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Forex Education Forex Fundamental Analysis

Trading Forex On the Most Important News Events

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

What Economic News Impacts Trading?

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

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

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

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

How to NOT Predict Trading News

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

News Trading Errors

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

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

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

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

News-Based Trading Systems

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

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

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

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

Trading with Volatility and News

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

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

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

Mind-Set to Trade News Trading

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

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

New Is Not the Solution (or Problem)

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

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

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

Ignoring News In the Press

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

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

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

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Beginners Forex Education Forex Basics

Fundamentals of Forex Trading You Didn’t Learn in School

This is what trading should be about. It should give you the freedom to not depend on the money you are getting but to be in control of it. Sometimes, this is easier said than done. That is why we have selected a few critical points that need to be reiterated for every beginner trader to read. With the present-day market expansion and ease of internet access, novice traders can read about lots of things that really aren’t that relevant. We have a different agenda. Today, you will read the things they don’t teach you. We will show you the bigger picture.

“If you work for money, you give the power to your employer. If money works for you, you keep the power and control it.” (Rich Dad, Poor Dad, Robert Kiyosaki)

Who runs the world?

Traders often miss this one key fact about trading – not all markets are governed in the same way. With stocks, things are quite clear. The money flow will dictate how the prices are going to be determined. But that flow can be out of the context of the free market sometimes (printing). In spot forex, however, when the money flows into the market, everything works mostly how the banks set. The prices will always go the opposite way traders go because this is how the big banks (i.e. Citibank, Deutsche Bank, Chase Bank, and HSBC, among others) manipulate the market. 

Get educated and don’t let the prevailing thought affect your critical thinking.

“One of the reasons the rich get richer, the poor get poorer, and the middle class struggles in debt is because the subject of money is taught at home, not in school.”  (Robert Kiyosaki)

What’s money worth?

When we think of stocks or commodities, we think of balance sheets, assets, and products that help us assign a price to any equity. What traders often fail to understand is that currencies act differently. So, when experienced stock traders wish to expand their portfolio and start trading forex, they overlook the nature of today’s currencies. The currencies we know now are fiat, which means they don’t have the value of their own like they did during the gold standard. The currencies’ value is nowadays solely determined by big banks. 

Understand what you are willing to trade as well as the essential differences between various instruments, tools, and markets.

“A person can be highly educated, professionally successful, and financially illiterate.” (Robert Kiyosaki)

Where did everybody go?

When beginners first start trading, they look for valuable content and support for development. Still, many make the mistake of following groupthink that immediately puts them in the losing group. Why does this happen? Traders who develop herd mentality don’t rely on their own analytical skills, knowledge, and experience, which is one of the main reasons why they can’t remain traders long term. Secondly, if you are a forex trader and you just look for the areas in the chart where everyone else is, you will soon be disappointed because the big banks will soon step in and change the price direction. 

Look up IG client sentiment and avoid outdated tools that are likely to give you this type of information. Your system should tell you how to avoid big banks, not how to be under their radar.

“Most people go along with the crowd. They do things because everybody else does it.” (Robert Kiyosaki)

Become rich in 30 days

Your favorite YouTuber or your trading mentor won’t be there to hold your hand forever. You must get in the game on your own. Yes, wealthy people do have advisors to keep getting the lofty return year after year, but to get there you first need to learn how to trade on your own. Even trading robots (expert advisors/EAs) can’t help you much if you don’t know which strategy or style of trading you want to use. 

Know what you care about. Explore your options and don’t believe the promises of getting unprecedented returns. You owe yourself that.

“There are no bad business and investment opportunities, but there are bad entrepreneurs and investors.” (Robert Kiyosaki)

Who are you? 

This is a deal-breaker if you want to be good at trading in any market. As a human being, regardless of your gender, you are prone to feeling different emotions that will either make you go forward or tell you that something isn’t the best choice for you. Sometimes, however, these emotions push us to do things we shouldn’t. We overleverage or under leverage; we enter too many trades; we don’t sleep and so on. This is not sustainable and you, like anyone else, will break at some point.

↳ Get to know yourself and understand your triggers so you can have control over your actions. Do the trading psychology test to get more insight.

“Emotions are what make us human. Make us real. The word ‘emotion’ stands for energy in motion. Be truthful about your emotions, and use your mind and emotions in your favor, not against yourself.” (Robert Kiyosaki)

Do you put all of your eggs into one basket? 

What do the experts do? Besides relying on experience, successful traders always diversify. They never depend only on the profit they can get from one market, and so should you. If you are a crypto trader, you will firstly diversify your coins. If you are a forex trader, you will think of different currency pairs to trade. Still, to be free of having to depend on one source of income (as one market is one source), you will look for other markets to trade. 

Make sure that you understand the similarities and differences between the markets and always have money management in place.

“When it comes to money, the only skill most people know is to work hard.” (Robert Kiyosaki)

How can traders lose the right way?

At the moment of experiencing a loss, traders are often unable to stop overreacting. They chase losses and enter new trades, which only takes their accounts further into the abyss. If you’ve been there, you know that this isn’t the right way. Therefore, the first step is to accept the loss and step away from your computer. Then, you will be smart about this experience and learn as much as you can. 

Use testing and journaling to understand how a particular trade loss can be mitigated. Then, improve your system, strategy, and money management to change your future trading.

“Wealth is a person’s ability to survive so many days forward— or, if I stopped working today, how long could I survive?” (Robert Kiyosaki)

How can you become a pro?

Leave no stone unturned. Learn about yourself, your weak points, your algorithm, and your skills, and make room for development. Don’t cry over spilled milk but shift from thinker to doer. Also, if you really want to stay in the game, get rid of the casino mentality and learn to wait patiently while working diligently. There is no instant gratification in the long game, only demo trading, journaling, testing, and revising before you invest your real money. 

Professional trading is trading real money for a living. Still, everyone can try that. Be a trader who persists in the struggles. Be the one who sees the bigger picture.

 “There is a difference between being poor and being broke. Broke is temporary. Poor is eternal.” (Robert Kiyosaki)

And, finally…

If you always see yourself as lacking, you can see neither the market potential nor the potential that comes from losing. Sometimes we fear loss; other times, we fear success. The question is what you will do about it.

Categories
Forex Fundamental Analysis

EUR/GBP Global Macro Analysis – Part 1

Introduction

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

Ranking Scale

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

EUR Endogenous Analysis – Summary

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

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

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

  • European Union GDP Deflator

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

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

  • European Union Manufacturing Production

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

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

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

  • Euro Area Manufacturing PMI

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

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

  • European Union Retail Sales

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

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

  • Euro Area Consumer Confidence

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

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

  • Euro Area Government Debt to GDP

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

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

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

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Forex Fundamental Analysis

NZD/USD Global Macro Analysis – Part 3

NZD/USD Exogenous Analysis

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

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

The US and New Zealand balance of trade difference

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

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

GDP growth differential in the US and New Zealand

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

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

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

The US and New Zealand interest rate differential

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

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

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

Conclusion

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

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

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Forex Fundamental Analysis

EUR/USD Global Macro Analysis – Part 1 & 2

Introduction

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

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

Ranking Scale

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

USD Endogenous Analysis – Summary

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

You can find the complete USD Endogenous Analysis here.

EUR Endogenous Analysis – Summary

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

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

  • Monthly retail sales

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

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

  • Industrial production

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

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

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

  • Unemployment rate

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

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

  • Employment change

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

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

  • Business confidence

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

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

  • Consumer Spending

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

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

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

  • European Union Government Debt To GDP

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

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

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

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

  • EU Rate of inflation

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

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

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

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

Categories
Forex Fundamental Analysis

The Importance Of ‘Personal Consumption Expenditures Price Index’ Macro Economic Indicator

Introduction

65%! That’s the average global economic output that households’ consumption contributes to economic output. Since inflation tends to go hand-in-hand with demand, most monetary policy decisions are centered around, ensuring a sustainable inflation rate in the economy.

You see, a manageable inflation growth can be the difference between a healthy economic growth, overheating heating economy, or a stagnating one. Therefore, understanding the factors that contribute to the overall inflation rate cannot just be the preserve for governments and central banks. This information can prove useful to forex traders as well.

Understanding PCE Price Index

To understand the PCE price index, we first need to understand PCE itself. Personal consumption expenditures measures how much households spend in an economy within a particular period. The consumption tracked by PCE includes consumption on durable goods, nondurable goods, and services.

Durable goods are consumer items that last for more than three years, such as cars and household appliances. On the other hand, nondurable goods include perishable consumer items like foodstuffs. The services, in this case, includes any services that might be sought by households ranging from professional services such as legal services to home-care services.

How PCE is Measured? 

As we have already established, most of the production within an economy is meant for household consumption. The government can be able to deduce the PCE using the GDP data. Firstly, the local manufacturers’ shipment data is used to estimate the amount designated for household consumption.

Next, deducing the consumption of services, the government uses data on revenue collected for utilities, professional services commissions, and receipts for services rendered. Net imports (i.e., imports fewer exports) are added, and the national inventory changes are subtracted. The resulting data represents the amount of consumption by households within the economy.

Purpose of the PCE Data

While PCE can be used to show the growth of aggregate demand and economic growth, it is also used to compute the PCE price index. The PCE price index is also known as PCE inflation. It measures the changes in the price of household goods and services over a specific period.

After obtaining the PCE data, it is converted into prices paid by the households. The conversion is achieved using the consumer price index. Note that the PCE price index incorporates the taxes paid, profit margins of the producers and suppliers, and the cost of delivery. Thus, the PCE price index is a broad measure.

Difference between PCE Price Index and the CPI

It is worth noting that both these indexes are used to measure the rate of inflation in an economy. However, the most notable difference between them is that the PCE data is derived from the GDP data and businesses’ surveys. CPI data, on the other hand, is arrived at from surveys conducted on the households. Based on their different sources, the PCE data covers a lot of the items that households on which household spend. Therefore, the PCE price index data tends to be smoothened since a significant change in the price of a single item won’t grossly distort the index.

Source: St. Louis FRED

Using PCE Data in Analysis

The PCE price index can be used as a broad measure of inflation within an economy. While CPI is a good measure of inflation, the PCE price index tracks the price changes in more goods consumed by households. More so, the price changes reflected in the PCE price index represents the cost of production, taxes, and the cost of delivering the goods and services to the consumers. Furthermore, using the core PCE price index eliminates the volatile prices of a few items, such as gasoline prices will distort the index reading compared to CPI.

Source: St. Louis FRED

As a measure of economic growth, the PCE data is unrivaled. Seeing that the PCE data itself is derived from the GDP figures, the changes in the immediate consumption by households can be used to track how the economy will grow in the short term. To properly gauge whether the increased expenditure on consumption is real or a result of inflation, the following factors are considered.

Firstly, is the quantity purchased by households increasing with little change in the prices? Are the households buying higher quantities at higher or lower prices? Are households spending more money to purchase lesser quantities? Since the PCE price index tracks broad changes in consumption, these factors will help determine whether the economy is growing or merely the prices of goods and services changing.

The changes in the PCE data can be used to show the conditions in the labor market. Household consumption represents the aggregate demand in the economy. Thus, when PCE increases, it shows that demand is increasing. The trickle-down effects of increased aggregate demand increase in the aggregate supply and expansion in production. The increased production implies that more labor will be needed hence lower unemployment levels and improved welfare. Conversely, decreasing PCE can be a leading indicator of worsening labor market conditions.

Impact on Currency

A straight line can be drawn from PCE to inflation to monetary policies. Demand is one of the primary factors behind inflation. In the forex market, the changes in PCE and PCE price index can be used to predict likely monetary policies. Note that most central banks use the PCE price index to set the target rate of inflation.

A continuous increase in PCE and rising PCE price index shows that inflation in the economy is increasing. Central banks are likely to implement contractionary monetary policies such as hiking interest rates to avoid an overheating economy. The contractionary policies make the currency appreciate relative to others.

Conversely, decreasing PCE levels accompanied by a lower PCE price index may be an indicator of a stagnating economy. Central banks are more likely to lower interest rates to stimulate the economy. Such expansionary policies make the currency depreciate relative to others.

Sources of Data

In the US, the Bureau of Economic Analysis publishes the Personal Income and Outlays report monthly. This report contains the PCE and PCE price index data. St. Louis FRED has an in-depth and historical analysis of the US’s PCE and PCE price index data.

How PCE Price Index Data Release Affects Forex Price Charts

In the US, the most recent publication of the PCE price index data was on October 1, 2020, at 8.30 AM EST and accessed at Investing.com.

Below is a screengrab from Investing.com. We can see that moderate volatility is expected in the forex market when the PCE price index data is released.

In August 2020, the core PCE price index increased by 1.6% from 1.4% in July 2020. This increase is expected to have a positive impact on the USD.

EUR/USD: Before PCE Price Index Release on October 1, 2020, 
Just Before 8.30 AM GMT

The EUR/USD pair was trading in a steady uptrend before the publication of the PCE price index data. The 20-period MA was steeply rising with candles forming above it.

EUR/USD: After PCE Price Index Release on October 1, 2020, at 8.30 AM GMT

After the release of the PCE price index data, the pair formed a 5-minute ‘Doji’ candle. As expected, the stronger USD made the pair adopt a bearish stance with the 20-period MA steeply falling and candles crossing over below it.

As observed, the PCE price index data release has a significant effect on the forex price action. Perhaps the relevance of the PCE data comes from the fact that the US Federal Reserve uses it to set the target inflation.

Categories
Forex Fundamental Analysis

Everything About ‘Durable Goods Orders’ Macro Economic Indicator

Introduction

Industrial production contributes to over 62% of the jobs in the goods production industry. Therefore, any changes in this sector’s production activity bring forth ripple effects into the overall economy. Owing to the significant role that industrial production plays in the economy, the investment goods bought for use in the industrial sector offer invaluable insights into the changes in the sector. Thus, durable goods orders as an economic indicator can be used to signal economic growth and businesses’ and consumers’ sentiment.

Understanding Durable Goods Orders

Durable goods are expensive and long-lasting items that have a lifespan of at least three years. These goods do not depreciate quickly. They include; heavy-duty machinery used for industrial purposes, computers and telecommunication equipment, raw steel, and transport equipment.

Core durable goods are the totality of durable goods, excluding data from transportation and military orders. The transportation equipment is excluded to ensure smoothening out the effects it would have on the durable goods data as a result of one-time large orders of new vehicles.

Durable goods orders data is, therefore, a monthly survey that tracks the purchase of durable goods. This data is used to assess the prevailing trend in industrial activity.

How to use Durable Goods Orders in Analysis

Since durable goods are expensive and long-lasting, their purchase is made on an occasional basis. For analysis reasons, the durable goods orders are treated as capital expenditure. The durable goods orders are used to signal near-term and future economic prospects. Let’s see what this data tells us about the economy.

Firstly, durable goods are heavy-duty machinery whose assembly and manufacture takes a long time. Therefore, the duration from when the assembly line of these goods begins to the time they are delivered to the buyers shows a period of sustained economic activity.

Capital expenditure in the industrial sector has a multiplier effect. The data on durable goods orders implicitly shows the level of activity in the industries along the supply chain of making and delivering these goods. Higher durable goods orders imply higher commercial activities in the relevant industries, while lower durable goods orders show reduced activities. So, what does this data tell us about the economy? Let’s take the example of increasing durable goods orders.

Higher durable goods orders imply that more jobs are created in the assembly lines, manufacturing, and mining. The resultant increase in employment levels leads to improved living standards and an increase in aggregate demand for consumer products in the economy. The increased aggregate demand for discretionary consumer products will force producers in these sectors to scale up their production, leading to more job creation and economic growth. Thus, the increase in durable goods orders can have both a direct and indirect impact on economic growth and the growth of other consumer industries.

Durable goods are used to further the process of production or service delivery. Therefore, the data on durable goods orders can gauge the sentiment of businesses and consumers. It is fair to say that businesses and consumers purchase durable goods when they are convinced that the economy is on an uptrend. Durable goods orders can thus be used as a testament to improving economic conditions and living standards. It follows the logic that businesses would not be scaling their productions or engaging in capital expenditure if they did not firmly believe that the economy is growing and a future increase in their products’ demand.

Due to their expensive nature, the purchase of durable goods heavily relies on credit financing. Thus, an increase in durable goods orders can be used to show that lending conditions are favorable. This willingness of lenders can be taken as a sign of improved liquidity in the banking sector, which in itself shows that the economy is performing well.

When capital expenditures are made, it is to replace the existing technology with a better one. Therefore, an increase in durable goods orders can be seen as businesses upgrading their current production means. Consequently, improved technology leads to efficiency in the production process and service delivery. This efficiency not only applies to improved quality and quantity of output but also in the allocation of factors of production.

Impact on Currency

In the forex market, the central banks’ perceived monetary policy is the primary mover of exchange rates. Forex traders pay close attention to economic indicators to gauge the health of the economy and speculate on the central banks’ policy decisions. Here’s how the durable goods orders can be used to this end.

Higher durable goods orders are associated with higher employment levels, increased wage growth, and steady growth in the aggregate demand and supply in the economy. When this trend is sustained for an extended period, governments and central banks may have to step in with contractionary monetary and fiscal policies to avoid an overly high inflation rate and an overheating economy. Therefore, sustained growth in the durable goods orders can be seen as a precursor to higher interest rates, which leads to the appreciation of the currency.

Conversely, a continuous decline in durable goods orders is an indication that businesses and consumers have a negative sentiment about the future. This sentiment could result from higher levels of unemployment, dropping levels of aggregate demand, or a stagnating economy. To spur economic growth, expansionary fiscal or monetary policies will be adopted. One such policy is lowering interest rates to encourage borrowing by making the cost of money cheap. Thus, a continuous drop in the durable goods orders can be seen to forestall a drop in the interest rates, which depreciates the currency relative to others.

Source of Information related to Durable Goods Orders

The US Census Bureau collates and publishes the data on the US durable goods orders. An in-depth and historical review of the US’s durable goods orders is found at St. Louis FREDTrading Economics publishes global data on durable goods orders.

We hope you got an understanding of what this Fundamental Indicator is all about. Please let us know if you have any questions in the comments below. Cheers!

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Forex Course

156. Why Interest Rates Matter While Trading Forex Currency Pairs

Introduction

The interest rate is one of the major fundamental indicators of a currency pair. Any increase in interest rate is a positive sign for an economy. However, there are some other factors that a trader should know.

What is the Interest Rate?

The interest rate is the charge that the Central Bank takes on loans and advances to control the money supply. The interest rate is usually revised quarterly based on the economic condition of a country.

The main aim of changing the interest rate is to control inflation and stabilize the country’s currency exchange rate. The interest rate is one of the most significant fundamental indicators for a country that directly affects the country’s economy both inside and outside.

Image Source: https://www.ecb.europa.eu/

When the country’s economic condition is excellent, and the targeted inflation is achieved, the central bank tries to discourage people from taking loans from the Central by increasing the interest rate.

On the other hand, when the economic condition is not right, Central Bank tries to expand the country’s economic activity by attracting people to take more money from the bank with a cheaper interest rate.

How interest Rate Impact on a Currency Pair?

In the forex market, traders usually trade in currency pairs instead of a single currency. Therefore, they should evaluate two separate countries’ economic conditions to determine which country is more reliable. Based on this knowledge, we can say that increasing the country’s interest rate will influence the currency to be strong against other currencies.

For example, we want to take a trade in the USDCHF pair, and we are waiting for the USD’s interest rate decision. When the news came, we saw that the Federal Reserve increased the interest rate from 2% to 2.5%. As a result, the USD became stronger immediately against the CHF, and the USDCHF goes up.

This is how the interest rate impacts on a currency. However, the opposite reaction might happen when the Federal Reserve decreases the interest rate from 2 % to 1.5% instead of increasing. In that case, the EURUSD might be stronger and move higher.

How to Make a Profit from the Interest Rate Change?

Making money from interest rates is an effective and solid way to trade based on the fundamental analysis. However, as a trader, we should focus on other fundamental releases and events to understand a currency pair’s overall structure. The significant economic releases of a country are interrelated. For example, if the inflation and GDP are good, an increase in interest rate is evident for the central bank.

Therefore, before taking a trade based on the interest, we should focus on what the other fundamental releases are telling about the currency.

Conclusion

After the above discussion, we can say that the interest rate is the most significant fundamental indicator of a currency pair. However, as the forex market consists of several uncertainties, we should focus on money management strongly. We may face some market conditions where the price might react against our expectations. So, the only way to make a consistent growth of our trading balance is to follow strong trade management.

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Forex Course

154. Understanding Hawkish and Dovish Central Banks

Introduction

The movement in a currency pair depends on several factors. Hawkish and Dovish Central bank is one of them. Besides economic releases, there are some events where Central provides an outlook and projection of the economy. Therefore, if the projection is excellent, it will create a positive impact on the currency market. If the projection is terrible, it will create a negative impact on the currency market.

What is Hawkish Central Bank?

If the economic condition is good, the central bank will raise the interest rate to achieve the inflation target. The hawkish central bank means providing a positive statement regarding the country’s present and upcoming economic conditions, like the economy is getting stable or the inflation is under control.

Let’s say the US economy is getting stronger with a decreased unemployment rate and the controlled inflation target. In this situation, the central bank will provide an official statement saying that the economic condition is favorable, known as the hawkish tone.

What is the Dovish Central bank?

If the economic condition is wrong, the central bank will cut the interest rate and provide a dovish tone. The dovish central bank means providing an outlook of the economy, stating that the economy is facing difficulty to achieve the economic goal.

Let’s say that the European economy is struggling to achieve the targeted inflation level. Moreover, the unemployment rate is increasing. In this situation, the central bank is likely to provide a dovish tone starting that it is planning for a rate cut.

However, the dovish and hawkish tone might cover several factors, as mentioned in the table below:

Decision

Hawkish

Dovish

Objective Reduce inflation Stimulate the economy
Monetary Policy Tighten Loosen
Economic Growth Projection Strong Weak
Current Inflation increasing Decreasing
Interest Rate Increase Decrease
Currency Effect Strong Weak

How Hawkish and Dovish Tone Affect the Forex Market

The hawkish and dovish central bank has both long term and short term impact on the currency market. If the US Federal Reserve provides a hawkish tone, we might see the US Dollar become stronger against most currencies. Therefore, if we want to trade on a short term basis, we can move to the 5-minute chart and take trades based on a suitable trading strategy.

