Forex Fundamental Indicator

Introduction

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

Understanding Economy Watchers Current Index

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

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

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

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

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

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

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

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

Using Economy Watchers Current Index in Analysis

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

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

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

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

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

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

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

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

Source: Trading Economics

Source: St. Louis FRED

Impact of the Japanese Economy Watchers Current Index on the JPY

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

When the Economy Watchers Current Index is continually rising, it can be taken as a sign that there is increasingly more money supply in the economy. In this case, governments and central banks might step in to implement contractionary policies like hiking interest rates. In the forex market, this will increase the value of JPY. Conversely, when the Economy Watchers Current Index steadily drops, it might trigger expansionary policies, which will make the JPY depreciate.

Data Sources

The Cabinet Office of Japan is responsible for the survey and publication of the Japanese Economy Watchers Current Index. In-depth and historical data is also available at Trading Economics.

How the Japanese Economy Watchers Current Index Affects The Forex Price Charts

The recent publication from the Cabinet Office of Japan was on October 8, 2020, at 2.00 PM JST. The release is available at Investing.com. The publication of the Japanese Economy Watchers Current Index is expected to have a low impact on the JPY.

In September 2020, the Japanese Economy Watchers Current Index was 49.3 compared to 43.9 in August 2020.

Let’s find out how this release impacted the JPY.

AUD/JPY: Before Japanese Economy Watchers Current Index Release on 
October 8, 2020, just before 2.00 PM JST

The AUD/JPY pair was trading in a weak uptrend before the publications of the Japanese Economy Watchers Current Index. The 20-period MA was merely slightly rising with candles forming just above it.

AUD/JPY: After Japanese Economy Watchers Current Index Release on 
October 8, 2020, at 2.00 PM JST

The pair formed a 5-minute “Doji” candles immediately after the publications of the index. Since the index showed pessimism in the Japanese economy, the JPY is expected to be weaker compared to the AUD. As expected, the pair subsequently traded in a renewed uptrend with the 20-period MA steeply rising and candles forming further above it.

Bottom Line

The article has shown the importance of the Economy Watchers Current Index in the Japanese economy. More so, the significance of the index has been evidenced by the price chart analysis. Note that although the index is usually a low-impact indicator. However, its significance is observed in the current coronavirus pandemic since it can be used as a leading indicator of economic recovery.

Introduction

Every government runs a budget. It is rare to find a scenario where a government has a balanced budget, i.e., its revenues match expenditures. Economists, policymakers, financial analysts, and consumers pay close attention to budget analysis figures. This interest in the budget is helpful to determine if the government is running a surplus or deficit. This information is vital in determining the country’s global credit rating, which will impact future investment decision-making, trade, and value of the currency.

Understanding Public Sector Net Borrowing

Public sector net borrowing refers to the government budget deficit. The budget deficit occurs when the income earned by the government is less than the public expenditures. Thus, the government can be said to be spending more than it collects in the form of taxes and trade. Governments fund their budgets, primarily using debt and taxation. While different governments have different lines of expenditures, they can all be summed up under three categories: current expenditures, capital expenditures, and transfer payments.

The budget deficits run by governments can tell us a lot about the health of the economy and possibly the cost of future funding. The budget report might be a complicated and tedious document for the average forex trader to analyze in its entirety. Thus, while there is a relationship between budget deficits and the economy’s health, it is advisable to compare the budget deficits with other economic indicators to get the full picture.

Increasing the budget deficit can tell us two things, either revenue collection is decreasing or the government expenditure is increasing rapidly. Here’s a look at how the budget deficit occurs. It starts with a decline in revenue. It is worth noting that exceedingly high budget deficits are connected to worsening economic conditions. When the economy is performing poorly, job losses become prevalent, leading to decreased aggregate demand forcing most companies to scale down while some discretionary consumer firms collapse entirely. Consequently, fewer people pay income tax, and corporate tax declines since most companies are making losses or bankrupt.

Naturally, most people will have to depend on social security programs to get essential needs. This overdependency forces the government to increase its expenditure on such programs. Furthermore, to bring the economy from recession, the government will be forced to increase capital expenditure to create more jobs and spur demand in the economy. Expansionary monetary policies, such as lowering interest rates, can also be used to make cheap loans available to the public.

