenue on the lent money. Hence, in general, the External Debt, specifically tied loans, are transacted for specific purposes that are defined and agreed upon by both lending and borrowing countries.

How can the External Debt numbers be used for analysis?

External Debt takes precedence over Internal or Domestic Debts as agencies like the International Monetary Fund monitor the External Debts, and also, the World Bank publishes a quarterly report on External Debt.

Any default on External Debt can have ripple effects on the credibility of the nation. Internal Debts may be managed, but once Debt is External, it is public information, and defaulting affects the credit rating, and the country is said to be in a Sovereign Default.

When a country is either unable or refuses to pay the Debt back, then lenders will withhold future releases of assets that are essential for the borrowing country. When a country defaults on Debt, the liquidity of the Government and the nation is questioned. It leads to investors and speculators quickly lose confidence in the Government’s ability to manage the economy effectively and withdraw their investments, bringing the nation to a standstill. In the currency market, such situations lead to currency depreciations very quickly.

Once Debt levels cross a certain threshold (generally, it is 77-80% of the GDP) where default risk increases, it becomes a vicious cycle. The knock-on effects of Debt servicing to decreased spending to slowing the economy all result in a recession or a societal collapse in extreme cases.

Impact on Currency

Government Debt is usually taken to finance public spending and build future projects that can help boost the economy. External Debt, when taken, is inflationary for the economy internally and leads to currency depreciation as it floods the market with the domestic currency through its spending. Hence, optimal utilization of the Debt so that it pays off, in the long run, is essential. When a country takes on Foreign Debt and spends its currency depreciates in the short-run for the duration of spending and vice-versa.

Although, the size of the External Debt compared to the economy’s size and its revenue should also be taken into account as the size of the Debt is relative. Underdeveloped economies Debt Sizes are not comparable on a one-to-one basis with those of the developed economies. External Debt is also one of the parts of the total Government Debt and hence, is not a macro indicator when compared to the likes of Total Government Debt and Total Government Debt to GDP ratio in general.

Hence, External Debt is a low impact lagging indicator as it does not account for the complete economic picture. The reasons for taking on External Debt by organizations or Governments, in general, would have been announced months ahead through which economists and investors can make decisions accordingly. Also, the changes that the Government intends to bring through the Debt can be traced through other macroeconomic indicators better than External Debt as an indicator in isolation.

Economic Reports

The World Bank maintains the aggregate External Debt data for various countries on their official website and publishes quarterly reports.

For the United States, the Treasury Department publishes the Gross External Debt reports on its official website. It releases its reports at 4 PM in Washington D.C. on the last business day of March, June, and September, and at 1 PM on the last business day of December for the corresponding quarters.

Sources of External Debt

Below are some of the most credible sources for ‘External Debt.’

Impact of the ‘External Debt’ news release on the price charts 

In the previous section of the article, we understood the External Debt fundamental indicator, which essentially represents the amount a country (both public and private sector) owe to other countries. They involve outstanding loans to foreign private banks, international organizations like the IMF, and interest payments to other institutions. Growing levels of Debt reduce GDP because the monetary payments flow out of the country. It will discourage foreign and private investment because of the concerns that the Debt is becoming unsustainable. Therefore, a country’s External Debt should be at a very nominal level.

In today’s lesson, we will illustrate the impact of External Debt on various currency pairs and examine the change in volatility due to the news announcement. For that, we have collected the data of Sweden, where the below image shows External Debt of the country during the 4th quarter. The data shows a marginal increase in Debt compared to the previous quarter, which means it may not severely affect the currency. Let us find out the reaction of the market to this data.

USD/SEK | Before the announcement:

Firstly, we will look at the USD/SEK currency pair and analyze the impact of External Debt on the price. In the above image, we see that the price was in a downtrend, and recently the market has reversed to the upside, which could be a possible reversal. If the price breaks previous resistance, we can confidently say that the market has reversed to the upside. Looking at the impact of the news release, we will position ourselves accordingly.

USD/SEK | After the announcement:

After the news announcement, the price slightly goes higher and closes exactly at the resistance area. The price after the close of ‘news candle’ is at a very crucial level. Later, we see that the volatility continues to expand on the upside, signaling a change of the trend. As the External Debt data was slightly on the weaker side, traders bought the currency pair by selling Swedish Koruna. However, the price continues to move higher after the news release resulting in further weakening of the currency.

EUR/SEK | Before the announcement:

EUR/SEK | After the announcement:

The above images represent the EUR/CZK currency pair, where we see that market was in a downtrend, and now it has pulled back from the ‘low.’ This is an ideal place for taking a ‘short’ trade, but since the volatility is exceedingly less, we should be careful before entering the market. Low volatile pairs are not desirable for trading purposes as they carry additional costs such as high Slippage, above normal Spreads, and difficulty in order execution.

For these reasons, pairs like EUR/CZK should be avoided. After the news announcement, there is hardly any impact on the currency where the price remains at the same level during and after the announcement. Thus, we don’t witness any volatility in the market, and the External Debt data did not bring any change in the price of the currency.

AUD/SEK | Before the announcement:

AUD/SEK | After the announcement:

The above images are that of the AUD/CZK currency pair, where we see that the market is in a downtrend before the announcement, and recently the price has moved above the moving average, which could be a sign of reversal. Without having many assumptions, it is wise to wait for the news release, and depending on the impact of External debt news, we will take a suitable position.

After the news announcement, the price moves higher, reacting negatively to the External Debt data, which was slightly lower than last time. The volatility increases to the upside as traders go ‘short’ in Swedish Koruna. The price exactly bounces off from the moving average, indicating a possible reversal of the trend.

That’s about ‘External Debt’ and its impact on the Forex market after its news release. If you have any questions, please let us know in the comments below. Good luck!

Categories
Forex Fundamental Analysis

Significance of ‘Foreign Direct Investment’ In Determining A Country’s Economy

Introduction With the advent of Globalization, nations started collaborating, and economies began to develop and grow at a faster pace. In today’s modern world, Foreign Direct Investment is one key result of Globalization. FDI is very helpful for boosting the pace of economic growth for emerging nations like India, China, and Japan, etc. Understanding this […]

Introduction With the advent of Globalization, nations started collaborating, and economies began to develop and grow at a faster pace. In today’s modern world, Foreign Direct Investment is one key result of Globalization. FDI is very helpful for boosting the pace of economic growth for emerging nations like India, China, and Japan, etc. Understanding this […]

Introduction

With the advent of Globalization, nations started collaborating, and economies began to develop and grow at a faster pace. In today’s modern world, Foreign Direct Investment is one key result of Globalization. FDI is very helpful for boosting the pace of economic growth for emerging nations like India, China, and Japan, etc. Understanding this phenomenon and its long and short term impacts can help investors, economists, and traders predict long term economic trends and make critical investment decisions.

What is Foreign Direct Investment?

An individual or a corporation investing and owning at least ten percent of a foreign company is called Foreign Direct Investment. When a growing company decides to invest in a business outside of its own country for expansion or increasing revenue purposes, it is called FDI. If the investment is less than 10 %, then it is treated as a stock portfolio.

When an investor owns equal to or more than 10%, it does not give him a controlling interest but allows the investor to influence the company’s running operations. The investor’s proposals, views, and opinions are taken into account in the management’s actions and policies. For this reason, the governing bodies of the nation track the FDI in their country’s business.

FDI is implemented in one of two ways:

Greenfield Investment: This is a process when a company decides to expand its operations globally in the form of franchises. A typical example would be that of the McDonald’s franchise, and they expand their operations by taking care of building and operating the franchise from the ground-up.

Brownfield Investment: It occurs through mergers and acquisitions, where a company acquires or merges with an already established company in another country. A recent example would be that of Tata Motors of India bought the Ford’s Land Rover and Jaguar. FDI is also categorized as Horizontal and Vertical FDI. A horizontal FDI is when a company invests in the same business in another country.

In contrast, a vertical FDI is when a company invests in another company that supplements the existing business operations. For example, if a car manufacturing company acquires a transportation company for its manufactured car transports, it is a Vertical FDI.

How can the Foreign Direct Investment numbers be used for analysis?

FDI is beneficial for the investors as it helps them to diversify their portfolio, meaning that their income sources are varied. The advantage would be that if their country or any of their invested company’s country is facing a political tension or recessions, it does not cripple their income as the other sources of their investments make up for these losses. Investor’s golden rule: “Do not keep all eggs in one basket” is applicable here.

If the investor is a corporate company, they might choose to acquire or merge with another company to enhance and trade each other’s expertise. Emerging economies have open trade policies and loose tax rules compared to developed nations, which is very attractive for foreign investors as they get a higher yield on their investment. Lower wages and higher than average growth are key benefits of investing in emerging businesses.