Moreover, the hawkish or dovish tone will indicate the overall outlook of a country’s economy that might help traders understand the upcoming market direction. For example, suppose the CPI, GDP, export-import, and other fundamental indicators are favorable. In that case, the central bank will provide a hawkish tone, and traders can take trades in a specific direction until there is a dovish tone.

Conclusion

Hawkish and dovish central banks directly affect the price of a currency pair; therefore, traders should keep an eye on the economic calendar to know when the event will happen. Moreover, during the central bank meeting and press conference, the market becomes volatile, affecting running trades. Moreover, the central bank releases a note after the website’s meeting where traders can read to know the dovish and hawkish tone.

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Forex Course

153. The Affect Of Monetary Policy On the Forex Market

Introduction

Fundamental analysis is one of the most reliable forex trading strategies in the world that considers economic releases and events. In fundamental analysis, many indicators provide a possibility of upcoming movement in a currency pair. Besides the economic release, some events like monetary policy decisions create an immediate impact on a currency pair.

What is Monetary Policy?

Monetary policy is an action or decision taken by the central bank to control the money supply and achieve the economic sustainability and macroeconomic goal. Every country has a strategic goal based on the current performance and upcoming economic growth of the economy. Therefore, most of the central bank changes the interest rate based on the economic condition.

Usually, the central bank sits quarterly for a monetary policy meeting to discuss the following four core areas:

  • Guideline for the money market
  • Interest rate decision.
  • Monetary policy measurement.
  • The outlook of the economic and financial developments.

How Monetary Policy Affects the Forex Market?

In a monetary policy meeting, the central bank discusses the present economic condition of a country. Therefore, any hawkish tone may create an immediate bullish impact on a particular currency. On the other hand, a dovish tone may create an immediate negative impact on a particular currency in any trading pair.

Besides the immediate effect, there is a long-term impact on the price of a currency pair. We know that any strength in an economy indicates a stronger currency. For example, if the ECB (European Central Bank) provides some consecutive outlook of the European economy saying that the inflation is under control, and the interest rate increased, which is likely to increase again in the next quarter. In that case, the influential European economy may create a Bullish impact on EURUSD, EURAUD, or EURJPY pair.

Moreover, there is some case where the central bank cut the interest rate where traders and analysts were expecting a rate hike. In this scenario, investors may shock at the news, and the effect might be stronger than before.

How to Trade Based on Monetary Policy Statement?

There is two way to trade based on the monetary policy decision. The first one is based on the immediate market effect, which is known as news trading. On the other hand, traders can evaluate the economic condition based on the recent monetary policy statement and see how the economy is growing in the long run. Based on this market scenario, traders can find a long term direction in the market based on economic performance as per the monetary policy statement.

Another way of trading based on the monetary policy decision is the fundamental divergence. If one fundamental indicator does not support another fundamental indicator, it creates fundamental divergence. For example, the US interest rate is increasing based on the strong employment report, but inflation does not support the rate hike. In this situation, traders can take trades with the possibility that the rate hike’s effect will not sustain.

Summary

Let’s summarize the effect of monetary policy in the forex market:

  • Monetary policy meeting happens quarterly where the central bank takes interest rate decision.
  • In the monetary policy meeting, the central bank provides an outlook of the economic and financial developments.
  • A hawkish tone makes the currency stronger, while the dovish tone makes the currency weaker.
  • Traders can identify the fundamental divergence based on the decision on monetary policy meeting.
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Categories
Forex Fundamental Analysis

Understanding The Importance Of ‘New Home Sales’ Macro Economic Indicator

Introduction

In any economy, demand is one of the primary leading indicators of economic growth and inflation. Therefore, the aggregate demand data plays a vital role in predicting economic growth and possible monetary and fiscal policies. Although considered a lagging indicator, the data on new home sales provides insight into households’ changing demand and their income situation.

Understanding New Home Sales

As the name suggests, new home sales provide data on the newly built single-family that were sold or are for sale during a given period. New home sales data is also referred to as new residential sales. Sales mean that a deposit for the house has been taken or a sales agreement has been signed.

The data on new home sales is derived from a survey of a sample of houses from the building permits register. Since the data obtained is from a sample survey, it is bound to be subject to sampling variability as well as non-sampling error. Response bias, nonreporting, and under-coverage factors also influence this data. Nonetheless, the data is nationally representative.

The new home sales report shows data for the new privately-owned houses and new houses by construction stage. The report presents data that are both seasonally adjusted and those not seasonally adjusted.

  • The number of units sold during the period
  • The number of units for sale at the end of that period
  • The ratio between the houses sold and those for sale
  • The median and average sale price

How to use New Home Sales Data for Analysis

Although the new home sales data is generally regarded as a lagging economic indicator of demand in real estate, there is no dispute that broader macroeconomic trends influence new home sales. Here are some of the factors that influence new home sales.

Household income: Significant changes in the households’ disposable income will change their demand for new homes. Disposable income is the residual amount after paying taxes. These income changes could be brought about by an increase in wages, reduction in taxes, or investment windfall. If there is an increase in disposable income, households’ demand for new homes will increase. They could right away purchase already completed units or get into sale agreements for houses ongoing construction. Therefore, new home sales can be expected to increase during the period of increased household income. Conversely, a decrease in disposable income will make households cut back on non-essential expenditure, such as buying new homes. Consequently, new home sales will be expected to decline.

Unemployment: The rate of unemployment in the economy is directly linked to the households’ welfare. A lower unemployment rate implies that more households have income and can thus afford to put down deposits for a new home. Similarly, the unemployment rate reduction signifies that more people can afford to service a mortgage loan. Therefore, a low unemployment rate can be correlated to an increase in the demand for new houses, hence increasing new home sales.

Source: St. Louis FRED

Conversely, higher rates of unemployment mean that more people are out of gainful employment. This instance forces households to prioritize their expenditures to cater to the essential items. Furthermore, higher unemployment could mean that more households do not qualify for a mortgage. Thus, a reduction in the new home sales can be expected with increasing unemployment.

Interest rate: In the financial markets, the prevailing interest rate determines the cost of borrowing – especially home mortgages. When interest rates are low, it means that more households can afford to borrow cheaply. It becomes easier for households to service debt without digging too much into their income, thus ensuring no significant changes in their welfare. Since most households can afford to borrow cheaply when interest rates are low, the demand for new homes can be expected to increase.

When interest rates are high, the cost of borrowing increases, and with it, the cost of a mortgage. Higher rates would restrict some households from servicing expensive debt without significantly impacting their welfare. Thus, with an increasing interest rate, it can be expected that new home sales will decline.

Impact on Currency

The new home sales data can impact a country’s currency in several ways. Here is how.

The new home sales can be used to show economic recoveries. Buyers of new homes could be speculative buyers – those who expect these homes’ prices to increase in the future then resell. To them, to them, new homes are an investment. Thus, the new home sales data can be taken as a sentiment about the economy. An increase in the new home sales could imply that the future economy is expected to improve. Similarly, in times of recessions, like the current coronavirus-inflicted recession, the new home sales data can be used to show market recovery. Therefore, an increase in the new home sales can be seen as a sign of economic recovery, which increases the value of the currency relative to others.

The new home sales can also be used to show when an economy is headed for a recession. Typically, recessions are punctuated with declining economic conditions, such as an increasing unemployment rate. Continually declining new home sales could indicate a looming recession as economic welfare of households is deteriorating. Furthermore, in these circumstances, expansionary monetary and fiscal policies tend to be implemented. These policies are designed to prevent the worst-case scenario from playing out. In the first quarter of 2020, such expansionary policies were witnessed globally. They were meant to prevent extreme economic shocks from the coronavirus pandemic. These policies result in the depreciating of the currency relative to other currencies.

Sources of Data

In the US, for example, the US Census Bureau conducts the survey and publishes the new home sales data for the US. An in-depth and historical review of the US’s new home sales is available at St. Louis FREDTrading Economics publishes new home sales data for countries globally. Furthermore, you can access the forecast of the new home sales globally up to 2022.

How New Home Sales Data Release Affects Forex Price Charts

The most recent release of the US’s new home sales was on September 24, 2020, at 10.00 AM ET. The news release can be accessed at Investing.com.

The screengrab below is of the monthly new home sales from Investing.com. On the right, we can see a legend that indicates the level of impact this fundamental indicator has on the USD.

As can be seen, high volatility is to be expected.

In August 2020, the new home sales were 1011K compared to 965K in July. The sales were higher than the anticipated 895K. Thus, a strong USD is expected.

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

EUR/USD: Before New Home Sales Release on September 24, 2020, 
Just Before 10.00 AM ET

Before the news release, the EUR/USD pair was trading in a neutral pattern as the 5-minute candles formed just around a flattening 20-MA.

EUR/USD: After New Home Sales Release on September 24, 2020, at 10.00 AM ET

After the news release, the pair formed a 5-minute ‘hammer’ candle, indicating that the USD weakened. Subsequently, the pair adopted a bullish stance with the 20-period MA rising.

As shown by the above analyses, the US new home sales data release failed to produce significant volatility. Therefore, we can conclude that new home sales are insignificant in the forex market as an economic indicator.

Categories
Forex Fundamental Analysis

What Should you Know About Commitments of Traders (COT) Report?

Introduction

One of the most significant uncertainties for policymakers is the future economic performance. All the policies adopted by governments and central banks are geared towards influencing the future’s economic performance. Economists, financial analysts, and forex traders alike use models and economic indicators to predict future economic performance. The commitment of traders (COT) report gives some insight into future economic performance.

Understanding the Commitments of Traders Report

In the US, the COT report is published by the Commodities Futures Trading Commission (CFTC). The COT report shows participation in the future market.

The COT report is comprised of four different types of reports. They are:

Legacy reports: This report breaks down the open interest positions of commercial, noncommercial, and retail traders into long, short, and spread positions. The report shows the total interest positions that are open along with the changes from the previous reporting period. This report is broken down into the long and short versions of ‘Futures Only’ and ‘Futures-and-Options-Combined’ segments. The Legacy COT report shows the open interests for 17 exchanges.

Supplemental reports: This report document contracts 13 agricultural commodities. These contracts are of both futures and options positions for noncommercial, commercial, and index traders together with nonreportable positions.

Disaggregated reports: This report covers the following five sectors; agriculture, petroleum, and its products, natural gas and its products, electricity, and metal. This report’s market participants are categorized into; producers, swap dealers, managed money, and ‘Others.’

Producers are entities whose core business activities involve the production, processing, and handling of physical commodities. These producers use the futures market to manage or hedge against risks potential to their core operations.

Swap dealer is one who enters into an agreement to exchange cash flows of a given commodity over a specific period. They use the futures market to manage and hedge against risks inherent in their swaps.

Money manager, as used in this report, means a registered commodity pool operator, an unregistered fund, or a registered commodity trading advisor identified by CFTC. They participate in the futures markets on behalf of their clients.

Others represent all other participants in the futures markets who cannot be placed in the above categories.

Traders in Financial Futures (TFF) report: This report shows the participants in the futures market for currencies, stocks, US Treasury securities, VIX, and Bloomberg commodity index. It categorizes market participants into; dealers, asset managers, leveraged funds, and others.

Dealer/ Intermediary is a participant on the ‘sell-side’ of a trade. Although they do not exclusively participate in the futures market, they have matched books meant to offset their risks. They are made up of large banks.

An asset manager is an institutional investor such as pension funds and insurance companies whose clients are predominantly institutional.

Leveraged funds hedge funds, registered commodity pool operator, an unregistered fund, or registered commodity trading advisors. Their activities in the futures market involve arbitrage across and within markets and taking outright positions.

Others include all reportable traders who cannot be placed in the above categories.

Using the Commitments of Traders (COT) Report in analysis

The COT report can be used to show whether investors are going long or short in the futures market. The CFTC collects the data used in making the COT report from reporting firms such as Futures Commission Merchants, foreign brokers, exchanges, and clearing members. Individual traders can also self-report by filling out the CFTC Form 40.

The COT report shows the open interests in the futures and options market as of Tuesday of each week. Since the COT report also shows the changes in the open positions, it can be used to show the sentiment about the economy over time. It is worth noting that the market positioning of the commercial traders and the noncommercial (speculative) traders is always the opposite of each other.

Commercial traders handle physical commodities. For them, it is natural to expect that the future price of their commodities will rise. In the futures and options market, commercial traders are hedging against risk; thus, they go short just in case prices fall. The noncommercial traders do not handle the underlying physical commodities, and thus, they are participating in the futures market speculatively and can either be long or short. Therefore, by looking at the behavior of noncommercial traders in the futures markets, we can gain insight into future price trends and the economy.

Take the above example of wheat futures, when the noncommercial traders are net short positioned in the futures market, the prices of wheat falls. Consequently, the wheat farmers and traders receive lesser pay for their products. In this case, their purchasing power is lowered, which decreases the aggregate demand in the general economy.

Impact on Currency

Forex traders pay close attention to the noncommercial traders in the financial futures. These speculative buyers tend to lead the market. When they are net long in a particular currency, it means that the demand for that currency will increase and, with it, its value relative to others. For most forex traders, the best way to trade forex using the COT report is by establishing the overbought and the oversold regions. These are the regions where trend reversal is imminent – when the noncommercial traders are at the lowest point could indicate a period of sustained short selling, and a reversal could follow.

The COT report can also be used to show a trend. For example, let’s take an instance where noncommercial traders are continuously net long on a particular currency in the futures market while the price for that currency steadily increases. With this strategy, forex traders can use noncommercial traders’ market positioning as confirmation of a trend.

Sources of Data

The US CFTC publishes the COT report.

How the publication of the COT Report Affects Forex Price Charts

The latest publication of the COT report was on October 2, 2020, at 3.30 PM ET. The release of this publication can be accessed at Investing.com.

The screengrab below is of the weekly CFTC speculative net positions of the AUD from Investing.com. To the right is a legend that indicates the level of impact the fundamental indicator has on the AUD.

As can be seen, moderate volatility is to be expected.

As of Tuesday, September 29, 2020, the AUD’s speculative net positions was 8.9K compared to the previous Tuesday’s of 16.3K. Noncommercial traders are net-long in the AUD futures, which should be positive for the AUD.

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

AUD/USD: Before the COT Report Release on October 2, 2020, Just Before 3.30 PM ET

The AUD/USD pair was trading in a neutral position before the release of the COT report. The 20-period MA was flattened with candles forming just around it.

AUD/USD: After the COT Report Release on October 2, 2020, at 3.30 PM ET

The AUD/USD pair formed a -minute bullish candle after the COT report’s release indicating that the AUD had appreciated relative to the USD. However, the pair could not sustain a bullish trend since it later continued trading in a neutral trend.

The effects of the COT report are long-term. For this reason, the weekly publication of the report has little impact on the short-term forex market.

Categories
Forex Fundamental Analysis

Understanding ‘Employment Trends Index’ and The Impact Of Its News Release On The Forex Market

Introduction

In any economy, the employment rate can be said to be the primary driver of economic growth. Due to its importance, several fundamental indicators track the labor market changes and many more attempting to predict the future of the labour market. Government and central banks’ policymakers may feel comfortable poring through all these economic indicators for the labour market, but for regular forex traders and households, keeping track of all these labour market indicators can be tiresome and even confusing. The Employment Trends Index (ETI), one of the most relevant labour market indicators, is making it easier to understand the labor market trends.

Understanding the Employment Trends Index

The Employment Trends Index is made by aggregating eight labour market economic indicators. The ETI report breaks down which labour market indicators positively impact the ETI and ranks them from the most positive to the least. Through the aggregation of these indicators, the “noise” in the labor market trend is filtered out. It is worth noting that these labour market indicators have shown to be accurate in their areas. These indicators are explained below.

Initial unemployment claims: This labour market indicator is collated and published by the U.S. Department of Labor. The indicator is published the Thursday of every week, and it shows the number of people who filed for the unemployment benefits for the first time. It is thus considered the latest indicator of unemployment.

Job openings: The U.S. Bureau of Labor and Statistics publishes this economic indicator. These job vacancies show the gap in the labour market that needs to be filled. It indicates the unfulfilled demand in the labour market and the desirable skills sought by employers. It further shows the potential of households to be gainfully employed in the short term.

Number of Employees Hired by the Temporary-Help Industry: The U.S. Bureau of Labor Statistics publishes this statistic. It shows the relationship between the labour market and business cycles since most businesses hire more temporary workers during peak periods and expansion phases.
The ratio of Involuntarily Part-time to All Part-time Workers: Published by the U.S. Bureau of Labor Statistics, this indicator shows the number of employees who are forced to work part-time. The indicator can be correlated to sub-optimal economic conditions, which would make filling positions full time uneconomical. An increasing ratio indicates worsening economic conditions.
Industrial Production: This indicator shows the level of output in sectors such as mining, manufacturing, and energy. The U.S. Federal Reserve Board publishes it. An increasing industrial production indicates that the employment levels are increasing while dropping industrial production levels signals higher levels of job loss.

Source: St. Louis FRED

Percentage of Respondents Who Say They Find “Jobs Hard to Get”: This indicator shows the scarcity of employment opportunities in the economy. Higher percentage signals either a stagnating or a shrinking economy. The Conference Board Consumer Confidence Survey publishes it.
Percentage of Firms With Positions Not Able to Fill Right Now: This statistic shows the lack of particular expertise in the labour market. It is published by the National Federation of Independent Business Research Foundation.
Real Manufacturing and Trade Sales: This indicator shows the level of engagement in the labour market, and the U.S. Bureau of Economic Analysis publishes it.

How to use the Employment Trends Index an analysis

The fact that the ETI aggregates most of the crucial labour market indicators makes it an ideal tool for analyzing the economy.

Since the labour market is considered one of the primary drivers of the economy, monitoring its trend can be used to detect the onset of recessions or recoveries. Here’s how. When the ETI is continually dropping, it indicates that the labor market conditions are worsening progressively. This condition is accompanied by a constant drop in the aggregate demand and supply, most consumer discretionary industries will go out of business, and the economy will progressively contract. Conversely, during a period of economic recession, an increase in the ETI signifies that the economy is on a recovery path.

An increase in the ETI does not necessarily mean that each of the underlying eight labour maker indicators improved. A higher ETI could mean that most of these indicators were positive, or they all were. In either of these instances, it means that the overall labour market is improving – it shows that labour conditions are improving. One of the most notable impacts of an improving labour market is the improvement of households’ welfare, which increases the aggregate demand and supply in the economy.

Source: St. Louis FRED

Conversely, a dropping ETI could be caused by a majority of the underlying labour market indicators being negative or all of them being negative. In either of these instances, the labor markets’ conditions are deteriorating, a condition usually punctuated with higher unemployment levels.

Impact on Currency

The ETI could be associated with contractionary and expansionary monetary and fiscal policies. Here are some of the ways that the ETI could impact a country’s currency. A continually increasing ETI means that the labour market has been enjoying a long period of constant growth. Such an instance signifies that the economy has been expanding, the welfare of households improving, and the unemployment levels low.

In any economy, if these conditions are not sustainable, an overheating economy with unsustainable levels of inflation becomes prevalent. In this case, the governments and central banks may be induced to implement contractionary monetary and fiscal policies. Thus, in the forex market, an increasing ETI can be a precursor for higher interest rates, which makes the currency appreciate relative to others.

A constantly dropping ETI is negative for the currency. The dropping ETI means that the overall labour market has been performing poorly. It means that more people are losing their jobs, wages are low, overall aggregate demand is dropping, and the economy is shrinking. With higher unemployment levels, governments and central banks tend to implement expansionary fiscal and monetary policies to stimulate demand and prevent the economy from sinking into a recession. These expansionary policies, such as lowering interest rates, makes the currency drop in value relative to others. In the U.S., the ETI data is published monthly by The Conference Board.

How the Employment Trends Index Report Release Affects Forex Price Charts

The latest release of the ETI report was on September 8, 2020, at 10.00 AM ET and accessed at Investing.com. The screengrab below is of the monthly ETI from Investing.com. To the right is a legend that indicates the level of impact the fundamental indicator has on the USD.

As can be seen, low volatility is to be expected.

In August 2020, the ETI was 52.55 and increase from 51.37 in July 2020.

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

EUR/USD: Before the ETI Report Release | September 8, 2020. Before 10.00 AM ET

As seen in the above EUR/USD chart, the pair went from trading in a neutral trend to a steady downtrend. The 20-period M.A. is steeply falling with candles forming further below it.

EUR/USD: After the ETI Report Release on September 8, 2020, at 10.00 AM ET

After the ETI report release, the pair formed a bearish 5-minute “Doji” candle. Subsequently, the pair adopted a weak bullish trend with candles forming just above the 20-period M.A.

Bottom Line

In the forex market, traders rarely pay close attention to the ETI. Most traders prefer gauging the underlying aggregated indicators separately, which explains the lack of impact by releasing the ETI report since the index shows what traders already know. It only serves to show the trend.

Categories
Forex Fundamental Analysis

What Should You Know About ‘Social Security Rate For Companies’ Forex Fundamental Indicator?

Introduction

Social Security Program is one of the most extensive Government programs in the world that pays out billions of dollars to its citizens each year. Social Security is a macroeconomic program intended to act as a safe-net for active workers of the United States. Changes related to this program tends to affect the majority of the population. Hence, understanding its role and impact on the living conditions of people can give us a better insight into how such programs work.

What is Social Security Rate For Companies?

Social Security Program: The Social Security Program is designed to facilitate retirement benefits, survivor benefits, and disability income for the citizens of the United States. It is run by the federal agency known as Social Security Administration. Social Security is the word used for the Old-Age, Survivors, and Disability Insurance (OASDI) program.

The program was born on August 14, 1935, where President Franklin D. Roosevelt signed the Social Security Act into law of the United States. Since then, the program has continuously evolved and changed significantly over the years. It is a government insurance program designed to act as a safety net for the working population in the United States.

To be eligible for the Social Security retirement benefits, the worker must have an age of 62 at a minimum and should have enrolled and paid into the program for ten years or more. Workers who wait till later ages like 66 or 70 receive higher and higher benefits accordingly.

