Categories
Forex Fundamental Analysis

Everything About ‘Germany Ifo Business Climate Index’ Forex Fundamental Indicator

Introduction

Although government expenditures play an important role in the economy, investments by the private sector can be said to be the backbone of any economy. Therefore, when the private sector businesses have a rosy outlook on the economy, it can be expected that they will increase their investments. For governments, economists, financial analysts, and forex traders, tracking investors’ expectations can help understand and even predict the future economy.

Understanding Germany Ifo Business Climate Index

The Ifo business climate index is used to rate the current business climate in Germany and also rates the expectations of businesses for the next six months. Thus, we can say that the Ifo Business Climate is a leading indicator of economic development in Germany.

Source: Ifo Institute

Since Germany is the largest economy in the Euro area, this index plays a vital role in influencing the E.U’s overall economic activity.

Calculating the Germany Ifo Business Climate Index

The Ifo Institute for Economic Research conducts a monthly survey of about 9000 businesses operating in Germany. The businesses operate in the construction, wholesaling and retailing, manufacturing, and service sectors – i.e., the survey covers the entirety of the German economy.

In the survey, the respondents are required to give their assessments of the current business environment and what they expect over the coming six months. In their responses, they can say that the current business environment is “good,” “satisfactorily,” or “poor.” For their expectations, they can respond as either “more favorable,” “unchanged,” or “more unfavorable.”

The Ifo then weighs these responses. The weight attached is based on the importance of the industry’s contribution to the overall economy. Their importance is gauged by the percentage of employees they have and their contribution to the GDP.

The balance in the current business situation is determined by the difference between the percentage of “good” and “poor” responses. Similarly, the balance business expectations are the difference between the percentage of the “more favorable” and “more unfavorable” responses. The business climate is calculated by taking the average of the balances of the current business situation and the expectations.

The Ifo index is seasonally adjusted to ensure that some of the recurring patterns are eliminated from the time series. To seasonally adjust the data, the Ifo Institute employs the X-13ARIMA-SEATS procedure developed by the U.S. Census Bureau.

Using the Germany Ifo Business Climate Index in Analysis

There are several ways in which this index can be used to show how the German economy is progressing.

When the index increases over time, it shows that the businesses are more inclined to increase their capital expenditure and investments in various projects in the economy. In doing so, they effectively ensure that the economic output will increase, which leads to higher GDP. Similarly, an increase in investments into economic projects and capital expenditures leads to an increase in production activities, which leads to higher employment levels.

Therefore, we can say that when the Ifo business climate index increases, it is expected that the rate of unemployment will reduce. Conversely, the rate of unemployment should be expected to rise when the Ifo business climate index drops. This is because the drop in the index implies that businesses expect business conditions will be more favorable. They will be prompted to cut back on investments and scale down core operations to mitigate losses. The resultant effect is lower levels of GDP and a higher unemployment rate.

Over the long term, the Ifo business climate index may be used to show the trends in business cycles and even used to predict recessions and economic recoveries. One of the primary drivers of any business is profiteering, which comes from their products’ demand. When businesses anticipate the demand to fall, their expectations are “more unfavorable.”

We know that the aggregate demand depends on the households’ demand. Therefore, when the demand is expected to fall, households are expected to have lesser disposable income, which could result from low wages and prevalent job losses; these are characteristics of a contraction. Therefore, when the Ifo business climate is continuously dropping, we can expect that the economy might go through bouts of recession.

On the other hand, if the Ifo business climate is steadily rising, it shows that the economy will undergo a steady period of expansion. This expansion comes from the fact that businesses will expect the demand for their goods and services to increase. This instance implies that households have more disposable income, which means wages have increased or employment increased.

Furthermore, when the economy has been through depression or recession, an improvement in the Ifo business climate index shows that the future is “more favorable.” It means that businesses do not expect the ongoing stage of recessions or depression to persist into the future. These expectations imply that businesses expect to increase their investments, a clear sign of economic recoveries.

 

Source: Ifo Institute

Impact of Germany Ifo Business Climate Index on the Euro

Germany is the largest economy in the E.U.; therefore, its economic outlook is bound to significantly impact the Euro since the EUR fluctuates depending on the economic performance of its member countries.

When the Germany Ifo Business Climate Index rises, it means that the German economy is expected to grow. Furthermore, the benefits of the resultant expansion of business operations in Germany might spill over to other countries in the E.U. in terms of job creation. As a result, the EUR will appreciate relative to other currencies.

Conversely, the EUR is expected to depreciate relative to other currencies when the Germany Ifo Business Climate Index continually drops. This drop signifies a potential contraction of the German economy, which may affect other EU-member countries.

Sources of Data

The Ifo Institute for Economic Research is responsible for conducting the surveys, aggregating data, and publishing the Germany Ifo Business Climate Index. Trading Economics has a historical time-series data of the Germany Ifo Business Climate Index.

How Germany Ifo Business Climate Index Release Affects The Forex Price Charts

The Ifo Institute for Economic Research published the latest business climate index on September 24, 2020, at 8.00 AM GMT. The release can be accessed at Investing.com. From the screengrab below, we can see that the German Ifo business climate index is a high-impact indicator.