Using Public Sector Net Borrowing in Analysis

Increasing budget deficit implies that the economy is slowing down, and the government is attempting to revive it. Budget deficits differ for different countries and may not necessarily give the entire picture of the economy’s health. Therefore, it is prudent to combine budget deficit analysis with the analysis of other fundamental economic indicators to determine if the expanding budget deficit is justifiable. For example, using a combination of unemployment levels and the aggressive government expenditure is creating the intended multiplier effect in the economy. More so, it can be used as a scorecard for the government’s fiscal policies’ efficiency and the public sector financial management.

With this strategy, we can spot if the budgetary allocations are going into viable capital expenditures or being spent on non-income generating activities such as paying for a bloated civil service wage. Furthermore, this approach can help stem out corruption in the public sector and seal any public monies’ leakages.

Source: St. Louis FRED

If the government employs expansionary fiscal policies year after year, it may result in a continually increasing inflation rate. Pumping more money into the economy continually increases the rate of inflation. In the flow of income, government spending is an injection. The resultant increase in the aggregate demand drives up prices since demand changes faster than producers can increase their production. It may be more challenging to keep the rising inflation in check if the central banks do not counter the expansionary policies. If the central banks do not implement contractionary monetary policies, the resultant inflation will distort the real wage and real interest rate levels in the economy.

Impact on Currency

As we mentioned earlier, forex traders should analyze the public sector net borrowing data along with other fundamental indicators to get a more comprehensive outlook of the economy. However, here is how the budget deficit affects the forex market.

An expanding public sector net borrowing is negative for the currency. An increasing budget deficit means that the government has to rely heavily on debt to fund its expenditure. With debt accumulation, repayment burden, especially the annual interest rates, weighs heavily on the revenues. If this trend persists, a significant portion of the government’s revenues will end up being used for debt servicing instead of development projects. The government may also be forced to restructure its debts, which come with increased costs. More so, if the growth of debt exceeds that of GDP, it would imply that the budget deficit is reaching unsustainable levels.

Source: St, Louis FRED

In the international markets, the country’s credit ratings will deteriorate. The country’s bonds may be downgraded from investment grade to junk bonds. Consequently, taking debt from the international markets will be more expensive since investors will demand a premium for taking higher risks. Borrowing from the domestic markets using treasury bills will be expensive since investors will demand higher discounts. Similarly, multilateral lenders will insist that the government implement a series of stringent austerity measures to qualify for loans and grants. All these factors come with severe economic and financial consequences for the country.

Sources of Data

In the United Kingdom, the Office for National Statistics (ONS) publishes the UK public sector net borrowing in its monthly Public Sector Finances report. Trading Economics publishes an in-depth review of the UK’s public sector net borrowing along with historical figures. A list of a country’s debt to GDP is also available at Trading Economics.

How Public Sector Net Borrowing Data Release Affects Forex Price Charts

The most recent release of the UK’s public sector net borrowing was on September 25, 2020, at 6.00 AM GMT and can be accessed at Investing.com.

The screengrab below is of the monthly UK public sector net borrowing from Investing.com. To the right, we can find a legend that indicates the level of impact this fundamental indicator has on the GBP.

As can be seen, this low volatility is expected.

In August 2020, UK’s public sector net borrowing worsened to 35.2B from 14.72B in July. This data was worse than analysts’ expectations of 35.05B.

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

GBP/USD: Before Public Sector Net Borrowing Release on September 25, 2020,
Just Before 6.00 AM GMT

Before the news release, the pair was trading in a neutral trend as shown by the above 5-minute GBP/USD chart. The 20-period MA was flattened with candles forming just around it.

GBP/USD: After Public Sector Net Borrowing Release on September 25, 2020, 
at 6.00 AM GMT

The pair formed a 5-minute bullish candle after the data release. This trend is contrary to the expected negative impact on GBP. Consequently, the pair adopted a bullish stance as the 20-period MA started rising with candles forming above it.

Although the Public Sector Net Borrowing is considered a vital indicator of economic health, public sector net borrowing data has an insignificant impact on the forex price charts.