Apart from the worker himself, a divorced spouse can also be eligible for benefits provided she has not remarried, and their marriage lasted over ten years. Similarly, children of retirees can also be eligible until the age of 18, which can be longer in the case of disability or child being a student.

Social Security Tax: It is the tax levied upon both the employer and employee to fund the Social Security Program (SSP). It is collected as a payroll tax as mandated by the Federal Insurance Contributions Act (FICA) and the Self-Employed Contributions Act (SECA).

Social Security Rate: For the year 2020, the Social Security Rate is 12.4% that is evenly divided between the employee and the employer. It implies the Social Security Rate for Companies is 6.2%.  Social Security Tax is levied on the earned income of employees and self-employed taxpayers. Employers generally withhold this tax from the employee’s paycheck and forward it to the Government.

It is also worth mentioning that there is a tax cap to the Social Security Fund. For 2020, the Social Security tax cap is $137,700, meaning any income earned above 137,700 is not subject to the Social Security tax.

How can the Social Security Rate For Companies numbers be used for analysis?

Social Security is regressive, meaning it takes a more significant percentage of income from low-income earners than their higher-income counterparts. It occurs because of the tax cap, as mentioned earlier, due to which higher-income earner’s portion of income is not subject to this tax deduction.

The collected funds are not stored for the currently paying employee; instead, they are used for the retirees currently eligible for collection. Some have raised concerns on this way of approach when the baby boomer generation starts to collect its benefits, then the ratio of paying to the collecting people would be tipped off. It would mean that more people are collecting benefits than the people paying into it.

Hence, a common worry in the 21st century is the insolvency of the Social Security Funds due to the increased life expectancy of people and decreasing worker-retiree ratio. Proposed solutions to this from analysts were to increase the current rate to keep the program funded. Still, politicians are hesitant to endorse it due to fear of backlash or negative sentiment outburst from the public.

The 2020 report from the OASDI trustees projects that the retirement funds would be depleted by 2035 and disability funds in 2065. When that occurs, the taxes would not be enough to fund the entire Social Security program, and the Government needs to fill this gap. It may result in higher taxes on workers, fewer benefits, higher age requirements, or a combination of these.

For companies, an increase in Social Security Taxes directly cut down their profit margin, and hiring is more expensive. As a result, companies would be forced to keep employees only when required to avoid losses. Hence, Tax rates have a cascading effect on business profitability for companies as well as employment rates for the United States. When Social Security Taxes increase, the income offered to the employees is also affected, which can discourage personal consumption and spending for the working citizens.

Impact on Currency

The Social Security Rate for the Companies and the employees are revised every year. For consecutive years it tends to remain constant and tends to change in small incremental steps over a few years at a time. Hence, the volatility induced in the currency markets is almost zero to negligible most of the time unless significant changes occur. The changes also would be priced in through news updates into the market long before we receive official statistics.

Hence, Social Security Rate is a low-impact indicator and can be overlooked for more frequent statistics for the FOREX markets.

Economic Reports

The U.S. Social Security Administration provides the complete historical data of the Social Security tax rates for both the employee and employer on its official website. The Organization for Economic Co-operation and Development (OECD) also maintains the same for its member countries on its official website.

Sources of Social Security Rate For Companies

Social Security Rates for companies can be found on the Social Security Administration website.

Social Security Rates for employees can be found on the OECD’s official website.

Social Security Rates for companies (similar policies with different names) across the world can be found on Trading Economics.

How Social Security Rate for Companies News Release Affects Forex Price Charts

By law, companies are required to contribute half of the social security rate that their employees contribute. In the U.S., this rate for companies in 7.65% for each employee on the payroll for up to $ 137,700 per employee. This rate is reviewed annually and has remained unchanged in the U.S. for the past 25 years. For forex traders, this release of this rate in the U.S. is considered a non-news event since it is not expected to impact the forex market.

The screen capture below shows the current social security rate for companies in the U.S. taken from Trading Economics.

The latest review of the U.S. social security rate was on October 10, 2020, at 4.00 PM ET, and the press release can be accessed here.

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

EUR/USD: Before social security rate release October 10, 2020, 
just before 4.00 PM ET

As can be seen on the above 15-minute EUR/USD chart, the pair is on a weak downtrend before the news release. This downtrend is evidenced by the candles forming slightly below the 20-period Moving Average between 12.00 PM and 3.45 PM ET. Furthermore, the Moving Average appears to be flattening.

EUR/USD: After social security rate release October 10, 2020,
at 4.00 PM ET

As expected, there was no market volatility after the news release about the social security rate for 2020. The chart above shows a 15-minute “Doji” candle forming after the news is released. The pair later traded on a neutral pattern as the 20-period Moving Average flattened. The news release about the social security rate for companies did not have any impact on the price action of the EUR/USD pair.

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

GBP/USD: Before social security rate release October 10, 2020, 
just before 4.00 PM ET

Before the news release, the GBP/USD pair is on a steady uptrend, as shown by the chart above. An hour to the release, the uptrend became subdued, and the pair adopted a neutral pattern.

GBP/USD: After social security rate release October 10, 2020, 
at 4.00 PM ET

After the news release, the pair forms a 15-minute “Doji” candle. It continues to trade in the neutral pattern observed earlier.

AUD/USD: Before social security rate release October 10, 2020, 
just before 4.00 PM ET

 AUD/USD: After social security rate release October 10, 2020, 
 at 4.00 PM ET

The AUD/USD pair shows a similar neutral trading patter as the EUR/USD and GBP/USD pairs before the news release. This trend is evidenced by the 15-minute candlesticks forming around a flattening 20-period Moving Average between 1.00 PM and 3.45 PM ET. After the news release, the pair forms a 15-minute “Shooting star” candle and continues to trade in the same neutral pattern as before.

From the above analyses, it can be seen that the news release of the social security rate for companies does not have any impact on the price action.

Categories
Forex Fundamental Analysis

Understanding What ‘GDP Deflator’ Is & Its Relative Impact On The Forex Market

Introduction

Investors and traders are continuously trying to determine which country is growing relatively faster to make currency investment decisions. Assessing growth for capitalist economies that use inflation as fuel can be tricky to understand. The differentiation between nominal and real growth, effects of inflation, and the role of a deflator are necessary to understand to arrive at correct conclusions from statistics.

What is GDP Deflator?

Most of the economies that we have today are capitalist economies and use inflation as the primary fuel for growth. Currency traders want to go “long” on currencies of countries that are experiencing relatively higher growth than other countries. Hence, a correct assessment of growth is crucial.

The broadest and most widely used measure of the growth of economies is the Gross Domestic Product (GDP). The GDP is the monetary measure of all goods and services produced within a country for a given period (quarter or year). Although, before GDP, Gross National Product (GNP) was widely used to compare growth amongst economies. GNP measures growth beyond borders and has certain limitations in its usage as a growth measure.

GDP Deflator

It is also known as GDP Price Deflator or Implicit price deflator. It measures the price changes in all goods and services produced within an economy. It measures inflation at the macroeconomic (or national) level. As prices of commodities increase over time, the GDP values are “inflated” over time.

For instance, a country that has a GDP of 10 million dollars for the year 2019 and 12 million dollars for the year 2020 would appear to have grown 20%. If the inflation rate for the duration was 10%, meaning the prices rose by 10% for all the commodities, then 1 million dollars out of 12 million dollars came purely through increased prices and not increased production. Hence, in 2020, the real GDP was only 11 million dollars. Therefore, real growth was only 10% instead of 20%.

The Nominal and Real GDP figures are vital to understand and measure the level of inflation by calculating the GDP deflator. The following formula gives the GDP deflator:

Here, the nominal GDP is the total dollar value of all commodities produced in an economy without accounting for inflation. It is a direct monetary measure of goods and services. Real GDP is the inflation-adjusted value of GDP. It strips away the effect of inflation from Nominal GDP to show real growth.

Deflators like the Real GDP also have a base year against which all other years’ figures are compared. For the United States, 2012 is the base year, meaning GDP deflator value for the year 2012 would be 100 (as nominal and real GDP would be equal due to zero inflation). Subsequent years will have higher or lower values accordingly to indicate inflation and deflation, respectively. The base year varies from country to country.

How can the GDP Deflator numbers be used for analysis?

It is essential to understand how inflation masks the real growth and leads us to make the wrong conclusions. As seen in the above example, countries may show higher and higher GDP figures, but in reality, they may have only achieved little or no growth at all. When comparing growth over several years, the GDP deflator is key to the analysis to strip away the effects of inflation. By employing the equation above, if we get a deflator score of say 110, it would indicate there is a 10 percent inflation during the observed period.

The Consumer Price Index (CPI) is the most popular and widely used indicator to measure inflation. The GDP deflator has some advantages over the CPI. As the CPI measures inflation for a fixed basket of goods and services, which does not change frequently, the GDP is a macroeconomic aggregate measure of inflation. The GDP deflator factors in any change in economic output and investment patterns. Any new change in the goods produced or change in the consumption patterns of people is accounted in by the GDP deflator, unlike CPI. The CPI basket is static and cannot account for commodities price changes that are not in the basket, whereas the deflator is all-inclusive in this regard.

It is also necessary to know that CPI includes the most commonly used goods and services that have an impact on the economy. It updates its basket as patterns change over the years. Hence, over time the GDP deflator and the CPI have similar trends and can be used interchangeably.

Impact on Currency

The GDP deflator is a basic measure of inflation that erodes currency value. It is an inversely proportional lagging indicator. High values of the deflator are bad for the currency value and vice-versa. Since it is one of the measures of inflation, it is a low-impact lagging indicator as it is not as popular and as frequent as the CPI. It is a quarterly statistic, whose effects are already priced in through more frequent inflation measuring statistics.

Economic Reports

The Bureau of EA releases quarterly reports of the GDP price deflator alongside the quarterly GDP figures on its official website for the United States. GDP and deflators are essential macroeconomic indicators, and therefore are available on the World Bank and many other international organizations like the OECD, IMF, etc.

Sources of GDP Deflator

The BEA releases its quarterly GDP deflator statistics on its official website for the public.

The World Bank also maintains GDP and GDP deflator statistics for most countries on its official website.

Deflator figures for most countries can be easily found on the Trading Economics website.

How GDP Deflator Data Release Affects The Price Charts

In the US, the GDP deflator is released by the Bureau of Economic Analysis quarterly, about 30 days after the quarter ends. It measures the annualized change in the price of all goods and services included in gross domestic product; and is the broadest inflationary indicator. The most recent data was released on July 30, 2020, at 8.30 AM ET can be accessed at Investing.com here. An in-depth review of the GDP deflator data release can be accessed at the Bureau of Economic Analysis website.

The screengrab below is of the GDP deflator from Investing.com. On the right, a legend indicates the level of impact the fundamental indicator has on the USD.

As can be seen, GDP deflator data is expected to have a medium impact on the USD after its release.

The screenshot below shows the most recent changes in the GDP deflator in the US. The GDP deflator changed by -2.1%, worse than analysts’ expectations of a 1.1% change. This change is expected to the negative for the USD.

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

EUR/USD: Before the GDP Deflator Data Release on July 30, 
2020, Just Before 8.30 AM ET

Before the news release, the EUR/USD pair traded in a neutral pattern. This trend is evidenced by the 15-minute candles forming on an already flattened 20-period Moving Average, as shown in the above chart.

EUR/USD: After the GDP Deflator Data Release on July 30, 
2020, at 8.30 AM ET

After the data release, the pair formed a 15-minute “hammer” candle. This trend is as expected since the USD weakened against the EUR. The data release was significant enough to cause a change in the market trend. The market adopted a steady bullish stance as the pair traded in an uptrend with the 20-period Moving Average steeply rising.

GBP/USD: Before the GDP Deflator Data Release on July 30, 
2020, Just Before 8.30 AM ET

Unlike the EUR/USD pair, the GBP/USD pair was trading in a steady uptrend before the data release.

GBP/USD: After the GDP Deflator Data Release on July 30, 
2020, at 8.30 AM ET

After the data release, the pair formed a bullish 15-minute candle. It subsequently traded in a renewed uptrend with the 20-period Moving Average steeply rising similar to the EUR/USD pair.

NZD/USD: Before the GDP Deflator Data Release on July 30, 
2020, Just Before 8.30 AM ET

NZD/USD: After the GDP Deflator Data Release on July 30, 
2020, at 8.30 AM ET

The NZD/USD pair was trading in a similar neutral pattern as the EUR/USD pair before the data release. Similar to the EUR/USD and the GBP/USD pairs, the NZD/USD pair formed a 15-minute bullish candle after the data release. Subsequently, the pair adopted an uptrend with the 20-period Moving Average steadily rising.

Bottom Line

As observed in this analysis, the GDP deflator has a strong impact on the price action, enough to alter the prevailing market trend upon its release. Forex traders should avoid having any significant open positions before the GDP deflator data release to avoid being caught on the wrong side of the news release.

Categories
Forex Fundamental Analysis

What Should You Know About ‘Loans to Private Sector’ Fundamental Forex Driver

Introduction

Private Sector has a significant and crucial role to play in the economic growth of capitalist economies. The development of private sectors can single-handedly drive the GDP and development of the country forward. Credits and loan availability to the private sector can significantly impact the pace of expansion of the country. Hence, an analysis of the loans disbursed to the private sector can offer us much insight into the country’s growth.

What are Loans to Private Sector?

Loan

It is a credit incurred by an individual or entity. The creditor is generally a financial institution or the Government. The lenders give borrowers money on certain conditions that can include terms relating to the repayment date, interest charges, or other transactional fees. A loan can be secured or unsecured. In secured loans, the loan is given out against collateral like property, mortgages, or securities.

Private Sector

It refers to the part of the economy, which is not under state or central government’s control. The private sector industries are mostly privately owned and for-profit businesses. Private sectors can produce productive jobs, higher income, productivity growth. When private sectors are complemented with the Government sector’s support, the growth rate is multiplied many folds.

Loans to Private Sector

It refers to credits provided to the private sector by financial corporations. Credit can be as loans, nonequity securities purchases, and trade credits, etc. Financial corporations here can be monetary authorities (ex: Central Banks), finance and leasing companies, lenders, pension funds, insurance companies, and foreign exchange companies.

How can Loans to Private Sector numbers be used for analysis?

Most modern economies are capitalist economies, i.e., most of the GDP is derived from the private sector that operates on profitability. Economic indicators like employment, wage growth, the standard of living, GDP, etc. are all heavily dependent on the private sector. In the United States, the private sector contributes more than 85% of the total GDP. Hence, private sector growth is almost equivalent to the country’s growth.

In capitalist economies, the private sectors are competitive, provide high employment, better income, and lie at the forefront of technological innovation in general. Due to competition amongst fellow business organizations, the benefits of working in the private sector far exceed that of the public sector.

Credit plays a vital role in the economic growth of capitalist economies. Credit serves as a crucial channel for money transmission from central authorities to the private sector. Loans can fund production, consumption, and capital formation for businesses that, in turn, generate revenue for the country.

Loans can help private businesses to expand beyond just the cash in hand and speed up their growth rate. The ease with which credit facilities are made available to the private sector will largely control the pace of economic growth. The Government and the Central Bank authorities’ support in providing credit to private industries have historically proven to be very beneficial for the state and country’s urbanization and rapid growth.

On the flip side, a decrease or lack of credit availability can significantly impact small and medium businesses, resulting in halting expansion plans, laying off employees, or in the worst close filing bankruptcy.

The public sectors can only take care of the essential services and set rules and regulations in different areas. The required development has to come from the private sector. But it is the private sector that can boost economic growth through investment, employment, competition, innovation, and better wages.

In the underdeveloped economies, the Government’s support in credit and business support to the private sector has mostly helped uplift people from poverty. In the developing economies, private sector investments have dramatically improved the standard of living for many countries like China, Japan, and India. Private sectors of developed countries already enjoy the support from the public and banking sector, which explains their high GDP and consistent growth rate.

Impact on Currency

An increase in loans to the private sector is a positive sign for the economy. It indicates more businesses are now creditworthy and are working on expansionary plans. A healthy increase in the number of loans to the private sector is good for the future economy. An increase in loans to the private sector also indicates the market is more liquid, and the currency will lose value for the same set of goods and services. Conversely, a decrease in loans to the private sector means the market is less liquid, and money is costly. Currency appreciates, but economic growth is difficult to achieve.

Loans to private sector statistics are useful for the Governments and international investors and companies to check the health of the private sectors in a particular economy. International companies open businesses where ease of doing business is high. For them, it is a useful indicator. Private Sector Loan is not a significant economic indicator for the FOREX markets. Hence it is a low impact indicator.

Economic Reports

The World Bank collects domestic credit data to the Private Sector as a GDP percentage on their official website. The dataset is annual and covers most countries. The datasets are updated once they receive the latest data from the respective countries.

Sources of Loans to Private Sector

The World Bank’s Domestic Credit to private sector reports is available here.

We can also find a consolidated list of Loans to the private sector on the Trading Economics website.

How Loans to Private SectorAffects The Price Charts?

Loans to the private sector is not a statistic most forex traders keep an eye when making their trades. The lack of interest is because it is considered a their-tier leading indicator. It is, however, essential to know how the release of this fundamental economic indicator affects the forex price charts.

The Eurozone private sector loans data is released monthly by the European Central Bank about 28 days after the month ends. It measures the change in the total value of new loans issued to consumers and businesses in the private sector. The most recent release was on July 27, 2020, 8.00 AM GMT can be accessed here. A more in-depth review of the economic news release can be accessed at the ECB website.

Below is a screenshot of the Forex Factory official website. On the right side, we can see a legend that indicates the level of impact the Fundamental Indicator has on the EUR.

As can be seen, low impact is expected on the EUR.

The screengrab below is of the most recent change in private loans in the EU. In June 2020, private loans grew by 3% as compared to the same period in 2019. This change represented a flat growth from the previous release. Based on our fundamental analysis, this should be positive for the EUR.

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

EUR/USD: Before Eurozone Private Sector Loans release on July 
27, 2020, Just Before 8.00 AM GMT

From the above chart, the EUR/USD pair is trading on a neutral trend before the data release. The candles are forming around the flattening 20-period Moving Average. This trend is an indication of relative market inactivity.

EUR/USD: After Eurozone Private Sector Loans release on July 
27, 2020, 8.00 AM GMT

After the news release, the pair forms a 15-minute bullish candle as EUR becomes stronger as expected. However, the news release was not strong enough to cause a shift in the pair’s trend since the pair continued to trade in the previously observed neutral trend.

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

EUR/JPY: Before Eurozone Private Sector Loans release on July 
27, 2020, Just Before 8.00 AM GMT

Before the news release, EUR/JPY traded in a similar neutral trend as observed with the EUR/USD with the candles forming around a flattening 20-period Moving Average.

EUR/JPY: After Eurozone Private Sector Loans release on July 
27, 2020, 8.00 AM GMT

As observed with the EUR/USD pair, EUR/JPY formed a 15-minute bullish candle after the news release as expected. The subsequent trend does now significantly shift.

EUR/CAD: Before Eurozone Private Sector Loans release on July 
27, 2020, Just Before 8.00 AM GMT

EUR/CAD: After Eurozone Private Sector Loans release on July 
27, 2020, 8.00 AM GMT

The EUR/CAD pair shows a similar neutral trading pattern as the EUR/USD and EUR/JPY pair before the news release. After the news release, the pair forms a 15-minute bullish candle but later continued trading in the earlier observed neutral trend as the 20-period Moving Average flattens.

Bottom Line

Loans to the private sector play a vital role in stimulating a country’s economic growth. From the above analyses, the release of the loan growth data has an instant short-term effect on the EUR. The data is, however, not significant enough to cause any relevant shift in the prevailing market trend.

Categories
Forex Fundamental Analysis

What Is GDP Annual Growth Rate & What Impact It Has On The Forex Price Charts?

Introduction

Apart from inflation, gross domestic product growth is one of the most closely monitored macroeconomic statistics. This interest in the GDP growth rate is because GDP is one of the leading indicators of economic health in any country. Therefore, apart from understanding how the GDP growth rate impacts a nation’s economy, forex traders must comprehend how it affects the exchange rate.

Understanding the GDP Annual Growth Rate

GDP: A country’s gross domestic product is the monetary measure of the entirety of goods and services that have been produced within an economy over a specific period. The formula for calculating the GDP for a country is summing up the households’ consumption expenditure, expenditure by the national government, spending by businesses, and the net value of exports. The fact that the GDP covers the entire expenditure within an economy makes it a robust leading indicator of economic health.

GDP Growth Rate: The measure of how the various components in an economy are changing over a given period is the GDP growth rate. The GDP growth rate shows how much a country’s economy has expanded or shrunk relative to the previous period. Thus, the GDP growth rate is the primary measure of how well or poorly an economy is performing.

GDP Annual Growth Rate: The GDP growth rate is calculated every quarter. However, the annual growth rate measures the change in the real GDP between a given quarter and a similar quarter in the previous calendar year. While the QoQ GDP growth rate gives a more recent picture of how the economy is fairing, the annual growth rate is necessary to indicate the longer-term trajectory of the economy.

How the GDP Annual Growth Rate is Measured

It is worth noting that the GDP annual growth rate is calculated using the “real” GDP, meaning that the GDP has been adjusted for inflation. This adjustment is made to ensure the effects of inflation do not result in a false sense of economic progression. There are two ways of determining the GDP annual growth rate.

The first one is by annualising the QoQ GDP growth rate. Annualising means converting the short term QoQ GDP growth rate into an annual rate.

Annualised GDP growth rate  = (1 + QoQ GDP)4 – 1

The second method for calculating the annual GDP growth rate is by comparing the rate of change from a given quarter with that of the same quarter in the previous year.

YoY GDP growth = (Current quarter GDP/ Similar Quarter's GDP – previous year) – 1

How the GDP Annual Growth Rate can be used for analysis

Economists track the GDP growth rate not just because it shows the current state of the economy but because it the primary objective of fiscal and monetary policy formulation. The annual GDP growth rate shows a long-term trajectory of the economy. It provides an effective measure to compare the sizes of economies of different countries.

Governments and central banks formulate their policies around the GDP growth numbers. When the YoY GDP is falling, expansionary monetary and fiscal policies that will be implemented. A falling GDP is an indicator that the economy is heading to higher levels of unemployment; reduced wages; and a general reduction in aggregate demand and supply. Therefore, to avoid recession, expansionary policies like a reduction in interest rates are introduced. These measures are reducing the cost of borrowing, which in turn leads to increased expenditure by households, businesses, and the government.