In September 2020, the German Ifo business climate index was 93.4, lower than the analysts’ expectation of 93.8.

Let’s see how this lower than expected release impacted the EUR/GBP price action.

EUR/GBP: Before Germany Ifo Business Climate Index Release on 
September 24, 2020, just before 8.00 AM GMT

Before the release of the index, the EURGBP pair was trading in a weak uptrend. The 20-period M.A. was almost flattening. They adopted a weak downtrend moment before the release.

EUR/GBP: After Germany Ifo Business Climate Index Release on 
September 24, 2020, at 8.00 AM GMT

After the release of the Germany Ifo Business Climate Index, the pair formed a 15-minute bullish candle but adopted a strong downtrend afterward. The 20-period M.A. steeply fell with candles forming further below it. This trend shows that the EUR weakened against the GBP since the Germany Ifo Business Climate Index was weaker than expected.

As shown by the above analyses, the Germany Ifo Business Climate Index has a significant impact on forex price actions.

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Forex Fundamental Analysis

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

Introduction

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

What are Job Vacancies

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

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

Purpose of Job Vacancies Statistics

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

Job Vacancies as an Economic Indicator

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

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

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

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

How Job Vacancies Affect the Economy

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

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

Source: OECD Statistics and US BEA

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

Job Vacancies and Impact on the Currency

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

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

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

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

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

How Job Vacancies News Release Affects The Price Charts

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

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

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

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

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

EUR/USD: Before JOLTS release August 10, 2020

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

AUD/USD: Before JOLTS release August 10, 2020

NZD/USD: Before JOLTS release August 10, 2020

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

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

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

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

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

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

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

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Forex Fundamental Analysis

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

Introduction

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

What is Import Prices?

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

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

How can the Import Prices numbers be used for analysis?

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

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

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

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

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

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

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

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

Impact on Currency

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

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

Economic Reports

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

Sources of Import Prices

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

Import Prices – Effect on Price Charts

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

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

Import Prices Report

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

Historical Impact Prices Report

Impact Level

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

USDJPY – Before the Announcement

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

USDJPY – Before the Announcement

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

USDCHF – Before the Announcement

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

USDCHF – After the Announcement

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

AUDUSD – Before the Announcement

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

AUDUSD – After the Announcement

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

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

Categories
Forex Fundamental Analysis

Imports by Category – Comprehending This Forex Fundamental Driver!

Introduction

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

What are Imports by Category?

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

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

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

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

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

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

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

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

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

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

Impact on Currency

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

Economic Reports

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

Sources of Imports by Category

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

Imports by Category News Release – Effect on the Price Charts

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

Level of Impact

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

Imports data – AUD

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

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

Imports – Australia

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

AUDUSD – Before the Announcement

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

AUDUSD – After the Announcement

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

AUDCAD – Before the Announcement

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

AUDCAD – After the Announcement

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

AUDJPY – Before the Announcement

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

AUDJPY – After the Announcement

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

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

Categories
Forex Fundamental Analysis

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

Introduction

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

What is Employment Change?

Employment

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

Employment Change

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

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

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

How can the Employment Change numbers be used for analysis?

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

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

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

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

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

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

Impact on Currency

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

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

Economic Reports

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

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

Image Credit: U.S. Bureau of Labor Statistics

Sources of Employment Change

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

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

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

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

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

Categories
Forex 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.

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Forex Fundamental Analysis

What Does The ‘GDP Growth Rate’ Forex Driver Say About A Nation’s Economy?

Introduction

GDP Growth Rate is the most critical fundamental macroeconomic indicator for measuring economic prosperity. It is the number one macroeconomic indicator, and all other leading, coincident, and lagging indicators are all trying to predict what GDP Growth Rate would be. Our fundamental analysis revolves around predicting the growth rate before the GDP Growth Rate reveals it. It is the de facto measure of economic growth for all countries worldwide.

The importance of this economic indicator cannot be understated. GDP Growth Rate figures move the markets like no other, be it the currency or the stock markets. Hence, understanding the significance of this macroeconomic indicator is paramount for traders and investors.

What is the GDP Growth Rate?

Gross Domestic Product

It is a measure of the total economic output of a country. It is the total monetary value of all the goods and services produced within the country regardless of citizenship (resident or foreign national). The commonly used term “size of the economy” refers to this economic indicator. The US is the world’s largest economy, and it means it has the highest nominal GDP or highest economic output.

GDP Growth Rate

GDP Growth Rate is the measure of the rate of economic growth. In other words, it tells the pace at which an economy is growing. Generally, developing or emerging economies like China, India, or Japan will have a higher GDP growth rate than the mature or developed economies like the United States, United Kingdom, etc.

Mathematically, it is the percentage change of Gross Domestic Product with regards to the previous quarter. Although the GDP Growth Rate is reported quarterly, it is annualized for better analysis and comparison. It means that the quarterly GDP is scaled to a year to compare the Growth Rate with the previous year and understand whether the economy is growing faster or slower compared to the previous year. 