Developed and mature companies offer their expertise, resources, and funds to emerging businesses to generate lasting interests and a long-term partnership. This adds to the revenue of the mature companies and boosts the growth of the developing economies as they experience increased fundings, support. This leads to improved standards of living in emerging economies.

A typical example would be the IT boom in India when the silicon-valley tech giants started expanding their operations onto the southern parts of India that gave a massive boost in employment and wage growth in India. Today, cities like Bangalore and Hyderabad have become Indian silicon-valleys with such rapid FDI.

The FDI is susceptible to trade laws, taxation rules, political situations, and ease-of-doing-business factors. For example, The recent decreasing trend in the global FDI is mainly due to President Donald Trump’s Tax cut that led to major companies to repatriate their foreign accumulated wealth back.

Impact on Currency 

In the initial stage, a definite rise in GDP is seen because of the FDI itself, but that is followed by a positive amplifying effect later, which is higher than the initial injected FDI. Increased jobs, productivity, and efficiency due to access to sophisticated technologies and management from the investing companies all promote growth. All this is appreciating for the economy and hence, the currency of the FDI receiving economy.

Developed economies may be resilient towards decreased FDI, but developing nation’s GDP rates fluctuate on a greater magnitude based on FDI changes. Emerging economies need the funding and expertise offered through FDI to boost their economy.

The FDI numbers are representative of long term growth, and the boost or slow down may be apparent only after certain months or years. The FDI trails news releases associated with trade agreements or press releases from companies and hence is a lagging or reactionary indicator for traders. It is more helpful for economists and analysts of the Governments to assess their economic growth.

Economic Reports

The following four significant organizations keep track of the Foreign Direct Investments:

  • The United Nations Conference on Trade and Development (UNCTAD): It publishes quarterly FDI aggregate reports for countries throughout the world and is available on its official website under the World Investment Reports category.
  • The Organization for Economic Cooperation and Development (OECD): It releases its quarterly FDI statistics that include both inflowing and outflowing FDI statistics in its reports but does not include FDIs between the emerging markets themselves.
  • The International Monetary Fund (IMF): It publishes annual reports of FDI Investment trends, data availability, concepts, and recording practices. It covers FDI reports of 72 countries and is made available as an online database.
  • The Bureau of Economic Analysis (BEA): It tracks the inflowing and outflowing FDI within the United States. It is an annual report released in July every year.

Sources of Foreign Direct Investment

The UNCTAD FDI reports are available here – UNCTAD – FDI | UNCTAD – FDI – 2019

The OECD FDI statistics are available for analysis here – OECD – FDI | OECD – FDI – OCTOBER -2019

The BEA FDI releases are available here – BEA – NEW FDI

Impact of the ‘Foreign Direct Investment’ news release on the price charts

The crucial factors in the economic growth of any country are the commercial transactions and Foreign Direct Investment (FDI). The FDIs increase the exporting capacity in the host country and lead to an increase in profit at the foreign exchange market. There is widespread belief among international institutions, researchers and, policymakers that FDI has a great impact on the economic growth of a country. Thus, every country puts out various measures and schemes to boost Foreign Direct Investment in the country and increase the buying pressure on the currency.

In this section of the article, we will study the impact of FDI announcement on the value of a currency and examine the change in volatility. For this, we will be analyzing the year-on-year FDI data of Canada, where the latest data available with us are the investments by foreign institutions in the year 2018. The below image shows that FDI rose by $42,099 million dollars in 2018 compared to the previous year. Let us find out the reaction of the market.

Note: It is worthwhile to mention here that the FDI news announcement was followed by another major news event, which has a significant impact on the currency. Therefore, during continuous news announcements, markets should be analyzed based on collective volatility and not just single data.

EUR/CAD  | Before the announcement:

Let us first look at the EUR/CAD currency pair, where, in the above chart, we see that the volatility has increased on the downside, which could possibly turn into a reversal. If the news announcement turns out to be negative for the Canadian economy, the price can shoot up, thereby ruling out the reversal of the trend. However, a positive news outcome is an ideal case for going ‘short’ in the pair. But we should not forget about another news announcement right after the FDI. However, the FDI release will always be not be accompanied by a news release, and thus the above explanation holds in such cases.

EUR/CAD  | After the announcement:

After the FDI data is released, we see that the market crashes below, and there is a sudden drop in price. This is the result of the positive FDI data for the current year, where there was an increase in Investments by foreign institutions. The bearish candle indicates that the FDI data was bullish for the Canadian dollar, and traders were delighted with the data. One should trade the pair after the volatility settles down after the continuous news announcements.

USD/CAD | Before the announcement:

USD/CAD | After the announcement:

The above images represent the USD/CAD currency pair. Before the announcement, the market is an uptrend indicating weakness in the Canadian dollar. As the uptrend is very strong, one should be cautious before taking a ‘short’ trade in the pair as there are high chances that the news announcement may result in a spike below and not a reversal of the trend.

After the news announcement, we see that there is a drop in price, but the market does not collapse. The possible reason for low volatility after the release is that the market was expecting better FDI data and also due to the prevailing uptrend. One should go ‘long’ in the pair after the market shows signs of trend continuation.

CAD/JPY | Before the announcement:

CAD/JPY | After the announcement:

Lastly, we discuss the impact of FDI on CAD/JPY currency pair, where, in the first image, we see that the market is in a strong downtrend, pointing towards weakness in the Canadian dollar. As the Canadian dollar is on the left-hand side of the pair, in order to buy the currency, one should go ‘long’ in the pair, unlike in the above pair. Only if the positive FDI data is able to cause a perfect reversal of the trend, one can buy the currency pair else should trade with the trend.

After the announcement, the market moves initially moves higher owing to upbeat FDI data but gets immediately sold into and closes as a bearish candle. Thus, we can say that the impact was least on the pair, and there was no considerable change in volatility.

That’s about ‘Foreign Direct Investment’ and its impact on the Forex market after its news release. If you have any questions, please let us know in the comments below. Good luck!

Categories
Forex Daily Topic Forex Fundamental Analysis

Importance Of ‘Government Spending’ & It’s Relative News Impact On The Forex Market

Introduction

Introduction

Introduction

Government Spending is an essential determinant of the economy’s growth. The portion of GDP that is allocated to Government Spending can primarily set the pace of economic growth. Increased Government Spending has been a critical lever to stimulate the economy during times of recession.

Government Spending numbers also determine whether the Government is elected by people next time or not. Hence, Government Spending numbers also can help or hurt the Government in elections. Thus, this can be considered a critical macroeconomic indicator for economists, analysts to predict upcoming trends.

What is Government Spending?

The Government Consumption Expenditures and Gross Investment are together, forming what is called Government Spending in general. Both of these are the final expenditures accounted for by the governing sector. Government Consumption Expenditures contains Spending by the governing body to produce and provide goods and services to the public. Expenditures would typically include National Defense and Public School Educations, etc.

Gross Investments includes the Spending by Government for fixed assets that directly benefit the general public. Investments can consist of road construction, public transports, or procuring military equipment. Hence, overall Government Spending refers to the money spent on the acquisition of goods and services such as education, health, social protection, and defense. When the Government procures products and services for current use to directly benefit an individual or collective requirements of the community, it is called Government final consumption spending. When the same is done for future use, it is classified as Government investment.

Government Spending assists businesses and people economically in many ways. Unemployment compensation, Child Nutrition, Student Loans, retirement and disability programs, etc. all are facilitated out of Government’s revenue. During the time of recession or economic contractions, the Government increases its Spending and decreasing tax rates to stimulate the economy and vice-versa.

There are four primary sources for Government Spending:

  • Tax Receipts
  • Indirect Taxes
  • Money borrowing from citizens (ex: government bonds)
  • Money borrowing from foreign (ex: Loans from World Bank)

How can the Government Spending numbers be used for analysis?

The main factors that affect Government Spending are:

Mandatory Programs: In the United States, necessary programs like Social Security, Medicaid, and Medicare make up about two-thirds of federal expenses. As more baby-boomers reach retirement age, the increase in all the above costs puts weight on Government that affects its spending capability. These kinds of payments where there is no exchange of goods and services in return are classified as Transfer Payments Spending.

National Debt and Interest bills: The United States currently has a record-high debt level of 22 trillion US dollars, which, when taken as a percentage of GDP, exceeds a hundred percent. What this means is that the National Debt is greater than the revenue it generates. Even if the entire GDP were allocated to service debt hypothetically, it would still not suffice. Such skyrocketed debt levels have put the country in between a rock and a hard place. The United States must keep the interest rates low to be able to continue paying its interests to avoid the risk of default.