Conversely, a rapidly increasing growth rate of the annual GDP signifies that the economy is performing well. This economic prosperity translates to a higher rate of employment, higher wages; increased levels of investment and re-investments; and higher aggregate demand and supply within the economy. However, although an increasing GDP is good, a rapidly increasing annual growth rate could forebode an overheating economy.

An overheating economy is one that is experiencing an unsustainable period of prolonged economic growth. This prolonged growth risks high levels of runaway inflation in the economy due to the continually rising wages. More so, an overheating economy results in inefficient allocation of the factors of production since producers oversupply the economy to take advantage of the higher prices. These inefficiencies are likely to result in a nationwide economic recession.

To prevent the effects of an overheating economy, the government and central banks will implement contractionary monetary and fiscal policies. They include a reduction in government expenditure and increasing the interest rate. These policies will help slow down the rate of inflation and increase the cost of borrowing, effectively reducing the aggregate demand.

Therefore, the YoY GDP growth rate provides an important metric for the relevant authorities to ensure that the economy is progressing at a sustainable pace. Furthermore, it is a way for the governments and central banks to gauge the effectiveness of the policies put in place.

Impact on Currency

Forex traders keenly follow the changes in fundamental economic indicators to establish whether there will be a future hike or cut in the interest rate. A falling annual GDP growth rate is accompanied by expansionary monetary policies such as a reduction of the interest rate. This cut tends to depreciate a country’s currency. Therefore, a falling annual GDP growth rate is negative for the currency.

Conversely, an increasing annual GDP growth rate forestalls an increase in the interest rate to prevent runaway inflation. Therefore, it is expected that a rising annual GDP growth rate leads to the appreciating of the currency.

Sources of the GDP Annual Growth Rate

The statistics on global GDP annual growth rate can be accessed at Trading Economics and The World Bank.

How GDP Annual Growth Rate Data Release Affects The Forex?

This analysis will focus on the annual GDP growth rate in Australia. The most recent data release was on September 2, 2020, at 1.30 AM GMT and can be accessed at Forex Factory here. A more in-depth review of the data release can be accessed from the Australia Bureau of Statistics.

The screengrab below is of the annualised QoQ GDP growth rate from Forex Factory. On the right of the image is a legend that indicates the level of impact it has on the AUD.

As can be seen, both the annualised QoQ GDP growth rate data is expected o result in a high impact on the AUD.

In the 2nd quarter of 2020, the Australian economy contracted by an annualised rate of 7% compared to a 0.3% contraction in the first quarter. This contraction was worse than analysts’ expectation of 6%. This contraction is expected to depreciate the AUD relative to other currencies.

Let’s now analyse the impact made by this release on the Forex price charts of a few selected pairs.

AUD/USD: Before Annualised QoQ GDP Growth Rate Release on 
September 2, 2020, Just Before 1.30 AM GMT

From the above 15-minute chart, the AUD/USD pair was trading in a neutral trend before the data release. This trend is evidenced by candles forming just around an already flat 20-period Moving Average. However, 30 minutes to the news release, the pair adopted a steep downtrend forming two long bearish candles with the 20-period MA falling.

AUD/USD: After the Annualised QoQ GDP Growth Rate Release on 
September 2, 2020, at 1.30 AM GMT

After the data release, extreme volatility is observed. As expected, the pair forming a long 15-minute bearish candle due to the weakening AUD. The 20-period MA continued to fall steeply even though the pair started recovering from the worse than expected data release. Subsequently, the steepness of the 20-period MA subsided.

GBP/AUD: Before Annualised QoQ GDP Growth Rate Release on 
September 2, 2020, Just Before 1.30 AM GMT

The GBP/AUD pair traded in a similar pattern as observed with the AUD/USD pair before the annualised GDP data release.

GBP/AUD: After the Annualised QoQ GDP Growth Rate Release on 
September 2, 2020, at 1.30 AM GMT

As expected, after the news release, the pair formed a long 15-minute bullish candle due to the weakening AUD. As with the AUD/USD pair, the GBP/AUD pair underwent a period of correction with the 20-period MA flattening and the subsequent candles forming lower than the news candle.

EUR/AUD: Before Annualised QoQ GDP Growth Rate Release on 
September 2, 2020, Just Before 1.30 AM GMT

EUR/AUD: After the Annualised QoQ GDP Growth Rate Release on 
September 2, 2020, at 1.30 AM GMT

Like the other pairs, the EUR/AUD pair traded within a neutral trend with a significant shift in the trend immediately before the GDP data release. Like the GBP/AUD pair, the EUR/AUD pair formed a long 15-minute bullish candle after the news release due to the worse than expected data.

Bottom Line

The above analyses have shown that the GDP annual growth has a significant effect on price action. The period of relative market inactivity before the data release indicates that most forex traders avoid opening any new, significant positions until the data is released.

Categories
Forex Fundamental Analysis

What Should You Know About Industrial Production MoM Forex Indicator?

Introduction

Before the Service sector dominated the Industrial sector as a significant contributor to the GDP, it was the industrial production alone that was seen as a measure of economic growth. It still holds for many developing economies. Economies like China, Japan, India, etc. all had significant industrial revolutions that helped their countries to improve their economy. The industrial sector still contributes a considerable percentage to the economy and employs millions of people.

What is Industrial Production MoM?

Industrial Production: It refers to the total output produced by the industrial sector. Here the industrial sector consists of the mining, manufacturing, electric, and gas utility sectors. It is like a mini-GDP report for the industrial sector. By definition, it must be apparent that it primarily deals with tangible commodities or physical goods. On the other hand, The Service sector comprises of non-tangible entities largely.

The Industrial Production Index goes as back as 1919 if required, and is published by the Board of Governors of the Federal Reserve System in the United States. The extended time-frame availability of data makes it a more robust, reliable economic indicator as more data points are available relative to other sectors.

The data is aggregated by combining data in different units. Some of the data may be in dollar terms, some may be in tonnes (e.g., the weight of barrels of oils and steel), or inferred by the number of hours worked. The logged-in hours are obtained from the Bureau of Labor Statistics. It is expressed as a percentage of real output relative to a base period. The base year is currently 2012. The methodology incorporated to calculate the Industrial Production is the Fisher Ideal Index, where the contribution of each sector is weighted (the higher the contribution, the higher is the weightage in the index calculation).

Industrial Production Indices comes in YoY and MoM versions comparing production size with the previous year and month, respectively. The YoY figures deem more use to analysts and government officials to analyze the performance of the industrial sector for this financial year. The MoM (Month over Month) figures are useful for closely monitoring for the expected uptrends or downtrends during business cycles. The MoM figures are more useful for investors in this regard.

How can the Industrial Production MoM numbers be used for analysis?

We have to understand the significance of this statistic historically. Before the development of the service sector, i.e., before the era of computers and the internet, the most industrialized countries were the most advanced economies. Countries that had many factories manufacturing tons of commodities were seen as highly advanced economies back in the day. Hence, it is no surprise that at such times the Industrial Production figures were a direct measure for the economy’s economic activity and growth.

The general trend in economic growth has been that underdeveloped economies have the primary sector as a significant contributor to the GDP. The developing economies have the secondary sector (industrial sector) as the primary contributor to the GDP, while the developed economies have the tertiary (or service) sector.

For the United States, the Industrial Sector now contributes less than 20% to the overall GDP, while more than 80% comes from the Service sector itself. Although it may sound like only 20%, it is only in comparison, but individually the industrial sector is in itself huge and employs millions of people. 15-20% is still a significant contribution, and that is the reason why it is still being published as well as analyzed by investors, traders, analysts frequently to infer significant economic conclusions.

With machine automation, the advancement of technologies, and the introduction of artificial intelligence, many traditional jobs in the industrial sector are getting replaced. This trend is likely to continue further down the line. As of now, the Industrial Production figures bear some relevance, though it is only a matter of time that its contribution further falls and is overlooked by investors and analysts.

(Image Credit: St. Louis FRED)

The industrial sector is more sensitive to business cycles as well as economic shocks, as evident from the historical plot. The current COVID-19 pandemic has had a more significant impact on the industrial sector than the service sector due to the nature of business.

Impact on Currency

Since the Industrial Production figures only account for a few sectors of the economy, hence it is not a macroeconomic indicator encompassing all industries into its statistics. For this reason, the relative significance of this indicator in the currency markets is less. Whereas, investors looking to invest in stocks of companies belonging to the Industrial sector use Industrial Production MoM figures to make investment decisions. Overall, it is a low-impact coincident indicator that bears no significant volatility in the currency markets but has a significant influence on the equity markets.

Economic Reports

The Board of Governors of the Federal Reserve System publishes reports of the Industrial Production statistics as part of its monthly “G.17 Industrial Production and Capacity Utilization” report on its official website. It is released around the 15th of the month for the previous month. It is a preliminary estimate and is annotated with a superscript ‘p’ in the tables. It is subject to revision in the subsequent five months as more data becomes available. The report details both seasonally adjusted and unadjusted versions for our convenience.

Sources of Industrial Production MoM

The Federal Reserve publishes Industrial Production MoM reports on its official website. The same statistics are available with more tools for analysis on the St. Louis FRED website. Similar Industrial Production MoM statistics for most countries is available on the Trading Economics website.

How the Monthly Industrial Production Data Release Affects The Price Charts

In the US, the monthly industrial production data is released by the Federal Reserve about 16 days after the month ends. It measures the change in the total inflation-adjusted value of output produced by manufacturers, mines, and utilities. The most recent data was released on August 14, 2020, at 9.15 AM ET and can be accessed at Investing.com here. An in-depth review of the industrial production data release can be accessed at the Federal Reserve website.

The screengrab below is of the monthly industrial production from Investing.com.

As can be seen, the industrial production data is expected to have a low impact on the USD upon its release.

The screenshot below represents the most recent changes in the monthly industrial production in the US. In July 2020, the US industrial production increased by 3% down from a 5.7% increase in June. This change was in line with analysts’ expectations of a 3% change. Therefore, this is expected to be positive for the USD.

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

EUR/USD: Before the Monthly Industrial Production Data Release 
on August 14, 2020, Just Before 9.15 AM ET

Before the data release, the EUR/USD pair was trading in a renewed uptrend with the 15-minute candles forming above a steadily rising 20-period Moving Average. This pattern indicates that the USD was weakening against the EUR.

EUR/USD: After the Monthly Industrial Production Data Release 
on August 14, 2020, at 9.15 AM ET

As expected, the pair formed a 15-minute bearish candle after the data release indicating a  momentary strength in the USD. The data was, however, was not significant enough to bring forth a change in the trading pattern. The pair continued trading in the earlier observed uptrend with the 20-period Moving Average steadily rising.

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

NZD/USD: Before the Monthly Industrial Production Data Release 
on August 14, 2020, Just Before 9.15 AM ET

Similar to the trend observed with the EUR/USD pair, the NZD/USD was trading in an uptrend before the data release. The 20-period Moving Average can be seen to be steadily rising in the above 15-minute chart.

NZD/USD: After the Monthly Industrial Production Data Release 
on August 14, 2020, at 9.15 AM ET

After the data release, the pair formed a 15-minute bearish candle. As observed with the EUR/USD pair, NZD/USD continued trading in the earlier observed uptrend with the 20-period Moving Average steeply rising.

AUD/USD: Before the Monthly Industrial Production Data Release 
on August 14, 2020, Just Before 9.15 AM ET

AUD/USD: After the Monthly Industrial Production Data Release 
on August 14, 2020, at 9.15 AM ET

Before the data release, the AUD/USD pair was trading in a similar uptrend pattern as the EUR/USD and NZD/USD pairs. After the data release, the pair formed a 15-minute bearish candle and subsequently continued trading in the earlier observed uptrend similar to the other pairs.

Bottom Line

The monthly US industrial production data an important leading indicator of the economy’s health. From this analysis, however, while the data release affects the USD, it is not significant enough to cause a shift in the prevailing market trend.

Categories
Forex Fundamental Analysis

Importance of ‘Lending Rate’ News Announcement on the Forex market

Introduction

The ease with which money can be obtained within a country primarily drives the business sector and consumer spending. Consumer Spending and Businesses mostly make up the GDP of a country. Hence, understanding Lending Rates and its impact on the economy can help us build our fundamental analysis better.

What is Lending Rate?

Lending Rate: The rate at which a bank or a financial institution charges its customers for lending money. It is the fee that is to be paid by the customer for the borrowed money. Bank Lending Rate, in general, is the Bank Prime Rate.

Bank Prime Rate: It is the rate of interest that banks charge their most creditworthy customers. It is the lowest interest rate at which banks generally gives out loans. On the receiving end usually are large corporations with a good track record with the concerned bank. Generally, the loans taken are also huge.

Other forms of loans like house mortgage, vehicle loans, or personal loans, are all either partly or wholly based on the prime rate. It is also important to note that the Central Bank’s interest rates set the bank lending rate. For the United States, the Federal Reserve’s, the Federal Open Market Committee (FOMC) determines the target fed funds rate.  Fed funds rate will ultimately influence all the Bank lending rates on account of competition.

How can the Lending Rate numbers be used for analysis?

Banks and financial institutions are the primary source of money for businesses and consumers across the country. Hence, Bank Lending Rates can mainly drive business direction and influence consumer spending.

The Central Banks will influence the interest rates through their open-market operations in the inter-bank market by purchasing or selling bonds. When Central Banks buy bonds, they inject money into the economy, thereby effectively inducing inflation. It is popularly referred to as the “Dovish” approach. When the Central Bank sells bonds, it is effectively withdrawing money from the economy, making money scarce and costly to borrow. It is popularly referred to as the “Hawkish” approach.

When the Central Bank wants to deflate the economy, they will sell bonds, and when they decide to inflate, they will effectively buy bonds. In the private sector, Consumer Spending makes up about two-thirds of the United States’ GDP, and the rest is mostly by the business sector. The ease with which money is made available to people and business organisations affects the economy in a big way.

When lending rates are low, businesses can procure loans easily; they can run, maintain, and expand their current businesses. On the other hand, when the lending rates are high, only the high-end companies can procure loans. Meanwhile the rest of the business struggle to stay afloat in the deflationary environment. Businesses would be forced to keep their expansionary plans on halt when loan rates are high.

Consumers are also encouraged to take on loans when the rates are low. It promotes consumer spending, which, in turn, boosts local business. On the other hand, when interest rates are high, consumers would tend to save more spend less. When spending is less, businesses also slow down, especially sectors that do business with non-essentials like entertainment, luxury, or recreation.

On the international scale, the lending rates and deposit rates of banks from different countries also drive the flow of speculative money from international investors. When the lending rate in one country’s bank is lower than the deposit rate in another country’s bank, investors can generate revenue through a “carry.” Investors will borrow from the low-yielding currency bank and deposit in the high-yielding currency bank. The difference between these two rates is the margin they make.

The above plot shows the actual plot between the interest rates differential (AUS IR – USA IR) and the AUD USD exchange rate. As we can see, whenever the difference between the interest rates rises in favour of AUD, the exchange rate tends to follow. There is a strong correlation between both in the long run.

Since the Central Bank’s interest rates primarily determine all the lending rates (all types), investors generally calculate interest rate differentials by subtracting interest rates of two countries to see potential “carry” opportunities. Hence, when low-interest rates are prevalent, currencies lose value, on account of inflation and also outflow of money into other countries where deposit rates are higher.

Overall, the lending rates and deposit rates together move the currency markets in favour of the country’s currency, having higher deposit rates.

 Impact on Currency

The underlying Central Bank interest rates influence lending rates. The market is more sensitive to Central Bank interest rate changes than the bank lending rates. The lending rates of banks are also not as immediate as the Central Bank’s interest rate changes. Hence, although lending rates impact the economy, its effects are only apparent after about 10-12 months.

Hence, Lending rates are a low-medium impact indicator in the currency markets, as the leading indicator Central Bank interest rates take precedence over bank lending and deposit rates.

Economic Reports

The lending rates of banks can be found from the respective banks from which we would want to borrow money. For the United States, the Federal Reserve publishes Monday to Friday the daily Interest Rates in its H.15 report at 4:15 PM on its official website. Weekly, Monthly, Semi-annual, and Annual rates of the same are also available. The average Bank Prime Rates are also available in the same report.

Sources of Lending Rate

The United States Fed Fund Rates are available here. The prim Bank Loan Rate is available in a more consolidated and illustrative way for our analysis in the St. Louis FRED website. Consolidated Bank Lending Interest Rates of different countries are available here.

How Lending Rates Affects Price Charts

The lending rates can either create expansionary or contractionary effects within an economy.  Let’s now have a look at how it affects the price action in the forex market. In the US, lending rates entirely depend on the Federal Reserve’s Fund Rate. On March 4, 2020, the lending rates were cut from 4.75% to 4.25%. This cut coincided with the Federal Reserves’ interest rate cut from 1.75% to 1.25% on March 3.

On March 16, 2020, the lending rates were reduced from 4.25% to 3.25%. This cut coincided with the Federal Reserves’ interest rate cut from 1.25% to 0.25% on March 15.

For this reason, the lending rates rarely affect the price action in the forex markets.

In the US, the Bank Prime rate is published every weekday at 4.15 PM ET. Below is a screengrab from the US Federal Reserve showing the latest bank prime rates.

As can be seen, the rate has remained at 3.25% from March 16, 2020. For this analysis, we will consider if the change on March 16, 4.15 PM ET from 4.25% to 3.25% had any effect on the price action of selected currency pairs.

EUR/USD: Before Lending Rate Change on March 16, 2020, 
Just Before 4.15 PM ET

Between 10.00 AM and 4.00 PM ET, the EUR/USD pair was on a neutral trend. This neutral trend is shown on the 15-minute chart above with bullish and bearish candles forming slightly above the flattening 20-period Moving Average.

EUR/USD: After Lending Rate Change on March 16, 
2020, 4.15 PM ET

As shown by the chart above, the EUR/USD pair formed a slightly bullish 15-minute candle after the daily release of the lending rates. As earlier mentioned, the release of the lending rates is not expected to have any significant impact on the price action. This sentiment is further supported by the lack of change in the prevailing trend after the news release since the pair continued trading on a neutral stance.

GBP/USD: Before Lending Rate Change on March 16, 2020, 
Just Before 4.15 PM ET

The GBP/USD pair showed a similar neutral trading pattern as the EUR/USD pair between 1.00 PM and 4.00 PM ET. This pattern can be seen on the above 15-minute chart with candles forming on the flat 20-period Moving Average.

GBP/USD: After Lending Rate Change on March 16, 
2020, 4.15 PM ET

After the news release, the pair formed a slightly bearish 15-minute candle but continued trading in the earlier neutral trend.

NZD/USD: Before Lending Rate Change on March 16, 2020, 
Just Before 4.15 PM ET

NZD/USD: After Lending Rate Change on March 16, 
2020, 4.15 PM ET

Unlike the EUR/USD and the GBP/USD pairs, the NZD/USD pair had a steady downtrend between 12.15 PM and 4.00 PM ET. After the release of the daily lending rates, the pair formed a bullish 15-minute candle, but just like the other pairs, the news was not significant enough to change the prevailing market trend.

As we noticed earlier, the lending rates move in tandem with the Federal funds rate. Since the lending rates have always remained unchanged in the market and forex traders have anticipated this, hence the lack of volatility accompanying the news release.

Categories
Forex Fundamental Analysis

Everything About ‘Households Debt to Income’ as a Macro Economic Indicator

Introduction

Households Debt to Income is another metric that is used to assess the relative wealth and standard of living of people in the nation. It can give us hints on the spending patterns and circulation of currency and liquidity of the nation overall. Hence, Households Debt to Income ratio is beneficial for economists, investors, and also to deepen our foundation in fundamental analysis.

What is Households Debt to Income?

Debt-to-Income (DTI): The DTI is an individual financial measure that is defined as the ratio of total monthly debt payments to his monthly gross income.

Gross income refers to the income received from the employer or workplace and does not include any of the tax deductions.

The DTI is calculated using the below-given formula.

Disposable Personal Income (DPI): Disposable Personal Income, also called After-Tax Income, is the remainder of an individual’s income after all federal tax deductions. Hence, It is the amount people are able to spend, save, or invest.

Household Debt Service Ratio and Financial Obligations Ratio: The household Debt Service Ratio (DSR) is the ratio of total household debt payments to Disposable Personal Income (DPI).

Mortgage DSR: It is the total quarterly required mortgage payments divided by total quarterly Disposable Personal Income.

Consumer DSR: It is the ratio of aggregate quarterly scheduled consumer debt payments to total quarterly Disposable Personal Income (DPI). The Mortgage DSR and the Consumer DSR together form the DSR.

Financial Obligations Ratio: It is a broader measure than the Debt Service Ratio (DSR) as it takes into account rent payments, auto lease deductions, house owners’ insurance, and property tax.

How can the Households Debt to Income numbers be used for analysis?

DTI is a personal financial metric that is used by banks to determine the individual’s credit eligibility. A DTI ratio should be no more than 43% to be eligible for mortgage credit, but most banks prefer 36% as a healthy DTI ratio to lend money.

The household Debt Service Ratio & Financial Obligations Ratio is more useful, and large scale public data releases for fundamental analysis. The proportion of income that goes into servicing debt payments determines Discretionary Income, Personal Savings, and Personal Consumption Expenditures. Higher the Households Debt to Income ratio, the lesser the money available for other needs.

The Households Debt to Income measures the degree of indebtedness of Households, or in other words, it measures the burden of debt on Households people. The higher the numbers, the greater the load and lesser freedom to spend on other things. As debt burden increases, Discretionary Spending (i.e., for personal enjoyment) decreases, and the income is used entirely to meet the necessities only.

An increase in DPI or decrease in debt payment (by foreclosure or servicing all installments at once) is the two ways to reduce the Debt to Income percentage.

The Households Debt to Income is an essential metric for Government and Policymakers as dangerously high levels in these figures is what led to the financial crisis of 2008 in the United States.

Impact on Currency

High Households Debt to Income figure slows down the economy as debt durations are usually serviced for years. Higher numbers also indicate decreased spending as people spend more money to save and to maintain repayments. This cut back on expenditures results in slowing down businesses, especially those based on Discretionary items (ex: Fashion, entertainment, luxury, etc.) take a severe hit. The overall effect would be a lower print of  GDP, and in extreme cases, it can result in a recession.

Households Debt to Income is an inverse indicator, meaning lower figures are good for economy and currency. The numbers are released quarterly due to which the statistics are available only four times a year, and the limitations of the data set make it a low impact indicator for traders. It is a long-term indicator and shows more of a long-term trend. It is not capable of reflecting an immediate shift in trends due to which the number’s impact is low on volatility and serves as a useful indicator for long-term investors, economists, and policymakers.

Economic Reports

The Board of Governors of the Federal Reserve System in the United States releases the quarterly DSR and FOR reports on its official website. The data set goes back to 1980.

DSR & FOR Limitations: The limitations of current sources of data make the calculation of the ratio especially tricky. The ideal data set for such an estimate requires payments on every loan held by each household, which is not available, and hence the series is only the best estimate of the debt service ratio faced by households. Nonetheless, this estimate is beneficial over time, as it generates a time series that captures the critical changes in the household debt service burden. The series are revised as better data, or improved methods of estimation become available.

Sources of Households Debt to Income

The DSR and FOR figures are available here:

DSR & FOR – Federal Reserve

Graphical and Comprehensive summary of all the Households Debt related are available here:

St. Louis FRED – DSR & FOR

Households Debt to Income for various countries is available here:

Households DTI – TradingEconomics

How Households Debt to Income Affects The Price Charts

Within an economy, the household debt to income is vital to indicate the consumption patterns. In the forex market, however, this indicator is not expected to cause any significant impact on the price action. The household debt to income data is released quarterly in the US.

The latest release was on July 17, 2020, at 7.00 AM ET. The screengrab below is from the Federal Reserve website. It shows the latest household debt service and financial obligations ratios in the US.

The debt service ratio for the first quarter of 2020 decreased from 9.7% in the fourth quarter of 2019 to 9.67%. Theoretically, this decline in the debt to income ratio is supposed to be positive for the USD.

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

EUR/USD: Before Households Debt to Income Release on June 17,
2020, Just Before 7.00 AM ET

Before the news release of the household debt to income, the EUR/USD pair was trading on a steady downtrend. This trend is evidenced by the 15-minute candles forming below the 20-period Moving Average, as shown in the chart above.

EUR/USD: After Households Debt to Income Release on June 17,
2020, 7.00 AM ET

After the news release, the pair formed a bullish 15-minute candle indicating that the USD had weakened. The weakening of the USD is contrary to a bearish expectation since the households’ debt to income had reduced, the USD would be stronger. The pair later continued to trade in the previously observed downtrend.

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

GBP/USD: Before Households Debt to Income Release on June 17, 
2020, Just Before 7.00 AM ET

Before the news release, the GBP/USD pair had been attempting to recover from a short-lived downtrend. This recovery is evidenced by the candles crossing above a flattening 20-period Moving Average.

GBP/USD: After Households Debt to Income Release on June 17, 
2020, 7.00 AM ET

After the news release, the pair formed a 15-minute bullish “Doji star” candle. The pair traded within a neutral trend afterward with the 20-period Moving Average flattening. As observed with the EUR/USD pair, GBP/USD did not react accordingly, as theoretically expected, to the positive households’ debt to income data.

AUD/USD: Before Households Debt to Income Release on June 17, 
2020, Just Before 7.00 AM ET

AUD/USD: After Households Debt to Income Release on June 17, 
2020, 7.00 AM ET

Before the news release, the AUD/USD pair showed a similar trend as the GBP/USD pair attempting to recover from a short-lived downtrend. As can be seen, the 20-period Moving Average has already started flattening before the news release.

After the data release, the AUD/USD pair formed a 15-minute bullish candle. The pair continued trading in a neutral trend with candles forming on a flat 20-period Moving Average.

From the above analyses, the news release of the household to debt income data produced contrary effects on the USD. More so, the indicator’s impact on the currency pairs is negligible.

Categories
Forex Fundamental Analysis

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

Introduction

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

What is Small Business Sentiment?

Small Business

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

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

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

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

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

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

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

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

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

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

Impact on Currency

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

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

Economic Reports

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

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

Sources of Small Business Sentiment Indices

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

How Small Business Sentiment Data Release Affects The Price Charts?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bottom Line

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

Categories
Forex Fundamental Analysis

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

Introduction

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

What is Business Confidence?

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

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

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

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

Note

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

How can Business Confidence numbers be used for analysis?

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

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

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

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

Impact on Currency

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

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

Business Confidence Announcement – Impact due to news release

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

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

AUD/USD | Before the announcement

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

AUD/USD | After the announcement

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

AUD/NZD | Before the announcement

AUD/NZD | After the announcement

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

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

EUR/AUD | Before the announcement

EUR/AUD | After the announcement

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

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

Categories
Forex Fundamental Analysis

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

Introduction

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

What is GDP from Transport?

Transportation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Impact on Currency

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

Sources of GDP from Transport

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

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

GDP by Industry – BEATransportation Statistics –Annual Report – BTS

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

GDP from Transportation – Trading Economics

GDP from Transport Announcement – Impact due to news release

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

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

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

USD/CHF | Before the announcement

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

USD/CHF | After the announcement

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

EUR/CHF | Before the announcement

EUR/CHF | After the announcement

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

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

NZD/CHF | Before the announcement

NZD/CHF | After the announcement

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

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

Categories
Forex Fundamental Analysis

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

Introduction

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

What is Youth Unemployment Rate?

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

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

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

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

Skill Gap

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

Employment Regulations

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

Public Assistance

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

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

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

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

Mental Risk

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

Political unrest

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

Increased Public Spending

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

Decreased Innovation

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

Incarceration

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

Impact on Currency

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

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

Economic Reports

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

Sources of Youth Unemployment Rate

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

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

Youth Unemployment Rate – Impact Due To News Release

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

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

AUD/USD | Before The Announcement

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

AUD/USD | After The Announcement

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

AUD/EUR | Before The Announcement

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

AUD/EUR | After The Announcement

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

AUD/JPY | Before The Announcement

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

AUD/JPY | After The Announcement

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

Final Words

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

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

Categories
Forex Fundamental Analysis

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

Introduction

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

What is Bank’s Balance Sheet?

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

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

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

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

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

Loans

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

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

Cash

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

Securities

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

Fixed Assets

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

Balances at Central Banks

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

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

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

Money owed to Other Banks

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

Money owed to Bondholders

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

Owner’s Equity

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

Why Bank’s Balance Sheet?

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

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

How can the Balance Sheet numbers be used for analysis?

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

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

Impact on Currency

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

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

Economic Reports

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

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

Sources of Bank’s Balance Sheets

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

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

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

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

Categories
Forex Fundamental Analysis

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

Introduction

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

What are Labor Costs?

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

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

Labor costs are broadly categorized into the following two categories:

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

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

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

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

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

How can the Labor Costs numbers be used for analysis?

Labor costs are affected by the following factors:

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

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

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

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

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

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

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

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

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

Impact on Currency

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

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

Economic Reports

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

Sources of Labor Costs

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

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

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

Labor Costs Announcement – Impact due to news release

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

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

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

NZD/USD | Before the announcement

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

NZD/USD | After the announcement

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

NZD/CAD | Before the announcement

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

NZD/CAD | After the announcement

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

NZD/EUR | Before the announcement

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

NZD/EUR | After the announcement

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

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

Categories
Forex Fundamental Analysis

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

Introduction

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

What is Long Term Unemployment Rate?

Long-term unemployment

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

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

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

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

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

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

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

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

As long as long-term unemployment is prevalent, improving the living standards of people is hard to accomplish. People cannot apply for loans or buy a house on a mortgage if they frequently lose jobs and take a long time to find new jobs. Financial insecurity and strained personal finances discourage people from spending and encourage saving for another jobless quarter or two. Long-term unemployment has a severe effect on householders, with only one working individual who provides for the family.

Long-term unemployment is bad for the economy. On the flip side, 50% of the long-term unemployed find a job in six months, and 75% do within a year. Within 18 months, the remaining also does find something or the other if they keep looking.

Chart Credit: OECD

Overall, it is more challenging to reduce long-term unemployment than short-term cyclical unemployment. It is a critical hindrance to achieving high growth rates for any country. The above statistic shows how it is an international issue and not any particular set of countries.

Impact on Currency

Long-term unemployment rates are not as important as unemployment rates, jobless claims, non-farm payroll numbers. As unemployment rates itself include the long and short-term ones, it is not an important economic indicator for currency markets.

Hence, it is a lagging low-impact indicator. It is an inversely proportional indicator, meaning high long-term unemployment is bad for the economy and currency.

Economic Reports

In the United States, The Bureau of Labor Statistics publishes monthly employment and unemployment reports under the Employment Situation Report. Table A-12 in it details the long-term unemployed figures. The figures are seasonally adjusted for month-over-month, and year-over-year comparisons are also provided.

Long-term unemployment reports are also maintained by the Organization for Economic Cooperation and Development (OECD). It defines long-term unemployment if a person is unemployed for 12 or more months.

Sources of Long Term Unemployment Rate

The United States Bureau of Labor Statistics’ Long-term Unemployment data is available here. The Bureau of Labor Statistics publishes monthly employment and unemployment reports on its official website for our analysis. The OECD also maintains long-term unemployment data. Consolidated reports of long-term unemployment rates of most countries can also be found in Trading Economics.

Impact of ‘Long Term Unemployment Rate’ News Release on the Forex Price Charts

The long term unemployment refers to those persons who have been unemployed for more than 52 consecutive weeks. Very long term unemployment rate refers to those persons who have been unemployed for more than 104 consecutive weeks. This data is essential for the government and economists who analyze quarterly and yearly trends of unemployment.

It helps them in understanding the long term employment situation of the country. However, the monthly numbers are significant to the market players when it comes to the forex market. Therefore, the impact of long term unemployment is not realized immediately on the currency pair.

The below image shows the latest long term unemployment data of Australia that was released in February. We can see the unemployment rate was the same compared to the previous year, but there was a reduction in the percentage of the labor force. In the following sections, we will observe the change in volatility due to the news release.

AUD/USD | Before the announcement

The above image is a 1-hour timeframe AUD/USD chart showing the moves from February 25th to March 1st, 2020. The currency has been slowly moving down and picks up a little momentum in its drop-down after February 28th.

AUD/USD | After the announcement

The above image is a snapshot of AUD/USD on the day of long-term unemployment rates in Australia news announcement on February 27th, 2020. The report published by the treasury department of Australia showed lower unemployment rates than the previous year. The favorable figures for AUD did not reflect in the pair’s non-volatility.

AUD/GBP | Before the announcement

The above image is a 1-hour timeframe AUD/GBP chart showing the moves from 25th to February 26th. The currency has not shown any clear down or uptrends till now.

AUD/GBP | After the announcement

The above image highlights the currency pair move throughout the news announcement day. We can see that there was only about a 40-pip maximum move, which is minimal movement and typical for such a pair. The news did not build any rallying up for AUD against GBP.

AUD/EUR | Before the announcement

The above image is a 1-hour timeframe AUD/EUR chart before February 27th, 2020. As we can see, AUD has been losing its value slowly against EUR in the last two days.

AUD/EUR | After the announcement

The above image highlights the news announcement day. We can see that despite the long-term unemployment rates came in favor of AUD, the market ignored and continued selling AUD and purchased EUR. The downward trend before continued during and after the news announcement day without any effect.

In conclusion, as we have seen, the long-term unemployment economic indicator was almost entirely ignored by the market. The market knows it is a lagging indicator, and the effects have already been priced into the market, therefore showing no volatility during the news announcement. Hence, the above trend analysis confirms our fundamental analysis of the economic indicator as a low impact lagging indicator that is overlooked by the currency market.

Categories
Forex Basic Strategies

‘Balk the Talk’ Strategy – Combining Fundamentals With Technical Analysis!

Introduction

Fear is the greatest driving force in humans. We tend to react drastically in times of fear or when they are presented with sudden moves from the market. Fear is an emotion that drives traders around the world to watch out for every news announcement, for fear of missing out on important information. Fear results in fast decisions by traders, which are most of the time taken without thinking.

In the previous article, we mentioned that trading the news is one of the best ways to make a profit in a short period of time. We also mentioned focusing on news events with the highest impact (red flags) on the currency. In today’s strategy, we will be trading the Forex market by looking at news events that have the least impact on the currency and do not have a long-lasting effect on the pair.

Timeframe

Balk the talk strategy works well with the 15-minutes timeframe only. Since we are dealing with small price movements, we will capture those little gains by analyzing the 5 minutes time frame chart.

Indicators

In this strategy, we will not be using any technical indicators.

Currency Pairs

The strategy is suitable for trading in all major currency pairs listed on the broker’s platform. Make sure not to use the strategy on Minor and Exotic currency pairs. Currency pairs such as EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, GBP/JPY, and NZD/USD are highly preferred.

Strategy Concept

Although we are trading based on the news data, this strategy’s concept is very different from the previous strategy. Here we will be taking advantage of the sudden surge in volatility due to the news announcement. The volatility leads to price movement, which is not reliable and mostly false. Hence, we will analyze the charts from a technical point of view and position in the currency pair based on the indications provided by technical analysis.

News events that have orange and yellow flags associated with them are the ones that are not of great importance to traders. Even then, during the news announcement, the volatility gives rise to price movement, mostly not dependable. This means any move in the market created by such news releases does not last for long, and the market continues to move in regular from a few minutes after the news release. We will take advantage of this false movement by combining the market’s current price with that of the key technical levels.

Trade Setup

In order to illustrate the strategy, we will be taking the example of the Final Services PMI news announcement, which was released recently. We will analyze the impact of data PMI on the currency and see how we can take a suitable position in the currency based on the volatility induced in the pair due to the announcement.

Step 1

The first step of the strategy is to look for news events that have an orange or yellow flag linked to them. Note down the date and time of the announcement and open the respective chart. We recommend looking for news announcements of major economies only and trade in currency pairs involving the U.S. dollar.

In our example, we will be considering the impact of Services PMI on the EUR/USD currency pair.

Step 2

In this step, we will mark out the key technical levels on the chart. They could be support, resistance, demand, supply, and some indicator signals. Based on the sign of each technical level, we will take the position accordingly.

We can see in the image below that we have identified two important levels of support and resistance and marked them on the chart.

Step 3

The crux of the strategy is that we wait for the price to reach our key technical levels as a result of the volatility due to the news announcement. Once the price reaches those levels, we will place trades based on our technical analysis and understanding of market psychology. For example, in the below image, we see that due to the Services PMI news release price reaches exactly to our resistance, which we had marked in the previous step. Since the PMI data was slightly better than expectations, it led to bullishness in the currency, thereby taking the price marginally higher.

Since the Services PMI is a low impact event, we cannot afford the market to continuously move higher. This means it will respect key technical levels and follow the major trend of the market. In this case, the trend is down. Therefore, we trigger a ‘short’ trade precisely at the resistance, taking a bearable risk.

Step 4

The next step is to determine stop-loss and take-profit levels for the strategy. Since we are taking an aggressive entry, the stop loss for the trade will be small, resulting in a high risk to reward ratio. The take-profit is pretty much straightforward, where it will be set at the latest obstacle.

In this case, the take-profit is placed at the support of the range, which is ideal for booking profits.

Strategy Roundup

The strategy takes advantage of the market reaction when the actual figures of some news events are not of great importance to traders. Such news announcements only create panic in the market with no confidence. Keep in mind that this requires many things to be assessed before being able to successfully use this strategy over and over again. This means a lot of practice is required to apply in the strategy effectively. Pay attention to news releases which do not hold much ground. All the best!

Categories
Forex Daily Topic Forex Fundamental Analysis

What Does ‘Gross Fixed Capital Formation’ Economic Indicator Tell About A Nation’s Economy?

Introduction 

Gross Fixed Capital Formation can help us as a leading indicator of economic growth. GFCF figures increase when growth is forecasted, be it for companies, governments, or organizations, etc. Understanding this macroeconomic indicator can help us understand the level of economic activity going on the global scale and forecast the changes in the rate of growth for different economies, as indicated by the Gross Fixed Capital Formation figures.

What is Gross Fixed Capital Formation?

Gross Fixed Capital Formation (GFCF) is a measure of gross net investment into fixed capital goods by companies, governments, and households within the economy for a specific period. It is also called investment in short, or business investment generally.

Capital Goods: These are tangible assets that are used by companies to produce consumer goods and services. In simpler words, it refers to the physical goods required by a company to run its business. For example, a transportation company will have trucks as its capital assets that enable them to run its business and generate revenue. An IT company would have computers that would be its capital assets or goods that help it run its business. Any tangible (or physically quantifiable) good required in assisting the company production is termed as Capital Goods. Hence, Capital Goods can be tools, equipment, raw materials, transportation assets, power supply, etc.

Hence, GFCF is a measure of how much a company invests in acquiring capital assets to maintain or enhance its production capacity and efficiency. Capital Formation is a necessary component for any business or government operation. 

It is called “Gross” because it does not take into account the adjustments to consumption associated with the fixed capital, i.e., depreciation of the fixed capital assets that occur over time due to normal wear and tear. 

GFCF is not a gauge of total investment. It only measures net addition to fixed assets, and all financial assets are excluded along with inventory stocks and other operating costs. Among all these exclusions, the essential exclusion is that of real-estate (land sales and purchases). Real estate transactions only mean that land has been only transferred in ownership from one organization to another and is only included when a new land that did not exist before was created and added into the economy.

How can the Gross Fixed Capital Formation numbers be used for analysis?

As the capital goods wear out over time and a decrease in value, companies that cannot afford new capital goods will observe a reduction in production output. Also, a company that plans on expansion would be required to acquire new capital assets to increase its production capacity.

The difference in the Capital Formation figures for different countries reflects the economic development rate and the catch-up process amongst the compared economies. Higher investment rates into capital goods in less developed economies will lead to improved living standards in the long term on account of accelerated economic growth and improved equipment for the workforce with modern technology. 

GFCF is, in a way, a measure of how much of the revenue is invested back into its growth. The higher the investment into its growth, the more accelerated growth the economy undergoes in the long-run. Of course, when a portion of the revenue goes back into the business itself, it leaves lesser revenue for the shareholders or the business owners in the short run, but it pays off in the long run.

Changes in GFCF is indicative of fluctuations in business activity, business confidence, growth pattern. During economic uncertainty or a recession, business investment is reduced, as decreased revenue is consumed for immediate needs and maintenance operations. On the other side, during times of consistent economic growth and stable market, there is a general increase in GFCF as it is more likely to yield favorable returns in the future. It is less risky to invest in a stable market environment.

The below snapshot of the GFCF for the United States establishes our analysis point above:

Impact on Currency

GFCF is a proportional macroeconomic indicator. It is very suitable for macroeconomic analysis and is more suited to the regional or international level analysis of market conditions. While the increase in the GFCF figures is good for the economy in the long run, it is an especially useful indicator for long term traders and investors. It is not a very reliable measure for short-term currency market volatility assessment.

It is a quarterly report, and hence, other monthly indicators would be more appropriate for traders looking to stay ahead of the fundamental trends. But this GFCF is a leading indicator for companies, or economic growth both and can act as a double-check for our fundamental analysis.

Hence, in the currency markets, the GFCF figures bear low impact due to the frequency of release, and its long-term trend indicative nature makes it a less favorable indicator for day and swing traders.

Economic Reports

The GFCF figures are macroeconomic indicators and are generally available on the official websites of international organizations like the OECD (Organization for Economic Co-operation and Development), World Bank, or IMF (International Monetary Fund). The reports are released quarterly and annually for most countries, as data becomes available from different countries’ respective reporting institutions.

Sources of Gross Fixed Capital Formation

For the United States, the St. Louis FRED maintains the OECD data of GFCF here

You can find the GFCF data for all the OECD countries on its official website here.

You can find the GFCF list for various economies in the sources mentioned below. 

GFCF – Trading Economics

GFCF – World Bank

GFCF – United Nations

GFCF – IMF

Impact of the” Gross Fixed Capital Formation” news release on the Forex market

In the above section of the article, we defined the Gross Fixed Capital Formation economic indicator, which estimates the value of acquisitions of new or existing fixed assets by the business sector, governments, and households. When this value is subtracted from the fixed assets, we get the Gross Fixed Capital. Investors around the world consider this indicator to be an essential determinant of the GDP of a country. This value is directly reflected in the GDP as it measures the total assets owned by the government and individuals. 

In today’s article, we will be analyzing the impact of Capital Formation on the value of a currency and watch the change in volatility due to the news announcement. For that purpose, we have collected the previous and latest Capital Formation data of Japan as it is shown in the below image. A higher than expected number is considered to be bullish for the currency while a lower than expected number is considered bearish. Let us find out the reaction of the market to this data.

USD/JPY | Before the announcement:

The first pair we will be reviewing is the USD/JPY currency pair, where the above image shows the characteristics of the price before the news announcement. It is very clear from the chart that the market is in a strong downtrend with no retracement. This means the Japanese Yen is stable, and we might not see price retracement until strength comes back in the U.S. dollar.    

USD/JPY | After the announcement:

After the news announcement, volatility increases to the upside, and the price shows signs of bullishness. Since the Japanese Yen is on the left-hand side in this pair, and increasing price signifies the weakening of the currency. The market reacted negatively to the news release due to the weak numbers. However, we see that weakness does not sustain, and the volatility increases to the downside after a couple of candles.

GBP/JPY | Before the announcement:

GBP/JPY | After the announcement:

The above images are that of the GBP/JPY currency pair, where we see in the first image that the market is in a strong downtrend indicating that the Japanese Yen is stable. As there is a lot of bearishness in the market concerning the British Pound, an ideal trade plan would be to take a ‘short’ trade as the price pulls back to a ‘resistance’ or ‘supply’ area. Until then, we cannot position ourselves in the currency pair. After the news announcement, the price initially moves higher, owing to weak Capital Formations data where there was a reduction in the total assets compared to the previous quarter. Due to the selling pressure witnessed from the top, the weakness in Japanese Yen does sustain, and the ‘news candle’ closes with a wick on the upper side. The market fails to retrace even after the news release, and the price continues to move lower.       