Defaulting on the debt could be catastrophic for the nation and can lead to economic collapse. Increased deficit spending (Spending beyond budget) to stimulate the economy during times of recessions and bearing expenses of war and international contingency operations all have piled on the debt burden further.

Discretionary Spending: For the above two categories, the Government has no choice but to spend, but Discretionary Spending is for everything else. The Government decides how much money is to allocate to programs. Cutting back majorly on these can hurt the governing bodies in the next elections. Increased Discretionary Spendings can help in the short-run, but in the long run, all these will catch up, and consequences can be severe.

GDP: The revenue itself is an essential factor; decreased GDP rates can create deflationary situations that the Government tries to avoid in all conditions. Increased productivity and stimulations that result in higher prints in GDP can help service debts and still have enough resources to spend on economic activities freely. Increased taxes can help build up revenue for the Government but can lead to losing elections as the public might vote them out for imposing higher taxes. The Governments have increasingly relied on deficit spending to boost economic growth as indicative of the below graph.

Impact on Currency

By relative comparison with previous years, what policymakers have decided to spend on can determine many local level and national level economic impacts. Cutting back on certain sections can lead to slowdowns in that sector and vice-versa. Investors and Economists use this to predict economic trends.

In general, a relative increase in Government Spending is good for the economy. This indicator is typically expressed as a percentage of GDP, signifying how many portions of the total revenue Government has prioritized over debt servicing to stimulate growth. Government Spending for a given business cycle will decide the economy’s inflationary or deflationary conditions. When the economy is growing at a faster pace than the targeted rate, the Government can cut back on Spending and service their debts, or increase taxes to stabilize and vice-versa.

In this sense, Government Spending is a proportional indicator, the more, the better for the economy. It is a lagging indicator, as it is usually reactionary to situations in the marketplace and not an initiative effort. Government Spending is a lever used generally to fix an issue that already has happened (hyperinflation or deflation), hence has a lower impact on the long-term market volatility in the world of trading markets, although there may be some panic trading due to press releases.

Economic Reports

The Bureau of Economic Analysis releases quarterly reports on Government Receipts and Expenditures, which contains the Spending on different sectors, on their official website.

The Organisation for Economic Co-operation and Development also releases quarterly estimates of the associated countries on their official websites under the category of General Government Spending in two varieties: Government Spending per Capita and Government Spending as a percentage of its GDP.

Sources of Government Spending

The United States Bureau of Economic Analysis reports are available here:

The General Government Spending details are available for OECD countries on their official website here

Quarterly Government Spending reports of the United States Government can be found here categorically.

Below is a comparative index for countries – Government Spending as a percentage of GDP. Government Spending as a percentage of GDP – Trading Economics

Impact of the ‘Government Spending’ news release on the price charts

We understood in the previous section of the article that Government Spending refers to the money spent by the public sector for purchasing goods and providing essential services such as education, healthcare, social protection, and security. The two major categories of Spending include Current Spending and Capital Spending.

Government Spending ensures that the country is having basic facilities such as roads, bridges, hospitals, schools, and other allowances such as unemployment and disability benefits. Hence public sector spending plays a crucial part in the economic growth of a country. If Government Spending of a country is high, it also attracts foreign investment and other capital flows. Thus, the greater the Government spends, the greater will be the growth of the currency.

Today we will be discussing the impact of the news release on various currency pairs and examine the change in volatility before and after the release. For this, we have collected the latest Government Spending data of Australia, where the below image shows the quarter-on-quarter numbers of the same. The latest figures show an increase in Government Spending for the December quarter compared to the previous quarter.

AUD/USD | Before the announcement:

The first currency pair we will be discussing is the AUD/USD pair, where, in the above image, we see that the market is on the verge of continuing its uptrend after an appropriate retracement. At this point, if the Government Spending comes out to be positive for the Australian economy, we can expect the price to rise at least the recent ‘high.’ But if it were to be negative, we can expect a short-term reversal in the market.

AUD/USD | After the announcement:

Looking at the chart above, we can say that the market reacted positively to the news announcement and the price closed as a bullish candle. The bullishness in currency is due to the encouraging Government Spending data, which showed an increase in expenditure from the previous quarter. The upbeat data created cheer among traders, which made them go ‘long’ in the currency pair and buy more Australian dollars. One can ‘buy’ the currency pair after the news release after seeing that the data was better than last time.

EUR/AUD | Before the announcement:

EUR/AUD | After the announcement:

The above images represent the EUR/AUD currency pair, and as we can see, the overall trend and here too market seems to be continuing its downtrend after an appropriate retracement. Since the Australian dollar is on the right-hand side, a downtrend shows strength in the currency. Aggressive traders can take go ‘short’ in the currency pair before the news announcement as the trend shows an increase in the Government Spending from quarter-on-quarter. Remember that the stop loss should be kept higher than the recent ‘high’ due to increased volatility during the announcement.

After the numbers are released, volatility increases on the downside, and the price closes as a bearish candle, indicating selling pressure in the market. This is due to better than expected Government Spending data, which was higher than last time, and thus the market suddenly goes lower. One can go ‘short’ in the currency pair after analyzing the outcome of the data, with a stop loss above the recent ‘high.’

AUD/USD | Before the announcement:

AUD/USD | After the announcement:

Lastly, we find out the impact of the news on AUD/JPY currency pair, where we, in the first image we see that the market is range-bound and just before the announcement the price is at the ‘resistance’ of the range. This means we could expect sellers to become active at this point. However, the reaction depends on the Government Spending data, which can cause spikes on either side of the market. A ‘buy’ is also not recommended as the market is not in an uptrend.

After the news is announced, we witness a similar impact where the price goes higher and closes as a bullish candle. The positive news outcome and an increase in volatility to the upside is the ideal trade setup for going ‘long’ in the market. Thus, one can buy the currency pair with a stop loss below the support and a higher ‘take-profit.’

That’s about ‘Government Spending’ and its impact on the Forex market after its news release. If you have any questions, please let us know in the comments below. Good luck!

Categories
Forex Daily Topic Forex Fundamental Analysis

Everything About ‘Home Ownership Rate’ & Its Impact On The Forex Price Charts

Introduction

Introduction

Introduction

Home Ownership Rate is an economic indicator that is extensively used by both the public and private sector organizations to predict the demand for different types of Houses. It also forms a part of the index of leading economic indicators and thereby is used by the Federal Government and economists to forecast the economic health of the country. It is useful for investors from abroad also to gauge the standard of living or wealth per individual or financial health of a country.

 What is Home Ownership Rate?

Home Ownership Rate is the proportion of households that are owners. In simple terms, it is the ratio of the number of houses occupied by their owners to the total number of occupied houses in the region. The region can be country, state, or a metropolitical area.

Hence, the Home Ownership Rate is given by the following equation:

In the above equation, a housing unit can be a house, apartment, condo, or single room or group of rooms that are occupied or intended for occupancy as separate living quarters. In the United States, the Home Ownership Rate is provided by the United States Census Bureau for the entire U.S., states, regions, for the 75 largest Metropolitan Statistical Areas (MSAs).

The Census Bureau collects using a probability selected sample for about 72,000 housing units, both occupied and vacant. Households from all the 50 states and the District of Columbia are part of the survey for the four consecutive months.

How can the Home Ownership Rate numbers be used for analysis? 

The Home Ownership Rate tells us the number of householders that are owning a house. Owning a home signifies a lot of things. Firstly, owning a home means that either you are wealthy enough to own a home or at least have an income source (job or business) whose prospects you are confident about.

An individual or family decides to take home only when their financial prospects are looking confident, in most cases. When more people have their own homes, it indicates healthy liquidity of the economy, where enough people have had enough money to own a home, which is not cheap at all.

The below two graphs are the Quarterly Home Ownership rates and Real GDP growth rate. It is easily seen that when the economy is seeing improvement in Home Ownership rates, there is a correlating increase in GDP. During the downtrends also the same mirroring is observable in GDP and the Ownership rate. Hence, this becomes a leading economic indicator to predict a growing or contracting trend for the economy.

When the Home Ownership rate decreases, it indicates fewer and fewer people can afford to own a home, or more people are selling off their homes to secure their future. When the people of the country are not confident about their economic prospects, then they would prefer to save for a rainy day than take a risk with a big mortgage and own a house for which they may or may not be able to pay the bills consistently.

Decreasing Ownership rates are indicative of tight lending environments where higher interest rates discourage householders from procuring mortgages for homes. It is an indication that the government is pulling money out of the system to deflate the economy. Increasing Home Ownership Rates are indicative of the lending environment that is currently prevailing in the economy. An increase in the rates is indicative of loose monetary policy enabling the banks to lend out money at lower interest rates, thereby making it more affordable to the potential buying householders.