CAD/JPY | Before the announcement:

CAD/JPY | After the announcement:

The above images represent the CAD/JPY currency pair, where the characteristics of the chart appear to be similar to that of the above-discussed pairs. The price is violently moving lower before the news announcement with almost no retracement of any kind. We will be looking to sell the currency pair only if we geta price retracement due to the news release or any other release.

After the news announcement, we see the volatility increases to the upside for some time, and the ‘news candle’ closes with some bullishness. The market goes up as a consequence of the below than expected Capital Formation data where there was a reduction in the Capital Formation during the fourth quarter. Cheers!

Categories
Forex Fundamental Analysis

Knowing The Significance Of ‘Gross National Product’ Macro Economic Indicator

Introduction

The two most important metrics of economic growth are the Gross Domestic Product (GDP) and Gross National Product (GNP). Up until 1991 the United States primarily measured its economic growth in terms of the Gross National Product and switched to Gross Domestic Product to make it easy for comparison with other countries, since many other countries were measured through the same.

But in practice, it is always necessary to assess a country’s growth in both the GDP and GNP terms to better understand the overall economic output. Hence, GNP also forms an excellent fundamental indicator of economic growth, almost as important as the GDP.

What is the Gross National Product?

Gross National Product, also called GNP, is the total monetary value of all goods and services produced by the country’s residents and businesses, irrespective of the production location. It means a business earning revenue in a foreign land is included in the domestic country’s GNP. 

Gross National Product defines the economic output based on citizenship, or that country’s native people. Hence, a citizen having an extra income source in any monetary form overseas is factored into the GNP. GNP is higher for countries that have many of their businesses established in a foreign land. Accordingly, any output generated by foreign residents within the country is excluded out from the GNP.

Gross Domestic Product (GDP) v/s Gross National Product (GNP)

It is essential to understand the difference between GDP and GNP during our analysis. GDP and GNP both measure economic output for a given period but differ in how they define the economy’s scope.

Gross Domestic Product is the total value of all goods and services produced by the nation. Here, GDP limits its assessment to the nation’s geographical borders and does not take into account the overseas economic activities of its nationals.

GNP does not restrict itself to the geography of the nation but limits itself in terms of citizenship. GDP does not reflect determinant in nationality. As long as the finished goods and services are within the country’s borders, it is included. On the other hand, GNP will not include any of the domestic borders’ revenue if it is from a foreigner.

The formula for GNP is given as:

GNP = Consumption + Investment + Government + Net Exports + Net Income

In the above equation,

  • Net Exports stands for the difference between the revenue generated from Exports and revenue going out for imports.
  • Net Income stands for the income of domestic residents from overseas or foreign investments minus net income of foreign residents from domestic investments.

The GNP is very indicative of the financial well-being of a country’s nationals and its country-based multinational corporations. From a relative perspective, it does not tell us much about the country’s health, as the GDP does. GNP is a more realistic measure of a country’s Income than its production.

To clarify the role of each metric better, consider the below examples:

Microsoft is the United States-based multinational company. It has a branch in India. The revenue generated from the Microsoft-India branch will be included in the GNP of the United States, but not in India’s GNP. On the other hand, Microsoft-India’s revenue is not included in the GDP of the United States but is included in India’s GDP.

How can the Gross National Product numbers be used for analysis?

It is essential to understand that GNP does not reflect the domestic (geographical basis) conditions well. If a natural disaster were to occur within the United States, then the GNP would not be as affected as the GDP, as the foreign revenue by its residents would not depend on the domestic situations. Hence, GDP is a more accurate measure of economic activity. On the other hand, its citizens’ financial well-being is more accurately measured through GNP than GDP.

GDP is a measure of economic health, while GNP is a measure of a nation’s Real Income. Both are different but related. A country like China, where many companies from other countries have their business has higher GDP than GNP, on the other hand, the United States, which has many of its firms’ production houses outside its land, has higher GNP than its GDP. Significant differences between the GDP and GNP values can be accounted to the openness of the countries to International Trade and Global Markets.

Impact on Currency

The Gross National Product is itself susceptible to the currency and exchange rate. When the currency falls, the Gross National Product increases due to the strengthening of other countries’ currencies where the domestic firms are doing business. The health of the economy is not gauged by the GNP accurately. Currency movements are not as driven by the GNP as they are by the GDP. Hence, it is more critical as a financial indicator than as an economic indicator in our analysis.

It is a lagging and proportional indicator, and hence the impact of the GNP is not as pronounced as the GDP, as all other countries use GDP as their primary measure of economic health. Investors, economists, policymakers, and traders all use GDP primarily over GNP to assess the economy’s current health and direction. Hence, it is a low impact indicator of our fundamental currency analysis.

Economic Reports

For the U.S., the Bureau of Economic Analysis releases quarterly reports of the Gross Domestic Product, which contains the GNP information. The St. Louis FRED consolidates the same data and maintains it on its website.

Sources of Gross National Product

The St. Louis FRED website holds the GNP data that is very easy to access and analyze, and the link is here.

GNP data for various countries can be obtained here

Impact of the “Gross National Product” news release on the Forex market

In the above section of the article, we defined the Gross National Product (GNP) and described the analysis method. We will extend our discussion and understand the impact of the Gross National Product news announcement on the value of a currency. The GNP gives an estimate of the total value of all the final products and services rolled out in a given period utilizing production owned by a country’s residents.

The GNP includes personal consumption expenditures, domestic investment, government expenditure, net exports, and Income from foreign investments. A small distinction between the GNP and GDP is that GDP measures the value of goods and services produced within the country’s borders. In contrast, GNP calculates the value of goods and services produced by the country’s citizens only both domestically and abroad. However, GNP is also one of the most commonly used indicators for measuring the country’s economy.    

In today’s example, we will analyze the impact of the United Kingdom’s GNP on the value of the Great British Pound. The below image shows the GNP in the U.K. during the fourth quarter, which was higher than the third quarter. Let us find out the impact.  

GBP/USD | Before the announcement:

We will begin our discussion with the GBP/USD currency pair to observe the change in volatility after the news announcement. The earlier image shows the state of the chart before the news announcement, where we understand the market is in a strong downtrend, and recently the price seems to be moving upwards. This could be a possible price retracement that could lead to the continuation of the trend and an opportunity. 

GBP/USD | After the announcement:

After the news announcement, the market gets very bullish, and we see a sharp rise in the price. The positive reaction from the market is a result of the upbeat GNP data, which was better than expectations. This brought cheer among the market participants who took the price higher by strengthening the British Pound. We should not take any ‘short’ position until we notice trend continuation patterns in the market.

GBP/CAD| Before the announcement:

GBP/CAD| After the announcement:

The above images represent the GBP/CAD currency pair, where in the first image, we see that the market appears to be moving within a ‘range’ with the price currently at the bottom of the ‘range.’ Before the news announcement, the currency pair is very volatile, suggesting that there is a lot of trading action in this pair. In such high volatile environment, we recommend waiting for the news release and then taking a suitable position in the pair.

After the news announcement, the price suddenly moves higher and volatility expands on the upside. The bullishness in the British Pound is a consequence of the optimistic GNP data, which showed a growth in the economy during the fourth quarter. Since the price is at the bottom of the ‘range,’ one can take ‘long’ in this currency pair with a target until the ‘resistance.’

EUR/GBP | Before the announcement:

EUR/GBP | After the announcement:

The above images are that of the EUR/GBP currency pair, where we see that the market is in a strong uptrend before the news announcement, signifying the enormous amount of strength in the British Pound, since the currency is on the left-hand side of the pair. Depending on the outcome of the news and change in volatility, we will analyze the currency pair accordingly.

After the news announcement, market crashes, so much that the price goes below the moving average. The ‘news candle’ closes, forming a reversal candlestick pattern that could lead to the beginning of a downtrend. The volatility increases to the downside as the GNP data was reasonably good.

We hope you understood what ‘Gross National Product’ is and its impact on the Forex price charts. Cheers!

Categories
Forex Fundamental Analysis

Significance Of ‘Composite PMI’ As A Forex Fundamental Driver

Introduction

Composite Purchasing Manufacturing’s Index (PMI) is one of the major indicators of the country’s economic health. It is mainly concerned with the manufacturing and service sectors. The PMI provides information about the current business conditions from the data gathered from the company’s decision-makers, such as analysts and purchasing managers.

The PMI survey of each country consists of a questionnaire for the manufacturing or service sector, which collects the responses from the panel of senior purchasing executives at over 400 companies. The Composite PMI is basically a number that ranges between 0 to 100. The number above 50 represents an expansion compared to the previous reading. A PMI reading below 50 represents a contraction, and a reading at 50 indicates no change.

Calculation of the PMI

As mentioned in the above paragraph, the PMI is a number from 0 to 100, but we need to understand how one arrives at those numbers. The PMI is calculated using the below formula.

PMI = (P1 * 1) + (P2 * 0.5) + (P3 * 0)

Where:

P1 = percentage of answers stating an improvement

P2 = percentage of answers stating no change

P3 = percentage of answers stating a deterioration

The percentage stating deterioration has a zero multiplier; thus, it is always zero, but the larger the value of P3, the fewer the weight of the first two factors, thus lowering the total PMI value. in the case of P3=100% PMI = 0.

Use of Composite PMI

The PMI data is a critical decision-making tool for money managers that influences their investment across sectors to a great extent. Let us take the case of an automobile manufacturer, where the production decisions are based on the new orders it expects from the customers in future months. This will make them buy dozens of parts and raw materials, such as tires and plastics. The inventory rules also drive the amount of production the manufacturer needs to finish to fill new orders and to keep some inventory at the end of the month.

From the supplier’s point of view, the PMI data matter to him the most as well. The parts supplier to a manufacturing company will estimate the amount of demand it might get from these companies based on the PMI. Due to this, the suppliers charge more for their parts. The new orders data is closely related to the Composite PMI. For instance, if the new orders are growing, the manufacturing company may raise the prices of its products and accept the high cost of the parts. A company also uses the Composite PMI to plan its annual budget, supervise staffing levels, and manage cash flow.

The Economic Reports 

The Economic Reports of Composite PMI and related data are published monthly by the Institute for Supply Management (ISM) that is extremely useful for manufacturers and the investment managers. The ISM monitors changes in production levels from month to month and is at the core of the Manufacturing report. This is one of the earliest indicators of economic activity and that investors and economists get regularly. The institute also releases a Semi-annual report in May and December. When the number is rising, investors anticipate a bullish reaction from the market to the data that is seen in the currency and stock market.

Analyzing the data

The PMI data is very easy to analyze, where we only have to look at the number and compare it with the previous readings. A PMI reading above 50 indicates growth or expansion of the manufacturing sector. A reading of 50 indicates that the number of manufacturers reporting good business is equal to those stating business is not good. Another key number to look for is 43.2. If the PMI index has been above this number for a period of time, it indicates an expansion of the overall economy. Any number under 50 indicates a contraction in the manufacturing sector and that most businesses are not expecting good business in the near future.

Impact on the currency 

The composite PMI is closely watched by traders and investors around the world that greatly influences their investment decision. They mainly if the number is below or above the 50 levels, which shows potential contraction or expansion in the economy. If the number is greater than 50 over the last few quarters, it indicates growth in the economy, which drives the currency higher. If the number remains below the 50 mark, it means the economy has entered into a recession. Investors will not be interested in investing in countries where the economy is in a recession, which leads to a depreciation of the currency.

Sources of information on Composite PMI

Composite PMI is available on the official website of the Institute for Supply Management (ISM), which also provides a comprehensive analysis of the same. The data can also be found on some open-source economic websites and financial magazines.

Links to Composite PMI information sources

GBP (Sterling) – https://tradingeconomics.com/united-kingdom/composite-pmi

AUD – https://tradingeconomics.com/australia/composite-pmi

USD – https://tradingeconomics.com/united-states/composite-pmi

EUR – https://tradingeconomics.com/euro-area/composite-pmi

NZD – https://tradingeconomics.com/new-zealand/composite-pmi

JPY – https://tradingeconomics.com/japan/composite-pmi

The Composite PMI is a monthly survey sent to senior executives at more than 400 companies in 19 primary industries. The industries and companies are selected based on their contribution to the GDP and the sector, respectively. The surveys include questions about business conditions and any changes, whether it be improving, no change, or deteriorating. Hence, traders must keep an eye on this data and watch for its official releases.

Impact of the ‘Composite PMI’ news release on the Forex market 

Investors consider Composite PMI as a leading indicator of the economic health of a country. It is extremely for international investors looking to form an opinion on a country. The PMI is also a leading indicator of the growth in the gross domestic product (GDP). When formulating monetary policy, central banks use PMI surveys, which is reflected in the fixing of interest rates.

When it comes to predicting the GDP growth, a reading above 42 is considered a benchmark for economic expansion. In contrast, a reading below 42 indicates that the economy is heading into a recession. Since it is an important indicator for most of the people related to the economy and financial sector, it is bound to have a major impact on the value of a currency.

In today’s lesson, we will analyze the impact of composite PMI on different currency pairs and identify the change in volatility due to the news announcement. We will be looking at the PMI data in the Eurozone that was released in June (May as the reference month). The below image shows the previous, predicted, and latest PMI reading, where we see a big increase in the number compared to the previous month. Let us find out if the market receives the data positively or negatively.

EUR/USD | Before the announcement

Let us start with the EUR/USD currency pair to observe the change in volatility due to the news release. The above image shows the price’s behavior before the news announcement, where we see that the market is a strong uptrend. We will be looking to buy the currency pair after a price retracement to a support or demand level. At this point, we shouldn’t be taking any position in the currency pair.

EUR/USD | After the announcement

After the news announcement, volatility expands to the upside, and the market moves higher. As the PMI data was extremely positive for the economy, traders bought the currency and took the price higher. The PMI data had a positive impact on the currency pair, and the market makes new ‘high.’ One has to be cautious here by not jumping into the market for a ‘buy’ as it is against risk management rules.

EUR/JPY | Before the announcement

EUR/USD | After the announcement

The above images represent the EUR/JPY currency pair, where we see that the price is continuously moving higher with minimum retracements before the news announcement. It means the uptrend is very strong. From a ‘trade’ point of view, a similar approach will be followed here as well as we had in the previous currency pair, where we will be looking to buy the currency pair only a price retracement.

Right after the news is released, the price initially moves higher, but later selling pressure makes the ‘news candle’ to close near the opening. Therefore, we witness volatility in both the directions of the market in this currency pair. We can say that the PMI data did not have a major impact on the currency where the market remains sideways a few minutes after the news release as well.

EUR/AUD | Before the announcement

EUR/AUD | After the announcement

The above charts are that of the EUR/AUD currency pair, where the market shows a strong downtrend signifying a great amount of weakness in the Euro. Recently, the price has shown signs of retracement, and so we can expect a continuation of the down move after noticing trend continuation patterns. Until then, we will see what impact the PMI data makes on the currency pair.

After the news announcement, the price does not move adversely in any direction and remains almost at the same place as it was before. The PMI data has a neutral effect on the currency pair where ‘news candle’ forms a ‘Doji’ candlestick pattern. However, the Euro becomes bullish a few minutes after the news release and markets move higher, nearly reversing the downtrend.

This ends our discussion on ‘Composite PMI,’ and its relative impact on the Forex market post its news release. In case of any questions, please let us know in the comments below. All the best!

Categories
Forex Daily Topic Forex Fundamental Analysis

Understanding ‘Electricity Production’ & Its Importance As A Forex Fundamental Driver

Introduction

Electricity is the most versatile and controlled form of energy. It is non-polluting and loss-free. It can be produced entirely using renewable methods, such as wind, water, and sunlight. Electricity is weightless, more comfortable to transport and distribute, and represents the most efficient way of consuming energy. Strategies are being developed to generate and use electricity in the most efficient way. It must be produced in the least damaging way, without inhibiting economic development.

Net power generation

The total worldwide production of electricity in 2016 was 25,082 TWh. Sources of electricity were coal 38.2%, natural gas 23.1%, hydroelectric 16.6%, nuclear power 10.4%, oil 3.7%, solar 5.6%, biomass and waste 2.3%.

Choosing the mode of production 

The selection of electricity production mode and their economic viability is linked with the demand and supply in that region. The dynamics vary considerably around the world, resulting in different selling prices across the globe; for example, the price in Iceland is 5.54 cents per kWh while in island nations, it is 40 cents per kWh. Hydroelectric plants, thermal power plants, nuclear power plants, and renewable sources have their pros and cons, and selection is based on the local power requirement and fluctuations in demand. All power plants have varying loads on them, but the daily minimum is baseload, often supplied by plants that run continuously. Nuclear, coal, gas, oil, and some hydro plants can supply baseload.

Due to the advancement in technology, renewable sources other than hydroelectricity experienced decreases the cost of production, and the energy in many cases is cost-comparative with fossil fuels. Many governments around the world are allocating funds to offset the higher cost of new power production and make the installation of renewable energy systems economically feasible. However, their use is curtailed by their intermittent nature, less demand, and sometimes transmission constraints.

Economic development and electricity

Electricity is a major contributor to the economic development of a nation. It is the wheel that drives most aspects of everyday life in society. A nation is a compilation of activities and people whose progress is determined by the infrastructural components. Electricity is the source of fuel for almost all sectors of the economy. Most of our daily activities are dependent on electricity, our hospitals need electricity for various purposes, and airports need electricity for regular functioning and ensuring the safety of passengers.

When so many activities are dependent on electricity, production of the same is very important for every nation’s economic development because it brings investment opportunities for the country. In a country where electricity production is more, investors get interested because the cost of production in such a country is minimal compared to where there is no electricity. Running machines on electricity is cheaper compared to running them on generators. High electricity production helps to reduce the mortality rate in the country because the hospitals will be efficiently powered and is a key factor in service delivery at hospitals.

In countries with good electricity production, agricultural productivity is also high because electricity can help in powering irrigation, food preservation, and seed preservations. They enable the country to have fewer damages to agricultural products because they can be kept in storage facilities, and wastage can be avoided.

Impact on currency

Although electricity production is an important sector of the economy and a vital component, it may not have a direct impact on the value of a currency. The effect of shortage in electricity is first felt on the company, which will be reflected in its quarter-quarter data. If the results are bad, one can analyze the impact of electricity on the numbers and the stock price. If the industry itself is suffering, it primarily impacts the stock market and not the currency value. Hence, we can say that the impact of electricity is minimal on the value of a currency where investors, too, do not give much importance to this data.

Sources of information on Electricity Production

Economists and investors have not keenly tracked the electricity production data, so not many economic websites and newspapers publish the data regularly. The country’s electricity board is the official source of the data from where reliable figures can be obtained. However, we were able to collect the data on the electricity production of a few countries that can be used for reference and comparison.

GBPAUDUSDCADNZDJPY

High levels of electricity production improve the standard of living of the people in the country. This is very important for the economic advancement of a country. If people live in better conditions, it has ripple effects on every aspect of the country. It reduces unnecessary expenditures for the government. It improves the security of the country and helps to create job opportunities for the entire country because the indirect sectors use electricity to power their businesses. Development can only be realized when the key drivers of the economy are unhindered by the country’s lack of infrastructural components.

Impact of Electricity Production’s News Release On The Forex Market

In the previous section of the article, we comprehended the Electricity Production economic indicator and saw it’s economic importance. We shall extend our discussion and understand the impact of the Electricity Production news announcement on various currency pairs.

It is important to note that although electricity is needed for the economic development and well-being of citizens, it is not a crucial fundamental indicator. Therefore, investors and traders do not invest based on Electricity Production data. However, let us find out the impact on a few currency pairs on the day of the announcement.

The below image shows total Electricity Production in the United Kingdom, where it increased to 29731 in Gigawatt-hour in December from 28902 Gigawatt-hour in November of 2019. Let us see how the market reacts to this data.

GBP/USD | Before the announcement

We will begin our analysis with the GBP/USD currency pair and observe the change in volatility due to the news announcement. The above image shows the daily time frame chart of the currency pair before the news announcement. We see that the market has been moving in a ‘range,’ and currently, the price is almost at the top of the ‘range.’ Aggressive traders can take ‘short’ positions with a large stop-loss, as there can be volatility in the pair during the news announcement.

GBP/USD | After the announcement

After the news announcement, the price hardly makes a move and stays at the same place as it was before. There is no change in the volatility, as indicated by the ‘news candle.’ The market continues to move higher on subsequent days and breaks out from the ‘range.’ The move should not be considered as a result of news but instead was a technically driven move. Now traders should trade this currency pair using their breakout strategy.

GBP/CAD | Before the announcement

GBP/CAD | After the announcement

The above images represent the GBP/CAD currency pair, where we see that the market is in a strong uptrend before the news announcement and recently has been sideways. We should not expect major volatility in the pair. Technically speaking, we will be looking to go ‘long’ in the market after a suitable price retracement to the nearest support or demand level.

After the news announcement, the market moves higher by little, and volatility expands to the upside. We could say that since the Electricity Production data was slightly positive for the British economy, traders bought the currency after the news announcement and raised its value. At this point, we cannot take any trade as there is no formation of an appropriate continuation pattern in the market.

GBP/CHF | Before the announcement

GBP/CHF | After the announcement

The previous images are of the GBP/CHF currency pair, where we see that before the news announcement, the market is in a strong uptrend, indicating a great amount of the strength in the British Pound. Here too, the idea is to go ‘long’ in the market after a price retracement to a key technical level. The price seems to have broken out a small ‘range.’ Thus, we cannot take any position in the market at this point.

After the news announcement, the market instantly drops, and the prices move lower. The news data had a negative impact on the currency pair, where volatility increases to the downside. As the Electricity Production data does not have a long-lasting effect on the currency, the fall in price due to the release of the news can be an opportunity for joining the uptrend.

We hope you find this article informative. Let us know if you have any questions in the comments below. All the best.

Categories
Forex Fundamental Analysis

Why Understanding ‘Corruption Index’ Is Crucial In Determining Economy’s Health?

Introduction To Corruption Index

The corruption index is a score that is given to the government of a country, which indicates the degree of corruption in the country. The value is assigned from 0 to 100, with 0 indicating high levels of corruption and 100 indicating low levels. The score is given by Transparency International, an organization that tries to stop bribery and other forms of corruption activities in the country. Transparency international started ranking in 1995, and today it scores more than 176 countries and territories.