Loose monetary policy from the Central Authorities is intended to spur economic growth, which translates to such effects (increase in rates of ownership). Such a stimulus generally tends to keep the economy either going or growing in most cases, possibly avoiding any deflation.

Impact on Currency

The Home Ownership Rate is a leading proportional economic indicator. When the number of Households owned and occupied number increases, it is accompanied by signs of an expanding or growing economy, which is appreciating for the currency. An increase in the Home Ownership rate is appreciating for currency for the coming quarters and vice-versa.

The impact of the Home Ownership Rate is mild as more frequent reports like Building Permits overshadow it that indicates before houses are even built. Building Permits reports are monthly, and hence, the trends are spotted in advance before it is also confirmed by the Housing Starts, Housing Completion, and Home Ownership Rates.

Economic Reports

The Census Bureau publishes quarterly and annual reports on its official website for the United States along with other reports like Rental and Housing Vacancy rates. Homeownership Rates are also reported based on the age of the householder and also by family status.

The release dates for each quarterly report are already posted on its official website. It is typically released around 25-28th of the reporting month for the previous quarter at about 10:00 AM. Graphical statistics for the same are also available on its official website as illustrated below:

Sources of Home Ownership Rate

We can find the latest Home Ownership Rate report from the United States Census Bureau here – Home Ownership Rate – Census Bureau. The annual statistics for the same can be found here – Census Bureau – Quarterly and Annual. The same data is also available with comprehensive plotting tools on the St. Louis FRED website. Below is the reference for the same – Home Ownership Rate – FRED | Housing, and Homeownership Rate. The Home Ownership Rate for various countries is available here for further analysis – Home Ownership Rate – Trading Economics.

Impact of the ‘Home Ownership Rate’ news release on the price charts

In the previous section of the article, we learned about the ‘House Ownership Rate’ fundamental indicator, which is nothing but the percentage of homes that are occupied by owners in a country. The Census Bureau releases this data, which includes info about the state of ownership overall, after the end of every year. Home Ownership is considered an important part of contributing to a productive society. The government promotes Home Ownership by offering tax deals and cheap loans as it creates an asset for people to invest and accumulate their wealth. It indirectly encourages the growth of a country, socially and financially.

The below image shows the graphical representation of the House Ownership Rate of Switzerland in 2017 and 2018. As we can, the rate increased to 42.5% percent in 2018 from 41.3% in 2017. A higher than expected data is considered to be positive for the currency while a lower than expected reading is taken as negative. Let us analyze the reaction of the market to this data and view the change in volatility due to the announcement.

GBP/CHF | Before the announcement:

We shall start with the GBP/CHF currency pair, where the above chart represents the ‘daily’ time frame chart of the pair. We see that the price is in a downtrend and is presently at its lowest point. Technical analysis suggests that until we have a price retracement, we cannot trade in the direction of the trend. Depending on the impact of the news announcement, we will be able to a suitable position in the market.

GBP/CHF | After the announcement:

After the news announcement, we see that market falls lower, and volatility increases to the downside. The market reaction can be explained by the fact that the House Ownership Rate came out to be positive for the economy, which made traders sell the currency pair and go ‘long’ in Swiss Franc. As the impact of this news event is less, we cannot expect the market to go lower and make ‘lower lows.’ Thus, one needs to cautious before taking a sell trade.

AUD/CHF | Before the announcement:

AUD/CHF | After the announcement:

The above images represent the AUD/CHF currency pair, where we see that before the news announcement, the market was in a strong downtrend indicating a great amount of strength in Swiss Franc. Currently, the price is at a place where the market had rallied earlier, also known as the ‘demand’ area. Thus, we can expect buyers to come back into the market at any moment. Aggressive traders at this stage can go buy the currency with a strict stop loss.

After the news announcement, the price initially goes lower but gets immediately bought, and the ‘news candle’ leaves a wick on the bottom. Volatility is witnessed on both sides of the market, and the price closes near its opening price. The news release did not have an adverse impact on the pair and cause any major change in the price chart. Once the price moves higher and gives an indication, traders can go ‘long’ in the currency pair with a stop loss below the ‘news candle.’

NZD/CHF | Before the announcement:

NZD/CHF | After the announcement:

The above images are that of the NZD/CHF currency pair where the overall trend appears to be up, and recently the price has retraced to a key technical level. Here, the Swiss Franc does not appear to very strong, and the New Zealand dollar is showing signs of strength. If the news release does not influence the currency pair strongly, this could be an ideal setup for going ‘long’ in the market.

After the news announcement, the market’s reaction to the news data was minimal, and we hardly see a change in volatility. An increase in volatility to the upside is a confirmation sign that the market will continue its uptrend, and a further move to the upside can be expected.

That’s about ‘House Ownership Rate’ and its impact on the Forex market after its news release. If you have any questions, please let us know in the comments below. Good luck!

Categories
Forex Fundamental Analysis

Everything About ‘Cement Production’ & Its Importance as an Economic Indicator

Introduction

Introduction

Introduction

Cement is a commodity that is likely to never run out of demand any time soon. As buildings get kept on renovated in the developed economies, and significant infrastructures like apartments, independent single-family houses, and corporate company buildings continue to be constructed in the developing economies, Cement is required. Increasing Cement Production figures are suitable for the economy, and if the increase is due to international demand, then it is good for the global economy.

Few commodities like Crude Oil, Iron, Steel, and Cement are very required in the modern economy, and countries that are ahead in the production of these goods have experienced substantial growth. Concrete stands behind water in second place as the most widely consumed resource on the planet. Hence, understanding of Cement Production and its impact on economies can help us understand the macroeconomic picture for better fundamental analysis.

What is Cement Production?

The Cement that we generally refer to is the Portland Cement. Cement is the primary ingredient of concrete used in construction. Cement combines with water, sand, and rock to harden to form a concrete structure that has high strength and durability.

Cement is manufactured through a tightly regulated chemical combination of Calcium, Aluminum, Silicon, Iron, and other ingredients. Cement is made using limestone, shells, and chalk or marl combined with shale, clay, slate, blast furnace slag, silica sand, and iron ore. These together, when heated at high temperatures, form a rock-like substance that is ground into the fine powder that we generally refer to as Cement.

How can the Cement Production numbers be used for analysis?

Cement is an essential ingredient in today’s urban infrastructure. It is used in the construction of homes, buildings, apartments, etc. Hence, every physical structure that we can set our eyes on around us is probably made out of Cement. It is for this very reason Cement stands second after water as the planet’s most consumed resource.

Hence, the demand is virtually inexhaustible, not for the near future, at least. As the emerging economies continue to develop at a pace higher than that of the mature economies, there will be a large section of the global population coming into the middle-class, where invariably demand for housing, expansion of businesses are set to increase.

In the world of Cement Production,  China is miles ahead of any other country, exporting 2,500 million metric tons of Cement in 2014. China has the largest cement industry. China uses this Cement for its construction as well as exporting to other countries. Cheaply available Cement has mostly helped China in its infrastructure improvement.

In the second place, far lies India with about 280 million metric tons output in 2014. Even further lies the United States, with about only 83 million metric tons in 2014.

(Source)

(Source)

Although the United States remains the largest economy in the world, that is going to change, as China and India continue to grow at a pace higher than the USA. The growth rate of India is the highest, while China is close to the United States in GDP terms.

As of 2019, the USA GDP is 21.5 trillion dollars, while China stands second with 14.2 trillion dollars. But it is important to note that China’s growth rate is higher than that of the USA, and if this continues, China will beat the United States. Most emerging economies are achieving their economic growth through exports, and dominating such essential commodities, like Cement, gives the economy an upper hand.

The availability of Cement at low prices helps the erection of commercial infrastructure easy that promotes the ease-of-doing-business factor in the country. As many companies like Apple develop their products in the United States but manufacture them in China, this promotes growth. The availability of infrastructure helps boost the economy to a great extent.

An increase in Cement Production helps developing economies to tap into the global market demand to compete against China for a more significant portion of the world market. For example, Indonesia is improving its share in the global market by providing Cement for as low as just 20 dollars compared to the 34 dollars price tag of China.

Hence, developing economies that can produce Cement commercially can boost their economy through international trade exports. Once a system is established that is efficient, upscaling it to unprecedented levels can boost the economy significantly.

(Source)

Note: Cement Production, although important, comes at the cost of air pollution. Cement Industry is one of the primary sources of Carbon Dioxide (Greenhouse gas) in the atmosphere, which is responsible for global warming. It is also responsible for soil erosion that destroys the top layer of land, which is necessary for agriculture.