The Corruption Index focusses on the public sector and evaluates the degree of corruption among public officials and politicians. In highly corrupt countries, the judiciary’s quality and independence are usually low, and official statistics try to underestimate the level of corruption to hide the bitter truth. The international agencies are a valuable alternative source of information to report the extent of illegal practices being done by civil servants and politicians in a given country.

Impact of corruption on the economy  

Most economists view corruption as a key obstacle to economic growth. It is seen as one of the reasons for low income and plays a critical role in generating poverty traps. It prevents economic and legal systems from functioning properly. Other effects are a misallocation of talent or human development, reduction in the incentive to accumulate “capital.”

Corruption hampers development by allowing agents to interfere in the usual functioning of the government. Economists believe that corruption is like a competitive auction; those who want a service, use the power of money to get it, and the result is an inefficient allocation of resources. The resources get used by people who do not deserve or are not meant to use it.

Contrary to this idea, some people argue that corruption ‘greases’ the wheels of development and that foster growth. The main idea is that corruption facilitates beneficial trades that otherwise would not have taken place. In this way, it promotes productivity by allowing individuals in the private sector to correct or avoid government failures of various sorts.

Limitations of Corruption Index

The index has been criticized lately based on its methodology used for ranking countries. Political scientists find some flaws in the way the corruption index is calculated. These flaws include:

  • Corruption data is too complex to be captured by a single source. For example, the type of corruption in rural Michigan will be different from that in the city administration of Chicago, yet the index measures them in the same way.
  • It is seen that the corruption index is influenced by perception about it. It means it is not measured by considering its real value, where the index may be reinforcing existing stereotypes and clichés.
  • The index only measures public sector corruption and ignores the private sector. This means the well-publicized scandals such as the Libor scandal, or the VW emissions scandal were not included in the corrupt segment.

 Analyzing the data

Corruption index is an important economic indicator that most economists and money managers look at before making investments. In recent times, it is making a huge impact on the economic development of a country. Thus, we need to understand how the data is analyzed. By comparing the two countries’ rankings, one can determine which of the two economies is stronger and enjoying investor confidence.

While analyzing the data, it important to keep in mind that economies of the same stature should be compared. We cannot compare the ranking of a developed country with that of a developing country. This is because corruption has a much greater impact on the growth rates of developing countries.

Impact on currency

Public corruption in emerging countries, especially, contributes to currency crises and put a major dent in the development of the country. Corruption acts repel stable forms of foreign investment and leave countries dependent on foreign bank loans to finance growth. Foreign investors refuse to put their money in developing countries where, for example, local bureaucrats accept bribes, and the government has been known to fall prey to businesspersons and builders.

A corrupt government may be undesirable for foreign direct investment (FDI), but it may not be equally disadvantageous when it comes to obtaining loans from international creditors. This is because governments of most countries offer considerably more insurance and protections to lenders than to direct investors. The result is a country with high debts and no foreign investment. Such an imbalance leaves an economy much more vulnerable to currency crises.

Sources of information on Corruption Index

The Corruption Index is published annually by Transparency International since 1995, which ranks countries by their perceived levels of corruption in the public sector. Transparency International is the official agency that keeps track of the corruption activities and wrongdoing of the government, which is reflected in the rankings. However, other economic websites measure corruption based on their parameters and factors. They also provide a statistical comparison of different countries with a clear graphical representation.

GBP (Sterling) – https://tradingeconomics.com/united-kingdom/corruption-index

AUD – https://tradingeconomics.com/australia/corruption-index

USD – https://tradingeconomics.com/united-states/corruption-index

CAD – https://tradingeconomics.com/canada/corruption-index

NZD – https://tradingeconomics.com/new-zealand/corruption-index

JPY – https://tradingeconomics.com/japan/corruption-index

The corruption index is gaining a lot of attention and importance around the world. Corruption decreases the amount of wealth in a country and lowers the standard of living. The economic impact of corruption is measured in two ways, first, the direct impact on the GDP growth rate and, secondly, an indirect impact on human development and capital inflow. The new methodology used by Transparency International uses four basic steps, including the selection of data, rescaling source data, aggregating the rescaled data, and a statistical measure indicating the level of certainty. The data collection and calculations are done by two in-house researchers and academicians.

Impact of Corruption Index’s news release on the Forex market 

The Corruption Perception Index (CPI) scores countries on how corrupt a country’s public sector is perceived to be by experts and business executives. It is a composite index, which is a combination of 13 surveys and assessments. The data is collected and compiled by a variety of reputed institutions.

The CPI is the widely used indicator of corruption all over the world. The corruption index is closely watched by investors who take investment decisions based on the ranking. However, it has a long-term impact on the currency, and the effect may not be seen immediately after the official news release.

In this section of the article, we will observe the impact of the CPI announcement on different currency pairs and witness the change in volatility due to the news release. For that purpose, we have collected the CPI ranking of Japan, where the below image shows Japan’s corruption score and rank in 2019. A score above 50 indicates low corruption levels and that the country’s government is clean.

USD/JPY | Before the announcement

Let us start our analysis with the USD/JPY currency pair and analyze the reaction of the market. The above image shows the daily time frame chart of the forex pair before the news announcement, where we see that the market is moving in a ‘range’ with the price at the top of the range. We will look to take a ‘short’ trade once we get confirmation from the market.

USD/JPY | After the announcement

After the news announcement, volatility increases to the downside, and the price falls drastically. The market reacted positively to the news data, where we see that the Japanese Yen gains strength after the news release. As the corruption index score was positive, traders strengthened the currency, as indicated by the large bearish ‘news candle.

GBP/JPY | Before the announcement

GBP/JPY | After the announcement

The above images represent the GBP/JPY currency pair, where we see that before the announcement, the market is in a strong uptrend, and recently the market has shown signs of reversal. We should be looking to sell the currency pair if the market is not able to move higher. However, we should wait for the news release to get a clear idea of the direction of the market.

After the news announcement, the market reacts similarly as in the previous currency pair, where the price moves lower and volatility expands to the downside. As the CPI data came out to be positive, traders sold British Pound and bought Japanese Yen, thereby strengthening the currency. At this moment, one can take risk-free ‘short’ trade with a stop loss above the ‘news candle.’

AUD/JPY | Before the announcement

AUD/JPY | After the announcement

Lastly, we will find out the impact on the AUD/JPY currency pair. The first image shows the characteristic of the chart before the news announcement, where it appears that the price is moving in a channel. One needs to be cautious before taking a ‘short’ trade as the price is at the bottom of the channel.

After the news announcement, the market gets a little volatile where we see that the price moves in both directions and finally closes near the opening. The overall reaction was bullish for the currency due to the healthy CPI data. The ‘news candle’ is not enough to confirm that the market is going lower as it has lower wick on the bottom, indicating buying pressure.

We hope you understood what ‘Corruption Index’ is and the impact on the Forex market after its news announcement. Cheers!

Categories
Forex Daily Topic Forex Fundamental Analysis

Understanding The Importance Of ‘Terms Of Trade’ As A Macro Economic Indicator

Introduction

Terms of Trade is a direct and useful measure of an economy’s International Trade health and gives us a good measure of how fast capital is moving in or out of the country. Terms of Trade make analyzing Balance Of Payments and, more specifically, Current Account Balance easier. Understanding of Terms of Trade can help us better analyze the current liquidity of the economy and its changes in a more crude way.

What are Terms Of Trade Indices?

Terms of Trade is the ratio of its Export Prices and Import Prices. It is the ratio of money received on exports to money spent on imports. If there is an individual’s analogy to be made, then it would be the ratio of an individual’s monthly income to his monthly expenses. Mathematically, it would be the number of export goods that can be purchased per unit of import.

Terms of Trade ratio expressed in percentages, and hence the ratio is multiplied by a hundred. A TOT figure above100 indicates that the country is receiving more on its exports than on its income and vice-versa.

When a country has a TOT figure of more than 100, it means that it is receiving more capital on exports compared to sending capital out on imports. Hence, on an overall basis, capital is flowing into the country. Higher the ratio, the faster the rate at which capital flows into the country. It ultimately translates to the pace at which a country is becoming wealthy and liquid.

When a country has a TOT figure less than 100, it means capital is flowing out of the economy, and its import expenses exceed that of its export revenue generated. Continued periods of TOT figures less than 100 will drive the economy to a vicious debt cycle from which recovery may be difficult. The ratio will tell us how fast the capital is depleting from the economy and is nearing a financial crisis. Countries prefer to have a ratio above 100.

The ratio tells us the rate at which the economy is accumulating capital. On the global market place and International Trade, the ratio will determine what portion of the world’s wealth goes to each country. In other words, based on the demand and supply on the international markets, the ratio will tell us how profits from international trade will be distributed amongst the participating countries.

How can the Terms Of Trade numbers be used for analysis?

Since TOT is a ratio change in TOT, figures can imply multiple things. An improvement in TOT figure could mean:

  1. Export prices have increased in contrast to Import prices being stagnant or dropped.
  2. Export prices would have dropped but not as sharply as import prices. Both dropped but not to the same degree.
  3. Export prices would have stayed the same while Import prices would have dropped.

All the above scenarios can lead to an improvement in the TOT figure. Hence, simple changes in TOT figures cannot be directly used to draw economic conclusions. It is crucial to understand the factors that have resulted in a change in TOT numbers. It is crucial to know whether the change is a consequence of a short-term shock or development or a consistent long-term trend that will persist throughout the coming periods.

TOT is susceptible to multiple economic factors, some of which are:

Exchange rate: A decrease in exchange rate adversely affects imports and benefits exports and vice versa. Imports become costly, and exports become cheap, adversely affecting TOT.

Inflation: The inflation rate across different economies and different sectors affect different economies having different export and import portfolios. For example, a sharp increase in Iron Ore prices can greatly benefit Australia, whose chief exports are Iron Ore, while it can affect importing countries like China and Japan adversely. So inflation across sectors have different impacts across economies and within the country amongst different sectors.

Demand and Supply: Increase in demand, coupled with the availability of those resources also affects TOT as exports and imports are a function of demand and supply. Scarcity increases prices and oversupply decreases the same.

Quality of Produce: Size and quality affect the pricing of products. A high-quality product is likely to cost more and benefit the exporter more. Hence, the portfolio of the country’s exports and imports determines the TOT fluctuations of different product grades.

Trade Tariffs: Protectionist strategies from Governments lead to putting trade barriers on imports. The political and trade ties between countries can also affect the long term trend of TOT figures for a given economy.

Portfolio of Exports and Imports: What types of Goods and Services a country exports and imports also matter. Countries that export goods and services that are more of primary importance (ex: food and energy) tend to always have high demand and TOT ratio more than 100 both within the economy and on the global economy.

Impact on Currency

When the TOT figure is above a hundred, it implies domestic currency is flowing into the country and creating a deficiency in the global market. Hence, higher TOT figures will increase its currency demand and thereby leading to currency appreciation. On the other hand, a continued TOT less than 100 indicates the world is being supplied with domestic currency and therefore leads to currency depreciation.

It is a coincident indicator and is more useful as a long-term trend indicator rather than short-term changes. The indicators affecting TOT would have been identified through Trade agreements or other media sources in general and hence, is a mild-impact indicator.

Economic Reports 

The Bureau of Economic Analysis publishes its TOT figures in the National Income and Product Accounts every quarter of the year on its official website. Below is a figure for an illustration of the same:

We can also find the aggregated TOT reports for the OECD countries on the official website. The World Bank also aggregates and maintains TOT data for most countries on its official website.

Sources of Terms Of Trade

For the US, we can find the Terms of Trade in their National Income and Product Accounts here:

BEA – National Income and Product Accounts

OECD – Terms Of Trade

World Bank – TOT

We can also find Terms of Trade Index for many countries categorized here.

Impact of the ‘Capacity Utilization’ news release on the price charts

In the previous section of the article, we learned the Terms of Trade economic indicator and understood its significance in an economy. The ToT Index measures the ratio of an export to the price of an import, per commodity. A country that heavily relies heavily on exports, this number gives an important hint of the nation’s growth. Even though the Terms of Trade is useful in determining the balance of trade in a country, it does not have a major influence on the GDP of the economy. Therefore, investors don’t give much importance to the data during the fundamental analysis of a currency.

Today, we will be analyzing the impact on Terms of Trade on different pairs and witness the change in volatility due to the news release. The below image shows the latest Terms of Trade data of New Zealand that indicates an increase in the value compared to the previous quarter. A higher than expected reading is considered to be positive for the currency while a lower than expected reading is considered as negative. Let’s see how the market reacted to this data.

NZD/USD | Before the announcement:

We shall start with the NZD/USD currency pair to examine the impact of Terms of Trade on the New Zealand dollar. In the above price chart, we see that the market is in a strong downtrend before the news announcement with increased volatility. Currently, the price is at a key technical area, which is known as the ‘demand’ area, and hence we can expect buyers to come in the market at any moment. Thus, once needs to be cautious before taking a ‘short’ trade.

NZD/USD | After the announcement:

After the news announcement, the market moves lower and volatility increases to the downside. The Terms of Trade data showed an increase in the total percentage, but this was not good enough for the market players who apparently took the price down and weakened the New Zealand dollar. Although the ‘News Candle’ closes in red at the time of release, it gets immediately taken over by a bullish candle, as this was a ‘demand’ area.

NZD/JPY | Before the announcement:

NZD/JPY | After the announcement:

The above images represent the NZD/JPY currency pair, where we see that the characteristics of the chart are similar to that of the above-discussed pair. Before the news announcement, here too, the market is in a strong downtrend, and the volatility appears to be high on the downside. One thing that is different in this pair is that the price is presently at its lowest point and seems to have made a ‘lower low.’ This means New Zealand is weaker in this pair.

After the news announcement, market crashes and the price drops sharply. The Terms of Trade has a similar impact on the pair, where we see a further increase in volatility to the downside. Again. the weakness does not sustain, and the price shows a large bullish candle after the ‘news candle.’

NZD/CAD  | Before the announcement:

 

NZD/CAD  | After the announcement:

Lastly, we shall discuss the impact on the NZD/CAD currency pair and observe the change in volatility. Here, we see that the market is continuously moving lower before the news announcement indicating a great amount of weakness in the New Zealand dollar. Just before the news release, the price seems to be approaching the ‘demand’ area, which can possibly change the trend for a while by initiating some bullishness in the pair.

The Terms of Trade news announcement gets lukewarm from the reaction where the price initially moves higher little and finally closes forming a ‘Doji’ candlestick pattern. The news release leads to further weakening of the currency where the volatility expands on the downside.

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

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 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 – FDIUNCTAD – FDI – 2019

The OECD FDI statistics are available for analysis here – OECD – FDIOECD – 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

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

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 – FREDHousing, 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

The Impact Of ‘Capacity Utilization’ On The Forex Price Charts

Introduction

Capacity Utilization is a straightforward and crude way of finding out whether a business or an economy is operating at its peak potential. Investors would always prefer to direct their capital, where their returns are maximized to the optimal levels. In this sense, Capacity Utilization can tell us which sectors, or companies, or even economies would attract capital, which would further fuel growth and prosperity. Hence, understanding Capacity Utilization figures will prove advantageous for our fundamental analysis.

What is Capacity Utilization?

Capacity Utilization refers to the proportion of the real potential economic output that is realized at a given point in time. It tells us at what level of maximum capacity is an industry operating at. It is expressed in percentage and is given by the below equation:

For example, a firm that can produce 10,000 phones a day, if it is producing 6,000 phones only, then the company is said to have a Capacity Utilization of 60%.

In the simplest sense, Capacity Utilization is like a report card of an industry or an economy. It tells the current score (or marks) out of the maximum possible marks.

How can the Capacity Utilization numbers be used for analysis?

Capacity Utilization Rate is an essential operational parameter for businesses, especially those manufacturing physical goods, as it is easier to quantify the output.

A company operating at less than 100% implies that the firm can increase its production, and consequently, its profit margin without incurring additional costs of installing new equipment to increase production. Likewise, economies with scores of less than 100% can afford to increase production capacity when demanded.

For the companies, it serves as a metric for determining operating efficiency. Capacity Utilization is susceptible to the following factors:

  • Business Cycles: Businesses are often seasonal, seeing an increase in business during specific periods of the years, although some companies may have consistent business activity throughout the year. It depends on the nature of business and the products being manufactured.
  • Management: Lack of proper management can also lead to wastage of resources; therefore, undermining the efficiency of the company itself. It is not often the common cause but is also one factor that investors must look into to make sure proper management is there to handle the business to utilize the available resources in terms of workforce and equipment to optimize revenue for the firm.
  • Economy’s Health: Economic conditions drive consumer sentiment and affect the spending patterns of people. During fluctuating inflation rates and unstable market economic conditions, people tend to save more and spend less, which can effectively reduce the demand for goods and services. In this case, the company may need to adjust their production to demand.
  • Competition: In an open market environment, competition always takes away a portion of our business, as companies battle for a bigger portion of the market, the best companies with excellent quality goods, and reputation tend to take a higher proportion of market revenue. At the same time, the laggards end up with lower demands for their product.

In general, competition and management factors are a minor component that applies to novice companies that are in the early stages of development. In most cases, the industries are well established in their field and have consistent performance and are indeed susceptible to Economic health and business cycles.

Low Capacity Utilization figures are not desirable. Fiscal and Monetary Policymakers ( Government and Central Banks) monitor the Capacity Utilization figures and intervene using fiscal or monetary levers to stimulate business and economy. Governments can decrease the tax burden on specific sectors to encourage them to invest capital in their growth. At the same time, Central Banks can reduce interest rates to encourage business owners to borrow money and increase business activity through expansion or investment opportunities.

 High Capacity Utilization figures are always preferable, as it indicates that the companies are running at their maximum capacity, and earning maximum achievable profit through their current business setup. When Capacity Utilization is close to 100%, the economy is performing at its peak, and it is ideal an ideal environment for investors to invest in industries. It implies that economic health is stable and growing.

Sector-wise Capacity Utilization rates difference can tell us what amount of slacks each industry is carrying and can direct investment capital into the growing industries than the slowing sectors. By comparing historical highs and lows, we can get a reference, on an industry’s current performance with regards to its peak high and low performances, to understand how it is faring right now.

Impact on Currency

Capacity Utilization is a coincident indicator that is reflective of the market environment and the corresponding policy levers executed to counter the market conditions by the Fiscal and Monetary policymakers. Hence, it gives us a current economic picture as it is a function of the market environment and policy levers.

It is a proportional indicator, where high Capacity Utilization Rates indicate healthy revenue-generating activity, which is suitable for the economy, higher GDP prints, and currency appreciates accordingly. On the other hand, decreasing Capacity Utilization Rates indicate a stagnating or deteriorating business activity, which poses a deflationary threat to the economy, or extreme cases recession, which is depreciating for the currency.

It is a low impact indicator, as the corresponding impacts would have been already priced into the market. We are saying this because policy maker’s decisions come out in the form of interest rates, tax exemptions or reductions, and through survey indicators like business and consumer surveys.

Economic Reports

The “Industrial Production and Capacity Utilization – G17” reports are published every month by the Federal Reserve in the United States on its official website. The reports are published in the formats of estimates and revised estimates.

The first estimate is released around the 15th of every month at 9:15 A.M. for the previous month. It factors in about 75% of the data. The second estimate accounts for 85%, the third estimate 94%, the fourth estimate 95%, and 96% in the fifth and sixth estimates as more of the source data becomes available after each passing month.

Sources of Capacity Utilization

The monthly Capacity Utilization statistics are available on the official website of the Federal Reserve for the United States. The St. Louis FRED website provides a comprehensive list of Industry Production, and Capacity Utilization reports on its website with multiple graphical plots. We can also find global Manufacturing Production figures for various countries in statistical formats here.

Impact of the ‘Capacity Utilization’ news release on the price charts

In the previous section of the article, we understood the meaning and significance of Capacity Utilization, which essentially talks about the manufacturing and production capabilities that are being utilized by a nation at any given point of time. If demand increases, Capacity Utilization increases, but if demand decreases, the rate will fall. Policymakers use this data for fixing interest rates and while calculating inflation in the economy. Thus, investors give a reasonable amount of importance to the data and take a stance in the currency based on the Capacity Utilization rate.

The below image shows the latest and previous Capacity Utilization rate of Japan. We see there was a decrease in Capacity Utilization in March, which means the country underutilized its resources. A higher than expected number should be taken as positive for the Japanese Yen, while a lower than expected number as negative. Let us discover the impact of the data on different currency pairs.

USD/JPY | Before the announcement:

We shall begin with the USD/JPY currency pair to analyze the change in volatility before and after the news announcement. The above image shows the state of the currency pair before the news announcement, where the price moving within a range broadly and currently is in the middle of the range. As there is no clarity with respect to the direction of the market, we shall be trading based on the outcome of the news.

USD/JPY | After the announcement:

After the news announcement, the price falls below the moving average, and volatility increases to the downside. Even though the Capacity Utilization data was not very good for the economy, traders considered the data to be mildly positive for the economy in this case and bought the Japanese Yen. After the market has shown signs of weakness, we are now certain that the volatility will expand on the downside, and thus, we can take a ‘short’ position with a stop loss above the ‘resistance’ of the range.

GBP/JPY | Before the announcement:

GBP/JPY | After the announcement:

The above images represent the GBP/JPY currency pair, where we see that before the announcement, the price has started to move in a ‘range’ after a large move on the upside. This also a place from where the market had reversed earlier, thus we need to trade with caution, as we are not sure where the market will head now.

After the news announcement, the price crashes and sharply moves lower. The Capacity Utilization data proved to be positive for the Japanese Yen, and traders went ‘short’ in the currency pair, thereby strengthening the currency furthermore. This is our final confirmation for taking a ‘short’ trade and taking entry as the volatility increases to the downside.

AUD/JPY | Before the announcement:

AUD/JPY | After the announcement:

The above images are that of the AUD/JPY currency pair, where in the first image, we see that the market is in a strong uptrend indicating a great amount of weakness in the Japanese Yen. Technically, we should be looking for buying the currency pair after a suitable price retracement to the ‘support’ area, but a news release can change the entire plan. Thus, we need to wait and see what the news outcome does to the currency pair.