An alternative called Green Cement is to replace Cement. It has better functionality, uses fewer resources, and is less damaging for the environment. With environmental issues being a significant concern, a potential shift may occur in the market towards green Cement as the go-to product for construction. Countries that will come up with an efficient way of mass-producing this green Cement at affordable prices can beat the current Cement industries. The only challenges are pricing and lack of availability in large quantities.

Impact on Currency

Cement Production is an economic indicator in our analysis solely based on its importance and demand. It is a proportional indicator, meaning an increase or decrease in its numbers can grow or contract the economy, thereby appreciating or depreciating domestic currency, respectively.

It is a micro-economic indicator, as it does not cover the entire economy’s production and can be closely monitored for countries whose dependency on Cement Production is high, which is more useful for regional level assessment.

In the currency markets, Cement Production values are not macroeconomic indicators and are only useful in microeconomic analysis within the country to predict construction-related growth, as an increase in labor force employment, wage growth, which are generally seasonal.

Economic Reports

The National Bureau of Statistical of China publishes monthly data of its Cement Production on its official website.

We can find global Cement Production data on globalcement.com given in the sources.

Sources of Cement Production

Cement Production – National Bureau of Statistical of China

Global Cement Production – globalcement.com

Cement Production statistics for various countries can be found here

Updates on Cement Industry, in general, can be obtained here

Impact of the ‘Cement Production’ news release on the price charts 

In the previous section of the article, we understood the Cement Production fundamental indicator and saw how it could be used for analyzing a currency. We shall extend this part of the discussion and see the impact it makes on a currency pair when the data is released. We would like to mention that Cement Production is not an important economic indicator when it comes to the fundamental analysis of a currency. Investors don’t consider it to a significant driver of the currency, but it surely impacts the construction segment, as building construction is largely dependent on Cement production and supply. This, in turn, affects the economy.

In today’s example, we will examine the impact of Cement Production on the Indian Rupee and look at the change in volatility to the news release. A higher production rate than before is considered to be positive for the currency, while a lower than the previous production is considered to be negative. The below image shows the graphical representation of Cement Production in India for the last two months. We see that there has been a reduction in total production for the month of February. Let us find out the market reaction.

USD/INR | Before the announcement:

We will first analyze the impact on the USD/INR currency pair. The above image shows the state of the chart before the news announcement, where we see that the overall trend is up, and recently there has been a price retracement to a ‘demand’ area. The buyers have already reacted from the demand area, and the price is on the verge of continuing the uptrend. Since the Cement Production indicator does not a major impact on the currency, traders can take ‘long’ positions and trade with the trend.

USD/INR | After the announcement:

After the news announcement, the price falls and goes below the moving average line. The ‘news candle’ closes with bearishness, indicating the Cement Production data was not lower by a large margin for that month as compared to the previous month. There is little change in volatility due to the news release, which explains the importance of the indicator among traders. Thus, traders should analyze the chart technically and trade based on that.

GBP/INR | Before the announcement:

GBP/INR | After the announcement:

The above images represent the GBP/INR currency pair, where, in the first image, we see that the market is moving within a range and currently is near the top of the range. At this point, one can expect sellers to activate and sell the currency. Since the ‘news announcement’ is a less impactful event, traders can take a ‘short’ position with a stop-loss above ‘resistance.’

After the news announcement, the market reacts positively to the data, and traders take the price lower. The impact of Cement Production was similar to the above pair as we see that traders bought Indian Rupee and strengthened the currency. Thus, it is clear that the market reacted technically (price fall from ‘resistance’) and not much to the news data.

EUR/INR | Before the announcement:

EUR/INR | Before the announcement:

The above images are that of EUR/INR currency pair where we see that before the news announcement, the market is in a strong uptrend, and recently the price has retraced to a ‘support’ area. This is a desirable market condition for going ‘long’ in the market after price action confirmation from the market. As the news data does not have a major impact on the currency, traders should not be worried about high volatility, which is typically observed after news announcements.

After the news announcement, the market moves lower by the bare minimum, and there is hardly any volatility witnessed. The Cement Production data did not create any major impact on the currency pair, where the market remains around the same price even after the news release. Once the market continues to move higher, one can join the trend by taking a ‘buy’ position.

That’s about ‘Cement Production’ and its impact on the Forex market after its news release. If you have any questions, please let us know in the comments below. Good luck!

Categories
Forex Fundamental Analysis

‘Disposable Personal Income’ – Understanding The Macro Economic Indicator

Introduction

Introduction

Introduction

Disposable Personal Income, also called DPI, is an economic indicator that can help investors understand the spending and saving patterns of the general population. It is from this data other forms of expenditures and savings are derived. Hence, understanding the changes in the relative disposable income numbers from time to time can help us understand the economic conditions better as part of our fundamental analysis.

What is Disposable Personal Income?

Disposable Personal Income, also called After-Tax Income, is what’s left of an individual’s income after all federal tax write-offs. Consequently, It is the amount people can spend, save, or invest. For example, An employee making 100,000 dollars a year, paying 25% of his income as tax would have to pay 25,000 dollars as tax payment, which leaves him with 75,000 dollars for that year. This 75,000 dollars would be his DPI, or more aptly the After-Tax Income.

Hence, the calculation of DPI is simple; it is just the difference between personal income and income taxes.

Note: The federal government may use the disposable income for further mandatory deductions like defaulted student loans, delinquent child support, or payment of back taxes. Hence, in the broader sense, the DPI would be the amount that is left after tax and other mandatory payments.

DPI is often confused with Discretionary Income, which is the amount that is left when the living expenses are deducted from the DPI. Living expenses are all the necessary expenditures incurred to conduct one’s lifestyle and would typically include rent, water bill, electricity bill, transportation costs, and groceries, etc.

For Example, A video gamer’s discretionary income would go to typically spending on purchasing new games, whereas a music-loving person would spend his discretionary income attending concerts perhaps. During times of recession or high deflationary conditions, the discretionary income takes the hit as it is miscellaneous spending and does not precede importance over taxes and necessary expenditures. Businesses that sell discretionary goods and services take the worst hit and hence are closely watched by investors for signs of recession and recovery.

Economic Reports

The U.S. Department of Commerce: Bureau of Economic Analysis (BEA) releases the DPI numbers every month in the last week for the previous month titled “Personal Income and Outlays” release. The month-on-month numbers are expressed in percentage changes with respect to last month’s figures.

The BEA also releases the other derived metrics from the DPI, like the REAL DPI, which takes inflation into account, and hence it is the inflation-adjusted version of DPI, PCE (Personal Consumption  Expenditure) and REAL PCE reports.

How can the Disposable Personal Income numbers be used for analysis?

The DPI data set goes back to as far as 1929. With such a long-range, the confidence in the numbers is high amongst economists with regards to its reliability. When compared against GDP growth, there is a good correlation between both.

As we can see below, the graphs have a similar trend, the first one is the Real GDP, and the second graph corresponds to the DPI, which are taken from the St. Louis FRED website for reference and illustration here. The shaded region indicates periods of recessions.

We can also see that during recessions, the GDP and DPI flat out from their usual trend and trend sideways or downwards (during more extended recessionary periods).

As DPI shows what the amount left with the individual after deductions are, the numbers can be used to derive other metrics. Economic indicators like Discretionary income, savings rates, Marginal Propensity to Consume (MPC), and Marginal Propensity to Save (MPS).

All these indicators are useful in speculating the direction of money flow, whether it ends up in banks in the form of savings or other people’s hands as part of the expenditure.

A healthy and growing economy would be reflected in the DPI numbers as the people make up the economy. It is important to remember that DPI is a reflection of the present financial situations of employees and hence only shows what the current economic status of the nation is. It is a coincident indicator in this sense and is dependent on macroeconomic factors like the government’s policies, Quantitative Easing, inflation, etc. which direct the money flow. Hence, it is the effect in the cause-and-effect equation. It reflects the results of an action rather than the act itself.

Impact on Currency

A steady increase in the DPI is always good for the economy and, therefore, the currency.  It is a proportional indicator. Low numbers are depreciating, and high numbers are appreciating for the currency.

A strong economy or most developed nation’s populations are expected to have higher DPI numbers relative to other economies, thereby enjoying a higher standard of living as they can spend on goods and services, beyond meeting their necessities.

An oncoming recessionary period would result in stagnant or dip in DPI numbers as people tend to save more when they are uncertain of their financial future.

Sources of Disposable Personal Income Reports

The monthly DPI numbers releases can be found on the official website of the Bureau of Economic Analysis as given below for reference:

Personal Income and Outlays

We can find historical and graphical analysis of the same numbers in the St. Louis FRED website as given below for reference:

Disposable Personal Income – Seasonally Adjusted Quarterly

For a more detailed analysis of the same, you can browse through the below relevant categories:

Personal Income – FRED

You can also find out the pure DPI numbers (not percentages) of other countries here:

DPI Trading Economics

Impact of the ‘Disposable Personal Income’ news release on the price charts

By now, we have understood the definition and significance of the Disposable Personal Income economic indicator. In this section, let’s analyze the impact of this economic indicator on currency and observe the change in volatility.

Personal Income, Disposable Personal Income, and Personal Consumption are announced together, and data of each of them is released along with the Personal Income. This is why we have collected the date and time of the announcement of Personal Income. As we can see below (yellow mark), traders do not give a lot of importance to the Personal Income data, and therefore one should expect moderate to less volatility during the announcement.

For illustrating the impact, we have used the latest Disposable Personal Income data of the United States. It is published by the Bureau of Economic Analysis of the U.S. The release said that Personal Income was increased by $106.8 billion in February, and the Disposable Personal Income (DPI) was increased by $88.7 billion which was 0.5% higher from the previous month. Let us look at the impact of this data on currency pairs.

EUR/USD | Before the announcement:

The above image shows the state of the chart before the DPI data is announced, and we can see that the market is in a downtrend, and recently it has given a retracement. Technically, this is the ideal condition for going ‘short’ in the market, but as the volatility is high, it is better to wait for the actual data rather than trading based on the market expectations. Taking a ‘buy’ in this pair can be risky even if the DPI data is positive for the U.S. economy as the down move is quite strong, and the reversal will not last (DPI is not a high impact event).

EUR/USD | After the announcement:

The DPI announcement induced a fair amount of volatility in the pair, and the ‘news candle’ leaves a long wick on the top indicating high selling pressure. From the reaction, we can conclude that the DPI for the month of February was very positive for the U.S. economy, which made traders buy more U.S. dollars. This sudden increase in volatility to the downside is a confirmation sign that the market will go much lower. Thus, as the price goes below the 20-period moving average, one can take a ‘short’ trade with a stop-loss just above the news candle.

USD/JPY | Before the announcement:

USD/JPY | After the announcement:

Next, we discuss the USD/JPY currency pair, where the behavior of the chart is different from the EUR/USD pair. Even though the chart is in a downtrend, the U.S. dollar is on the left-hand side. Hence, a downtrend indicates weakness in the currency. Just before the announcement, price is at the lowest point from where the market had retraced earlier. This means, irrespective of the news announcement, we can expect some buying strength from here. We cannot position ourselves on any side of the market at this point as technically, there is no supporting reason.

After the DPI data is announced, the market moves higher as a result of good DPI numbers, and the price makes a ‘bullish hammer’ candlestick pattern. But the data was not very upbeat to increase the volatility too much on the upside. As the market does not give clear signs of reversal, we cannot go ‘long’ in the market based on the data.

USD/HKD | Before the announcement:

USD/HKD | After the announcement:

The above images represent the USD/HKD currency pair where the price appears to be moving in a range, and predominantly the trend is down. Just before the announcement, the price is in the middle of the range, and we cannot predict at this point as to where the price will go. We need to wait to see the shift in volatility due to the news release and then have a view on the market.

After the DPI numbers are out, price falls to the bottom of the range, and we see a strong bearish candle. The DPI data proved to be positive for the currency in the above two pairs, but here the market reacted negatively. This could be due to the strength in the Hong Kong dollar or extreme weakness in the U.S. dollar. As the impact of DPI on currency is less, one can ‘buy’ USD/HKD near the ‘support’ with a target near to the ‘resistance.’

That’s about ‘Disposable Personal Income’ and its impact on the Forex market after its news release. If you have any queries, let us know in the comments below. Cheers!

Categories
Forex Fundamental Analysis

Understanding ‘Manufacturing PMI’ & Its Impact On The Forex Market

Introduction

Introduction

Introduction

The Manufacturing Purchasing Manager’s Index is an excellent leading or advanced macroeconomic indicator, which is used widely to predict economic expansion or contractions. It has a variety of applications for investors, economists, traders alike. It is a significant indicator to predict GDP, employment, and inflation in the upcoming periods. Hence, understanding of Manufacturing PMI can be hugely beneficial for a trader’s fundamental analysis.

What is Manufacturing PMI?

The Manufacturing Purchasing Manager’s Index is a survey of about 400 largest manufacturers in the United States of America. The word Manufacturing here implies that the study is associated with the industries that produce physical goods. Non-physical goods come into the category of Services Purchasing Manager’s Index, which is different.

Purchasing Managers in a company are the employees associated with procuring the raw materials, goods, and services that are required for running the company. For example, A car manufacturing company’s Purchasing Manager would typically be in charge of procuring nuts and bolts at the lowest or best prices from the market. The Purchasing Manager’s in this sense have a good idea of what the company requires and during what periods these requirements are set to increase or decrease.

How is the Manufacturing PMI calculated?

The Manufacturing PMI hence is a compilation of the survey answers given by the Purchasing Managers of the largest 300 manufacturing giants in the USA. The questions typically involve asked in the survey are related to month-over-month changes in the New orders, Production, Employment, Deliveries, and Inventories with equal weightage, as shown in the table below:

All the five categories, as seen when putting together, form the PMI. These five components are enough to ascertain a growth or contraction in the business activity of that company.

The Manufacturing PMI rating lies within the range of 0-100, where a score of above 50 indicates an expansion in the economic activity in the manufacturing sector, below 50 indicates contraction and 50 indicates no change in comparison to the previous month.

Economic Reports

In the United States, the Institute for Supply Management widely known in short as ISM releases the Manufacturing Purchasing Manager’s Index every month.

The ISM, established in 1915, is a large non-profit organization in its field. The members of the ISM Business Survey Committee (BSC) receive the questionnaire each month, asking them to identify the monthly changes for each index.

The ISM releases its Manufacturing PMI on the first business day of every month. The data for the Manufacturing sector goes back to 1947.

There are other companies that also publish PMI numbers, and IHS Markit Group is one such company that puts out numbers for the companies outside of the United States. Still, within the United States, the Insitute for Supply Management’s PMI is the most popular.

How can the Manufacturing PMI be Used for Analysis?

The data of ISM Manufacturing Reports on Business or the PMI goes back to 1947 due to which the data is robust and has high levels of confidence in ascertaining economic figures like GDP, inflation and employment, etc.

The Manufacturing sector of the United States makes up 20% of the total GDP, and hence the Manufacturing PMI is a significant economic indicator in that regard. The Manufacturing sector primarily drives the economic activities within the nation as it involves physical goods; hence it affects other dependent industries like transportation, labor force, etc.

The historical correlation between the real GDP and the ISM Manufacturing Data is about 85%, which is pretty good. The main advantage of studying Manufacturing PMI is that it is a leading or advanced economic indicator. It predicts the real GDP with a 12-month time lag, meaning it predicts a year ahead of time the real GDP due to which this index is widely sought after by investors.

A score of 80 and above has been correlated with a 3% average real GDP growth historically. A score of 70-80 correlates with 0-2% GDP growth rate and 55-70 correlates with -3% to 0% real GDP rate. Hence, above 50 indicates the overall economy is growing, and below 50 indicates contraction and possible recession.

Based on the Manufacturing PMI of different sectors, Suppliers can adjust their prices with the market. For example, if a cereal producing company’s Manufacturing PMI indicates expansion, then the crop suppliers can change their prices to a higher level to match the increase in demand and vice versa.

Below is a snapshot of Manufacturing PMI plotted against the real GDP growth rate historically, and we can clearly see the healthy correlation that exists between both. This shows the importance of this leading indicator’s importance in fundamental analysis of traders.

Impact on Currency

Since the United States is the largest economy, the US GDP drives the global GDP. In this sense, monitoring Manufacturing PMI gives us a good clue of the direction of the US economy and the relative direction of other economies. From this perspective, we can ascertain the currency direction also.

The further the score is away from 50 and closer towards 100, the better it is for the economy and resultantly for the currency. Higher scores translate to oncoming currency appreciation periods, while low scores would signal an oncoming recession and currency depreciation period.

A score of 85 and above is a strong signal for improving economic conditions and inflation in the economy.

Sources of Manufacturing PMI Reports

We can monitor the reports on the official website of the ISM. We can also go through the PMI of other countries from the IHS Markit official website.