After the news announcement, volatility slightly increases to the downside, and the ‘news candle’ barely closes in red. This means the impact of Capacity Utilization was least on this currency pair that did not result in huge volatility in the pair. As the overall trend is up, a ‘short’ trade can be very risky as the risk to reward ratio is not in our favor.

That’s about ‘Capacity Utilization’ 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 Is ‘Government Budget’ & How It Helps In Determining A Nation’s Economy?

Introduction

Government Budget is one of the annual reports that moves the market volatility significantly. The Government of a country or a state is responsible for managing the economic activity of that region. Hence the Budget will primarily determine the pace of economic activity for that fiscal year. Government Budget figures are incredibly crucial for traders and investors as it can impact everything from taxes to Sovereign risks.

What is Government Budget?

Government Budget is a detailed annual plan for public spending by the Government. The Budget, in general, applies to individuals, corporations, and Governments. An individual planning his finances for the year determining what portion of his monthly/annual income he is going to allocate for his expenses would be his Budget. For corporations, annual budgets would detail what amount of revenue would be spent on different departments like R&D, marketing, infrastructure, etc.

The Government Budget is the same as the above, but the list of expenses is related to public welfare. The Government is responsible for a multitude of operations like salary payments to Government employees, financing agricultural subsidies, providing financial support to specific industries. It may also include paying for military equipment, payout pension funds to the applicable people, and other Government running operations expenses, etc.

The Government Budget is calculated on an annual basis, and for the United States, this fiscal year begins on the 1st of October to the next year’s 30th of September.

What a Government earns through taxes is called revenue, and what it spends on is categorized under Government Spending. When the spending exceeds its revenue, then we call it as a Budget Deficit or Fiscal Deficit. On the other hand, when the revenue exceeds spending, we have what is called a Budget Surplus or Fiscal Surplus. The United States has been running a budget deficit most of the time throughout history, as shown below:

Budget money spent is usually categorized into two categories:

  • Mandatory Spending: These are the spending that the Government has no choice to cut back on as these are stipulated by law, which the Government cannot fault on. For the United States, Social Security is one such program that was brought into the United States law by President Roosevelt in 1935, under the Social Security Act. Medicare and Medicaid are also typical examples of Mandatory Spending, which are fixed and must be paid out by the Government.
  • Discretionary Spending: This part can make or break an economy. It is the part of Budget that the Government decides to spend on other programs that are not mandatory but essential for growth. There is certain flexibility on how much can be spent on which part of the economy.

How can the Government Budget numbers be used for analysis?

The Government’s Fiscal Deficit is financed through borrowing money from investors in the form of bonds for which the Government promises to pay interest. Deficit each year adds to the debt. The United States and many other developed economies have spent most of their time maintaining a Budget Deficit as the spending has been failing to stimulate the economy year after year.

If the Government decides to cut back on spending to service debt and interest payments, then the economy may slow down due to a lack of funding stimulus. On the other hand, if the Government continues to spend beyond its revenues to stimulate the economy, then it will keep piling up the previous debts.

The Budget has both short-term and long-term impacts on the economy. Based on which sectors the Government has chosen to allocate its spending, investors and traders can predict economic growth and slowdowns in different sectors.

The Budget’s portion that is being spent on servicing debt and interest payments also decides whether the country is in danger of Sovereign Credit Risk. The credit rating agencies like Standard & Poor’s, Fitch Group, and Moody’s, etc. credit rate the Government. If the credit rating falls, then investors quickly lose confidence in the Government’s ability to pay back.

Hence, investors demand higher interests for the risk associated and which further cuts a bigger pie out of the Budget, leaving less room for spending. The vicious cycle of debt is tough to get out of for the Government and hence, Budget figures and strategic allocation of funds is crucial.

Impact on Currency

Currency markets quickly lose faith in the Government that is unable to resolve National Debt and large Budget Deficits, and currency immediately depreciates. Increased confidence in the Government can appreciate the currency value.

Budget strategy tells the market the Government’s ability to maintain its debt and simultaneously invest its Spending on Growth. Only servicing debt slows the economy, and only spending on Growth piles up debt, which eats up tax revenue. Both are dangerous for the Government and the economy.

Hence, the Government Budget is a significant leading economic indicator for traders and investors alike. 

Economic Reports

The Budget reports of all countries are available on their respective Federal Government’s website. On an international scale, the World Bank and International Monetary Fund maintain the budget data for most countries. For the United States, the Budget reports are available on the Treasury Department’s official website and Office of Management and Budget’s website.

Sources of Government Budget

A comprehensive summary of all Budget related statistics are available on the St. Louis FRED and some other credible websites that are given below:

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

Till now, we have understood the importance of Government Budget in an economy and how it can be used for fundamental analysis of a currency. The Budget impacts the economy, interest rate, and stock markets. How the finance ministry spends and invests money affects the economy. The extent of the deficit influence the money supply and the interest rate in the economy. High-interest rates mean higher cost of capital for the industry, lower profits, and lower currency prices.

In this example, let’s analyze the impact of Government Budget on various currency pairs and examine the change in volatility due to the announcement of the same. For that, we have collected the data of Canada, where the below image shows the latest Budget that was fixed by the Canadian Government during the reference month. Let us find out the reaction of the market to this data.

USD/CAD | Before the announcement:

The first currency pair which we will be discussing is USD/CAD. The above image shows the exact position of the currency before the news announcement. We see that the market is in a downtrend, and recently the price has pulled back to a ‘supply’ area, and some initial reactions (red candle) can also be seen. Since the impact of the news outcome is less, aggressive traders can take a ‘short’ position with a stop loss above the ‘supply’ area.

USD/CAD | After the announcement:

After the news announcement, we see that the market moves higher, and there is a sharp surge in the price. The volatility increases to the upside the price closes as a bullish ‘news candle.’ Even though the Government Budget was higher than before, it narrowed to 3.58 billion in February from 4.31 billion in the corresponding month of the previous year. This is negative for the economy when analyzing from a yearly perspective. Thus, traders went ‘long’ in the currency and weakened the Canadian dollar.

CAD/JPY | Before the announcement:

CAD/JPY | After the announcement:

The above images represent the CAD/JPY currency pair, where we see that in the first image, the market is in moving within a ‘range,’ and currently, the price seems to have broken below the ‘support,’ showing an increase in the selling pressure. Since the Canadian dollar is on the left hand of the pair, a strong down move indicates a weakening of the currency. Since the price has broken below, we will be looking to sell the currency pair after some consolidation in the market.

After the news announcement, the price crashes below, and volatility extends on the downside. The bearishness in the price is a consequence of the weak Government Budget data that saw a decrease in the value compared to the previous year. Therefore, traders went ‘short’ in the currency pair by selling Canadian dollars. One needs to be cautious before taking a ‘short’ trade as the price is approaching a ‘demand’ area, and buyers can pop up at any moment.

GBP/CAD | Before the announcement:

GBP/CAD | After the announcement:

The above images are that of GBP/CAD currency pair, where we see that the market is in a strong downtrend before the news announcement, signifying strength in the Canadian dollar. We also observe that the price has recently bounced back from its’ lows’ and has crossed the moving average. This could be a sign of trend reversal, which we shall validate based on the outcome of the news.

After the news announcement, the price initially moves higher, but later selling pressure is seen, and the candle closes in the red. Here the volatility is witnessed on both sides of the market, and the price manages to close above the moving average line. The market appears to be volatile even after the news announcement, and we do get a sense of the direction of the market. However, aggressive can go ‘long’ in the market on the basis that the price continues to remain above the moving average, after the news release.

That’s about ‘Government Budget’ 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

‘Housing Starts’ – The Significant Of This Fundamental Indicator!

Introduction

‘Housing Starts’ Report is a widely used economic indicator by investors and traders to gauge the economic activity of a country. Construction of Houses affects many other dependent sectors like employment, raw material supplies, etc. Hence, we need to understand Housing Starts as part of our overall fundamental analysis.

What are Housing Starts?

Housing Starts refers to those properties whose housing construction activity has started on the foundations. It means only those are counted for which the building activity has crossed beyond the beginning foundation or footing laying stage. Houses for which only pillars and foundations are laid and stopped are not counted in.

This report follows the Building Permits reports, and after this stage, we have a Housing Completion report. Here each of the survey reports signifies different stages of the housing construction activity.

An increase is first observed in Building Permits, which then translates to an increase in Housing Starts and later translates to Housing Completion reports accordingly as the construction activity goes from start to completion. In this regard, understanding which report follows which one and what they mean from an economic viewpoint is crucial, as we will see later in the analysis section.

Housing Starts Report data is divided into the following three main categories:

Single-family homes: A single independent house constructed by a single-family is regarded as Single-family homes. This is the go-to type of home that people go for when they are financially secure and well off.

Townhomes and Condominiums (Condos): These are typically multi-storied or have multiple homes within a single structure that are independently owned. They differ from Apartments mainly in terms of ownership. Different owners own each independent unit.

Multi-family Structures: These would typically include Apartments or large townships which are owned by a single organization and made available on lease.

Economic Reports

The United States Census Bureau releases the Housing Starts reports under “New Residential Construction Survey Report” at 8:30 AM on the 12th working day of every month, which usually falls on 17-18 of every month, on their official website.

The survey is partially funded by The Department of Housing and Urban Development. The data is collected by Census field representatives using interviewing software through laptop computers.

In February, the annual estimates of New Residential Construction are finalized and released for the previous year. Initial estimates of single-family homes sold and for sale are also available every month in the New Residential Sales (NRS) press release as per the NRS Release Schedule. The housing numbers are seasonally adjusted to accommodate the weather dependency on the nature of the housing work to give more statistical accuracy.

How can the Housing Starts numbers be used for analysis?

The Housing Starts number is confused and misinterpreted with its sibling reports, i.e., Building Permits and Housing Completion reports, all signify different stages of economic activity effects. In that sense, Housing Starts numbers are current economic indicators, which means it tells what is going on in the economy right now. Building permits then in relativity is a leading or advanced indicator, and housing completion would be a lagging indicator.

When the government injects money into the economy, loans are available easily, and businesses are stimulated. There would be an increase in employment, which would have resulted in better wages for many. Such an activity would have prompted a rise in building permits, and when the money does reach people, housing starts numbers would see an increase. In this sense, an increase in housing starts tells investors that the economy is moving in a positive direction.

The type of Houses that have seen increase can also tell us the sentiment of people towards the financial future of the economy. An increase in single-family homes would suggest that more people are wealthy enough to afford one and are confident towards mortgage repayment. This also indicates that banks are also giving higher loans to more people, and the economy has more liquid money injected into the system.

An increase in condos or multi-family structures with respect to single-family homes would suggest that people are not comfortable enough to go for expensive homes and would rather save and settle into cheaper alternatives. This is usually prevalent during weaker economic periods, and a significant difference in the numbers can indicate an oncoming recessionary period.

Impact on Currency

An increase in the Housing Starts is reflective of the present current economic conditions. A strong economy would have higher numbers in the housing reports relative to a weaker economy where people would shy away from purchasing single-family homes.

An increase in housing starts reports also implies that demand for construction materials, hiring of labor forces, loans, and other construction-related activities has risen, and the economy is actively generating revenue than before, which is good for the nation and its currency.

Below is a snapshot of the Housing Starts historical report taken from the FRED official website, which shows the economic indicator’s correlation with the national economy’s growth. During times of recession (shaded bars in the background), there have been significant plunges in the numbers and vice versa. The below graph proves the importance of Housing numbers as an indicator of the economy’s performance in our fundamental analysis.

Sources of Housing Starts Index

Given below is the latest Housing Starts report taken from the official website of the Census Bureau. Follow this link for reference. Here, you can find the data related to New Residential Constructions. The St. Louis FRED website has comprehensive data in graphical forms, which will be easier for our analysis. The Census Bureau also explores other related economic indicators related to Housing Activity within the United States.

Impact of the ‘Housing Starts’ news release on the price charts

Housing Starts is one of the leading economic indicators which measures the strength of the housing sector. It shows the change in the number of new residential buildings that began construction during the reported month. The indicator, however, is not said to cause a major impact on the currency, and the volatility during news release will be ‘low.’ So, traders around the world do not pay much attention to this data. However, they do keep a watch on the trend to gauge the economy’s strength in the longer-term. Hence, based on the current data, they make some changes to their current position in the currency.
Many of the countries release the housing starts data on a Monthly and Yearly basis, where today we will be analyzing the month-on-month numbers of Canada. The below image shows previous, forecasted, and actual Housing starts data of Canada, where we see an increase in the number of constructions in the month of February. The Canadian Mortgage and Housing Corporation release the housing starts data of Canada. A higher than forecasted reading is considered positive for the currency, while a lower than expected data is taken to be negative.

CAD/JPY | Before the announcement:

We start our analysis with CAD/JPY currency pair, and the above image shows the state of the pair before the news announcement. We see that the Canadian dollar is in a strong downtrend, and recently it has formed a range that has created areas of ‘support’ and ‘resistance.’ There is of pessimism in the market as the economists and institutional investors are expecting a lower ‘housing starts’ data than before, which is one of the reasons behind the price going lower. Since the market is at the ‘support’ area, it is risky to go ‘short’ in this pair, and thus we need some clarity of the ‘housing starts’ data before entering the market.

CAD/JPY | After the announcement:

After the ‘housing starts’ numbers are out, there is very little change in volatility, which was expected as it is not a highly impactful event. The price initially goes up, which is a result of better than forecasted ‘housing starts’ data, but it gets immediately sold, and the candle closes at the opening price. The selling pressure is seen because even though the data was better than expected, it was still lesser than previous data, and this is negative for the currency. As the volatility is less and the price is at the ‘support’ area, we do not recommend a ‘short’ trade as the risk-to-reward ratio is unhealthy.

EUR/CAD | Before the announcement:

CAD/JPY | After the announcement:

The above images represent the EUR/CAD currency pair, and since the Canadian dollar is on the right-hand side, weakness in the Canadian dollar should take the currency higher, which is why the market is going up in the above pair. The ‘range’ before the news announcement seems to be much more established and clearer than in the previously discussed pair. Since price is close to the ‘resistance’ point, a positive ‘housing starts’ data can be an opportunity to go ‘short’ in the currency pair.

After the news release, we see that the candle closes with a wick on the top indicating strength in the Canadian dollar. Since the data was positive for the economy, one can take a ‘short’ trade expecting the volatility to expand on the downside. We should not forget that since the data does not have much impact, our ‘take-profit‘ for the trade should be the recent ‘support’ area.

NZD/CAD | Before the announcement:

NZD/CAD | After the announcement:

The next currency pair which we will be discussing is NZD/CAD, and in the first image, we see that the market is in an uptrend trying to make a new ‘higher high.’ This shows the amount of weakness in the Canadian dollar and the strength of the New Zealand dollar. As we have explained that the event does not cause much volatility in the pair, taking any position against the trend would be very risky.

After the news announcement, the Canadian dollar shows some strength owing to positive ‘housing starts’ data but not enough to take the price lower. This minimum volatility is a sign that once cannot go ‘short’ in the pair and instead look to join the trend.

That’s about ‘Housing Starts’ 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

Importance Of ‘Housing Index’ In Gauging The Strength Of An Economy

Introduction

Housing Index is a broad and long term metric for investors and traders to judge the Housing Market in a country or specific region. There is a good correlation between the Housing Market, Stock Market, and economic growth. Housing Markets generally reflect the health and strength of the economy. Hence, the Housing Index serves as a pulse check or double-check for traders to affirm their economic assessments.

What is the Housing Index?

It is a measure of changes in the price movement of single-family houses. It generally measures the changes in residential housing prices as a percentage change from an index period (base period). The Housing Price Index for the base period is 100, and subsequent reports measure the change relative to this period.

For example, an HPI of 110 indicates a 10% appreciation in the single-family housing prices in a region. Hence, it is a direct measuring tool for housing price trends and serves as an indirect measurement tool for housing affordability, mortgage default rates, and prepayments, etc.  It is often expressed as change with regards to the previous month in percentage also.

Although different agencies are measuring the Housing trends, the most prevalent is the Housing Price Index by the Federal Housing Finance Agency in the United States. The FHFA HPI is a weighted, repeat sales index. It means it takes Houses that have also been refinanced into account. This data is obtained from reviewing the repeat mortgage transactions on single-family properties that have been securitized by Fannie Mae or Freddie Mac.

The HPI covers the entire 50 states, and also publishes for the nine Census Bureau Divisions, for Metropolitan Statistical Areas (MSA) and Divisions for more specific and detailed analysis.

How can the Housing Index numbers be used for analysis?

Housing Index is a widely used economic indicator by traders and investors. It gives a head check to the economic health of a country or region.

Generally, people buy houses through mortgages. When the Housing Price rises, it indicates that the market or citizens can pay for much higher rates. It indicates that the liquidity of the economy is good.

Secondly, people buy homes using mortgages most of the time, and it indicates the ease of obtaining a loan from banks at cheaper interest rates. It indicates that the bank has enough reserves to dish out mortgage loans at such low rates. It ultimately means the economy has an actively circulating wealth in the system.

Rising Housing Prices are accompanied by wage growth, employment in the construction industry, especially. It also stimulates confidence for the owners of Houses to know that they have a high-value asset with them that generally translates to increased consumer spending. Overall the total demand increases, boosting the economy and resulting in a higher GDP print.

When the Housing Prices fall, it indicates that consumers are less willing to purchase Houses as they are less confident about their future financial security. It can also indicate that banks are also lending at higher interest rates that are not affordable by middle and lower-middle-class families. The Housing Sector slowing down is a reflection of the economy in this sense. Slowdown accompanied by Mortgage defaults can be warning signs for investors, and traders about an oncoming slowdown or recession.

The below graph confirms our analysis as the housing prices fall during recession periods. As it can be seen that the Housing Index is not market sensitive and does not fluctuate to temporary shocks and instead, it has a trend that builds up over a time frame of certain months or years. Hence, it is a better tool for long term trends than a short-term trend.

Impact on Currency

The Housing Price Index is a coincident and lagging indicator in the short run, as it is a consequence of what has already happened in the economy. When the citizens feel confident about their financial security sufficiently, then only would they take a step to purchase a house. Hence, the Housing Price Index is a confirmation of a trend that would have been predicted by the leading economic indicators.

But for investors and traders who are looking for long term trends, the Housing Price Index acts as an efficient tool to assess current market prices and use it to predict the trend.

Potential shifts in the Housing Price Index can move the stock markets. The currency market movement depends on the strength of the economy.

When compared with indicators like Building Permits and Housing Starts, it relates to as a coincident indicator. In the long run, it can be used as a leading indicator to spot the trend that has already begun.

It is a proportional indicator, meaning when the Housing Price Index rises, it has a ripple effect through jobs, wages, and other industries related, and hence increased economic activity translates to higher GDP prints and appreciating currency.

Economic Reports

The Housing Price Index (HPI) is released by the Federal Housing Finance Agency (FHFA). It gets data from Fannie Mae and Freddie Mac, which are Government Sponsored Enterprises (GSE).

It releases monthly and quarterly reports for HPI on its official website. The dates for the subsequent year are already announced and are typically released at 9:00 AM on the specified date.

Many other agencies provide Housing Indices, one such popular one is the S&P’s Case-Shiller Index, which uses a slightly different approach in measuring the Housing Prices.

Sources of Housing Index

The Housing Price Index from FHFA is available here

All the current and previous reports are available here

We can find the different Housing Indices on the St. Louis FRED website here

We can find Housing statistics for various countries in the statistical form here

Impact of the ‘Housing Index’ news release on the Forex Market 

In the previous section, we discussed the House Price Index (HPI) economic indicator, which essentially is a measure of the single-family house prices movement, with mortgages backed by government-sponsored enterprises. This report helps to analyze the strength of the country’s housing market and the economy as a whole. The house price index contributes only a small portion of the GDP of the country. Thus investors do not give much importance to the news release.

In today’s example, we will be exploring the impact of the announcement of the U.S. House Price Index on different currency pairs and witness the change in volatility. A higher than expected number is considered to be positive for the currency, while a lower than expected reading is taken negatively. This report is published by the Federal Housing Finance Agency. The above image shows an increase in the value of the House Price Index from the previous month, which should be positive for the currency. Let us see how the market reacts to this data.

USD/JPY | Before the announcement:

Let’s begin with the USD/JPY currency pair and try to analyze the impact on the pair. As we can see in the above chart, the price is an overall uptrend and recently has retraced to a ‘demand’ area. Looking at the price, we can say that the price might move higher and continue the uptrend, but we need to wait and see if the news announcement causes major changes to the dynamics of the chart.

USD/JPY | After the announcement:

After the news announcement, the price sharply moves higher, and we see a bullish ‘news candle,’ indicating that the House Price Index data was positive for the economy. The volatility, which was quite less before the news release, suddenly increases to the upside after the release. This was a result of the increase in the House Price Index by 0.2% for the current month, which made traders go ‘long’ in the U.S. dollar. This is a confirmation sign that the market will further move up.

USD/CHF | Before the announcement:

USD/CHF | After the announcement:

The above images represent the USD/CHF currency pair where we that before the news announcement, the market is in a downtrend, and currently the price is at the lowest point. This means the U.S. dollar is showing weakness in this pair, or Swiss Franc is strong. When the price is strongly moving lower, it is not recommended to have any ‘buy’ positions as it could be very risky. Thus, it is better to wait for the news release and gain some clarity about the data. Based on the data, we can take a position in the market. After the news announcement, there is a sharp rise in the price and a spike in volatility to the upside. This again came from the fact that the House Price Index news data was better than last time, which brought cheer in the market and made investors buy more U.S. dollars. The bullish ‘news candle’ is a sign of trend reversal that could be extended further.

GBP/USD | Before the announcement:

GBP/USD | After the announcement:

The above images are that of the GBP/USD currency pair, where we see that the overall trend of the market is down, and recently the price has pulled back from its ‘lows.’ Here, since the U.S. dollar is on the right-hand side of the pair, a down-trending implies strength in the U.S. dollar. We will be looking to trade this pair after we see some trend continuation patterns in the market, indicating that the downtrend will continue. After the news announcement, the price falls by a good amount, and the volatility increases to the downside. The bearish ‘news candle’ signifies that the House Price Index news was positive for the economy that took the price lower and increased the selling pressure.

That’s about the ‘Housing Index’ 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 Significance of ‘Imports’ Data In Determining A Nation’s Economy