Impact of the ‘Manufacturing PMI’ news release on the price charts

The Manufacturing Purchasing Manager’s Index (PMI) measures the activity of the purchasing managers in the manufacturing sector. The indicator is particularly important for the manufacturing industry, which measures the growth of that sector; this eventually contributes to the growth of the economy. Therefore, the index has a direct and indirect effect on the economy. When speaking about the impact on the currency, the indicator does not cause a drastic change in volatility, but we do witness some positions being build up in the currency during the announcement.

In this section, we will be analyzing the latest Japanese Manufacturing PMI which was released in the month of March. The below image shows the previous and actual PMI data, where we see an increase in PMI from before. A higher than before PMI reading is considered to be bullish for the currency, while a lower PMI than before is taken to be negative. Let us view the reaction of the market in this case.

AUD/JPY | Before the announcement:

We start our analysis with the AUD/JPY currency pair, and as we can see in the above chart, the market is in an uptrend pointing towards weakness in the Japanese Yen. One of the reasons is that the market is expecting a subdued PMI data this time which is making the pair go higher. The only way to trade this pair is if the PMI data of Japan comes out to be very positive, which could result in a reversal and strength in the Japanese Yen. However, if the data proves to be negative, we cannot join the trend until we get a retracement.

AUD/JPY | After the announcement:

After the PMI numbers are announced, we see a sudden surge in volatility on the upside as the data was negative for the Japanese economy. As the numbers were disappointing, traders sold the Japanese Yen and took the price higher. A strong bullish candle shows the impact of PMI data on the currency pair. From a trading point of view, one cannot enter the market for a ‘buy’ soon after the news release. By doing this, he would be chasing the market, which is against the principles of risk management.

NZD/JPY | Before the announcement:

NZD/JPY | After the announcement:

The above images represent the NZD/JPY currency pair, which again is in a strong uptrend, but the up move is not as aggressive as in the case of the AUD/JPY currency pair. Just before the news announcement, the price appears to be at the ‘resistance’ area, which means if the PMI data comes out to be negative for the economy, we can see a breakout on the upside or if the data is positive, it could result in a short-term reversal.

After the PMI data is released, volatility expands on the higher side, and later the candle closes with a wick. This wick is a result of selling witnessed at ‘resistance.’ Therefore, the Manufacturing PMI data has a similar effect on the currency pair. We can trade the above pair after the price retraces to the resistance turned support area and then going ‘long’ with a strict stop loss.

USD/JPY | Before the announcement:

USD/JPY | After the announcement:

In the USD/JPY currency pair, the characteristics of the chart seem to be different from the above-discussed pairs. Here, the Japanese Yen is showing signs of strength before the news announcement. Thus, a positive PMI data should take the currency lower while negative data might result in an up move. The volatility is seen on both sides of the market. Thus, it is advised to wait for the actual data before taking any action. It is also not advisable to trade in the ‘options’ segment as it is a less impactful event and volatility after the announcement will be ‘low.’

After the announcement is made, the market goes up just by a little, signifying the least amount of volatility. The Manufacturing PMI, even though it was negative for the Japanese economy, it failed to take the price higher as in other pairs, as the impact of it very less. Thus, the small rise in price could be used as an opportunity to join the downtrend.

That’s about ‘Manufacturing PMI’ and its impact on the Forex market after its news release. If you have any questions, please let us know in the comments below. Good luck!

Categories
Forex Fundamental Analysis

What Should You Know About The ‘Manufacturing Production’ Of A Country?

Introduction

Introduction

Introduction

Manufacturing Production statistics are a direct measure of current economic activity. It is instrumental for investors to get a correct estimate of current industrial activity. The Manufacturing Production Index also provides the capacity at which the industries are operating at which is useful for Government officials and business owners for planning and optimizing the performance of these industries. For economists, it helps to cut through media propaganda easily as the numbers reveal the real present situations of these industries and help analyze economic performance better.

What is Manufacturing Production?

Manufacturing Production, also called Industrial Production (IP) Index, measures the real or genuine output of the mining, manufacturing, and electric and gas utility industries. Hence, it covers some of the most important industrial sectors that play a significant role in economic growth and society’s sustenance.

Manufacturing Production Index is a measure of current industrial output. The Index’s reference period is 2012, which means that for the year 2012, the IP Index score is 100. All the scores that are published thereafter are in reference to this period. Hence, it is in a way it is a report card for the industrial sector’s final production output. The report also includes capacity utilization statistics that tell us at what percent of maximum capacity are different industrial sectors are operating at.

In the United States, the Manufacturing Production figures are taken from production data of all industries included in the North American Industry Classification System (NAICS) and industries like logging, newspaper, periodical, book, and directory publishing that have been traditionally considered to be Manufacturing.

The individual indices of Industrial Production (IP) are constructed through two sources:

  • Output measured in physical units.
  • The output is inferred from the data on inputs to the production process.

The IP index measures the output of individual industries taking their weightage derived from the proportional contribution of that industry to the combined output of all industries.

How can the Manufacturing Production numbers be used for analysis? 

If we are to be very strict with our analysis, then Manufacturing Production figures are coincident or current indicators when compared against New Orders Figures of the Institute of Supply Management’s Purchasing Manager’s Index.  It is more indicative of the current trend rather than a future trend. A decrease in New Orders is more indicative of future Production while Industrial Production (IP) Index is more current.

Although, since it is a monthly report, some use it as a leading indicator to oncoming economic turns as generally, these indices are indicative of ripple effects through employment, wages, and business activity.

Hence, it is more appropriate to take IP numbers as current economic indicators and use it to verify the fundamental trends that have been predicted by other leading indicators. We can use IP figures to identify whether our predicted trends have started to play out or not.

The data set for the IP index goes back to 1920, and hence it is a very reliable measure of economic activity, as shown above.

Below is the zoomed-in period of IP index, where we can see during the recession the IP index accurately depicts the economic conditions for that period. Through this, we can understand that the IP index is a double check for us to understand the current economic situation correctly. It is a one-for-one measure of economic activity.

Impact on Currency 

The Manufacturing Production Index has a mild impact on the currency market as the ongoing trend in the economy would have been already depicted by other macroeconomic leading indicators.

On the other hand, it does influence investor’s confidence in the different manufacturing sectors that can affect the stock market and correspondingly, resulting in a mild impact on the currency too.

It is essential to keep in mind that the mild impact is because the United States is a mature and developed economy and has a diverse portfolio of exports and imports. It may not be the same case for all countries where individual developing or commodity-dependent economies may heavily depend on the performance of their manufacturing sector. It all comes down to what percentage of GDP does the Industrial Production Index industries make up. The higher the percentage, the higher the impact.

For the United States, the Manufacturing Sector makes up 20% of GDP while the Services Sector drives 80%. The Manufacturing Production Index is a proportional and coincident indicator. Higher production figures lead to increased economic activity and lead to currency appreciation and vice-versa.

Sources of Manufacturing Production

The monthly Manufacturing Production statistics are available on the Federal Reserve’s official website here. The St. Louis website offers a comprehensive list of Manufacturing Production reports, and they can be found here. We can also find global Manufacturing Production figures for various countries in statistical formats here.

Impact of the ‘Manufacturing Production’ news release on the price charts

After getting an understanding of the Industrial Production economic indicator, we will now find out the impact of the news announcement on different pairs and witness the change in volatility due to the release. The development of Industrial Production and machinery output are the main drivers of economic growth.

Economists believe that country’s development and enhanced standards of living are positively correlated with the nation’s industrial activity. The GDP is directly proportional to growth in the economy’s manufacturing sector. Although it is an important determinant of the economy, when it comes to the movement of the currency, traders do not make drastic changes to their positions in the currency based on the data.

The below image shows the latest Industrial Production data of the U.S., where we see that there has been a decrease in production by a whopping 6.2% as compared to the previous month. A higher than expected value is considered as positive for the currency, while a lower than expected is considered negative. Let us look at the reaction of the market to this data.

USD/JPY | Before the announcement:

We will first look at the USD/JPY currency pair and analyze the impact of the Industrial Production data on this pair. In the above image, we see that the market was in a downtrend, and very recently, the price has shown a sign of reversal to the upside. The price action suggests that the market might move higher from here before going down. Since the economists have predicted a lower Industrial Production data, it is advised not to take any ‘short’ positions.

USD/JPY | After the announcement:

After the news announcement, the price initially moves higher due to increased volatility but later loses all the gains and closes in the red. Even though the Industrial Production data was very bad for the economy, the price did not react that bad as expected. We see a neutral response from the market where the ‘news candle’ closes near its opening price. Therefore, we can say that the impact of the news outcome was not great on the currency pair, and the volatility was average.

GBP/USD | Before the announcement: 

GBP/USD | After the announcement:

The above images represent the GBP/USD currency pair, where we see that the market is violently going down before the news announcement. Currently, the price is its lowest point, and there has been no price retracement of any kind. As per the technical analysis, we cannot take any position at this moment, as this would mean chasing the market and, this carries a huge risk.

After the news announcement, we see that that the price goes lower in the beginning, but later buying pressure takes the price higher, and the candle closes with a wick on the bottom. Overall, the volatility increases to the downside after the news release but does not sustain for long. The price continues to move higher one candle after the ‘news candle,’ which implies that Industrial Production does not have a long-lasting effect on the currency.

USD/CAD | Before the announcement:

USD/CAD | After the announcement:

The above images are that of the USD/CAD currency pair where we see that before the news announcement, the market is in a strong uptrend, and here too, there is no price retracement of any sort. This shows that the U.S. dollar is extremely strong. At this point, we cannot take any position in the market as this is against the rules of risk management.

After the news announcement, volatility increases to the upside resulting in further strengthening of the U.S dollar. Despite the fact that the Industrial Production data was really weak, the market does not react negatively to the news data, but rather we see an increase in the price. This might be due to the fact that the news data is of least importance to traders.

That’s about ‘Manufacturing Production’ and its impact on the Forex market after its news release. If you have any questions, please let us know in the comments below. Good luck

Categories
Forex Fundamental Analysis

‘New Orders’ – Everything About This Economic Indicator & Its Impact

Introduction

Introduction

Introduction

New Orders are essential for economists, government officials, and investors alike. It is a direct indication of oncoming expansion or contraction in the economy. For investors, decisions regarding investment in different sectors are critical, and New Orders figures are perfect tools to gauge an increase or decrease in economic activities. Hence, understanding this economic indicator can help us predict economic prospects better in our Fundamental Analysis.

What is the “New Orders” number?

The New Orders is not in itself a separate report. Still, it is published as part of an overall report that details the performance of Manufacturing Industries in terms of the previous month’s and current business activity and prospective plans.

The New Orders form the part of the report titled: “Manufacturer’s Shipments, Inventories, and Orders,” which is generally referred to as Factory Orders, published by the United States Census Bureau. It is also called the M3 Survey, which constitutes the New Orders Report that we are interested in. The overall report measures the performance of the industrial sectors by factoring in the total Shipments, New Orders, Order Backlogs, Total Inventory, etc. Hence, M3 Survey is a broad measure of economic conditions in the domestic manufacturing sector.

New Orders are reported in the dollar value of goods and services that have been ordered in advance. In the manufacturing sector, generally, orders are made months ahead of supply so that production can be planned and delivered accordingly. Hence, a New Order is conveying an objective to buy for immediate or future delivery from clients. New Orders report of M3 Survey includes all the manufacturing companies in the United States with more than 500 million dollars of annual shipments and specific selected smaller firms overall.

Also, Orders data for industries that have almost immediate deliveries are not recorded. Only the Orders which are supported by legal binding documents like a letter of intent, or signed contracts detailing booking of orders are included. The New Orders report all the New Orders received, excluding the canceled Orders for the previous month.

Special Consideration:

The word “New Orders” is also a component of the Performance of Manufacturing Index (PMI) and Performance of Services Index (PSI), which are also used to gauge business activity through similar survey-based index development. The New Orders in these statistics are also similar to the one we are discussing in this section and differ slightly in methodology, participants of surveys, surveyors, seasonal adjustments, and specific calculations that are different for Service Industries. These New Orders are different from the ones reported by the Census Bureau. Hence, care must be taken not to confuse with similar terminologies in both surveys.

How can the New Orders numbers be used for analysis? 

In the life cycle of production and consumption of goods and services, New Order is the earliest indicator in the manufacturing sector. In this sense, it is an advanced or leading indicator of an increase in economic activity.

The M3 survey is extensively used by government officials to develop economic, fiscal, and monetary policies. The New Orders serve as a warning sign for the officials to support the manufacturing sector as any significant downturns can lead to economic contractions and even employee layoffs. Politicians are motivated to keep employment rates high to ensure their chances of winning during elections.

As illustrated in the plot of the New Orders graph, the shaded areas indicate a recession period where we can observe a significant decline in the New Orders figures well before the actual recession, which confirms the importance of this economic indicator. It is also important to note that the year to year fluctuations are due to seasonally unadjusted figures.

Impact on Currency

Since New Orders are leading indicators of economic growth, the corresponding impact on the currency may be visible only after a certain period, which can vary from 1 month to 6 months. It is also important to note that the percentage change in New Orders from the previous month is not amplified by inflation and is only due to an increase in New Orders.

It is also essential to understand that the New Orders are seasonal for many industries, and it is vital to take the Seasonally Adjusted figures for a more accurate indication of economic growth.

An increase in New Orders indicates an increase in economic activity, which is good for the country and correspondingly to its currency. Hence, the New Orders figure is a proportional indicator, and a decrease in New Orders for previous months indicates a slowdown or contraction of economic activity.

The influence of investment markets on the economy is significant, and hence investors closely monitor for economic signals through New Orders. A positive change in New Orders translates to a positive change in equity markets too.

Economic Reports

The United States Census Bureau publishes the monthly M3 Survey reports on its official website. The Bureau releases two press releases every month.

The first one is “Advance Report on Durable Goods Manufacturers’ Shipments, Inventories, and Orders,” which is available about 18 working days after every month.

The second one is “Manufacturers’ Shipments, Inventories, and Orders,” which includes durable and non-durable manufacturing and is available about 23 working days after every month.

Sources of New Orders Reports

Census Bureau’s Factory Orders report is available here. For reference, you can find the latest advance report of the Census Bureau here. We can find the New Orders for different economies with statistical representation here. The graphical plot of New Orders is available on the St. Louis FRED official website.

Impact of the ‘New Orders’ news announcement on Forex

Till now, we have discussed the New Orders fundamental indicator and understood it’s significance in an economy. New Orders measures the value of orders received in a given period of time. They are legally binding contracts between a consumer and a producer for delivering goods and services. New Orders help in predicting future industrial output and production requirements. Investors feel that the data does not necessarily gauge the growth in the manufacturing and so they do not give a lot of importance to the data during the fundamental analysis of a currency.

Today, let’s analyze the impact of New Orders on different currency pairs and observe the change in volatility due to the news announcement. The below image shows the New Orders data of Sweden, where we see there has been a huge reduction in the percentage of New Orders compared to the previous month. A higher than expected reading is considered as bullish for the currency while a lower than expected reading is considered as negative. Let us see how the market reacts to this data.

USD/SEK | Before the announcement:

The first pair we will be discussing is the USD/SEK currency pair, where the above image shows the position of the price before the news announcement. It is clear from the chart that the market is in a strong downtrend, and the price is presently at its lowest point. Technically, we will be looking for a price retracement to a ‘resistance’ or ‘supply’ area so we can join the trend. At this moment, we cannot take any position.

USD/SEK | After the announcement:

After the news announcement, the market moves higher initially, but due to the selling pressure from the top, the candle closes almost near its opening price. As the New Orders data was extremely weak for the economy, traders go ‘long’ in the currency and sell Swedish Krona in the beginning. But since the trend is down, sellers push the price lower, and the ‘news candle’ leaves a wick on the top. We still cannot take any position after the news release.

EUR/SEK | Before the announcement:

EUR/SEK | After the announcement:

The above images represent the EUR/SEK currency pair, where the characteristics of the chart are similar to that of the above-discussed pair. The market here too is in a strong downtrend signifying the great amount of strength in the Swedish Krona, as the currency is on the right-hand side of the pair. We can see in the first image that the currency pair is not very volatile, which means there will be additional costs (Spreads & Slippage) when trading this currency pair.

Hence, we should trade this pair if the news announcement ignites volatility in the market. After the news announcement, the price hardly reacts to the news data where it stays at the same point as it was just one candle before. Therefore, the news release does not have any impact on this currency pair, and there is no alteration to the volatility.

SEK/JPY | Before the announcement:

SEK/JPY | After the announcement:

Lastly, we will look at SEK/JPY currency pair and see if there is any change in volatility due to the news announcement in this pair. Before the news announcement, the market is in a strong uptrend indicating strength in the Swedish Krona. In order to join the uptrend, we should wait for the price to pull back at a’ support’ area, as the price is at the highest point, and then take position accordingly.

After the news announcement, the price initially falls lower owing to poor New Orders data, but it bounces exactly from the moving average and closes with a wick on the bottom. Hence, we can say that the news release has some impact on this pair, causing a fair amount of volatility after the announcement.

That’s about ‘New Orders’ and its impact on the Forex market after its news release. If you have any questions, please let us know in the comments below. Good luck!