The other reason is that the GDP Growth Rate changes according to the business cycle and is usually very high during the last quarter, accounting for holiday shopping from consumers driving up the GDP. Hence, annualizing with seasonal adjustment makes it more accurate for analysis. The Real GDP Growth Rate accounts for inflation and is the most-watched GDP statistic.

The GDP Growth Rate is affected by the four components of the GDP:

A | Consumer Spending: It is also called Personal Consumption. It represents spending associated with the end-consumers or the general population. The Personal Consumption Expenditure reports, Retail Sales, are all different economic indicators representing Consumer Spending. It makes up about 69% of the total GDP in the United States.

B | Business Investment: Economic Output of the Business Sector makes up 18% of the total GDP in the United States. Business Surveys like Purchasing Manager’s Index, Industrial Production, etc. help assess the Business Sector’s contribution to economic output.

C | Government Spending: It involves all the expenditures incurred by the Government to maintain and stimulate economic growth and run its operations. In the United States, significant proportions of Government Spending go to Social Security, Medicare benefits, and Defense Spending. It accounts for 17% of the total economic output for the United States.

D | Net Exports: It is the difference between the total exports and imports. Revenue is generated from exports and depleted from imports. Developing economies will mostly have positive Net Exports as it is an integral part of their revenue generation. The United States has -5% Net Exports of the total GDP, meaning it is a net importer.

How can the GDP Growth Rate numbers be used for analysis?

When the economy is growing or expanding, the GDP Growth Rate is favorable. When the GDP Growth Rate is increasingly positive, businesses, jobs, and personal income all grow followingly. Developing economies grow faster than mature economies (as the developed economies are already more saturated compared to developing ones). It is generally standard for matured economies to peak out at 3-4% GDP Growth Rate and developing economies can have anywhere between 5-20%.

When the economy is slowing or contracting, businesses will halt new investments and plans to avoid deflation. New hiring is also postponed; people will save more than spend to prepare for the oncoming deflationary conditions. The economy comes to a slowdown. The Government intervenes through fiscal and monetary levers to stimulate economic growth and bring it back to normal conditions and maintain the growth rate. Overall, the GDP growth rate tells us the economy’s health.

Impact on Currency

The GDP is a lagging macroeconomic indicator that has high-impact on the market volatility. Investors’ decisions are based on the GDP growth rate. It is a proportional indicator. High GDP Growth Rates are suitable for the economy overall and vice-versa.

Though it is a lagging indicator, it has many implications for the economy. It is the most extensive measure of economic activity and the primary gauge of the economy’s health. GDP Growth Rate comparisons amongst different economies are vital for currency markets, and hence, it has a very high impact on the currency market.

Economic Reports

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

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

Sources of GDP Growth Rate

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

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

GDP & GNP – FRED 

GDP Growth Rate – World Bank

GDP Growth Rate – IMF

Impact of the “GDP Growth Rate” news release on the Forex market

In the previous section of the article, we explained the GDP Growth Rate fundamental indicator and saw how it could be used for gauging the strength of an economy. The GDP Growth Rate indicates how quickly or slowly the economy is growing or shrinking.

It is driven by four components of GDP, the largest being personal consumption expenditures. But economists prefer using real GDP when measuring growth because it is inflation-adjusted. When the economy is improving, the GDP Growth Rate is favorable. If it is contracting, businesses hold off investing in new technologies. If GDP Growth Rate turns, then the country’s economy is in a recession.

In the following section, we will analyze India’s GDP Growth data and observe the change in volatility due to the news announcement. The below image shows the fourth quarter GDP Growth data of India, where there has been a fall in the value compared to the previous quarter. The most critical and highest contributor to the growth of the Indian economy is services. Let us find out the reaction of the market to this data.  

USD/INR | Before the announcement:

We shall start with the USD/INR currency pair to study the impact of GDP Growth Rate on the Indian Rupee. The above image shows the ‘Daily’ time-frame chart of the currency before the news announcement, where we see that the market is moving within a ‘range’ and currently the price seems to have broken out of the ‘range.’ The volatility is high on the upside, indicating that the Indian Rupee is weakening. Depending on the GDP Growth Rate data, we will take a suitable position.  

USD/INR | After the announcement:

After the news announcement, we see a sudden rise in the volatility to the upside. The price moves higher initially, but selling pressure from the top makes the ‘news candle’ to close with a wick on the top. This was a result of the harmful GDP Growth data where there was a reduction in the Growth Rate from last quarter.   

INR/JPY | Before the announcement:

INR/JPY | After the announcement:

The above images represent the INR/JPY currency pair, where it is clear from the first image that the price was moving in a ‘range’ before the announcement, and presently it has broken the ‘support’ with a lot of strength. This is the first sign of weakness in the Indian Rupee that could probably extend. If the price remains below the moving average, a ‘sell’ trade can be initiated.

After the news announcement, the price crashes lower but immediately gets reversed, and the ‘news candle’ closes with a wick on the bottom. The initial reaction was a result of the weak GDP Growth Rate, which lead to the further weakening of the currency. Volatility increased to the downside due to the news announcement, which was on expected lines.

AUD/INR | Before the announcement:

AUD/INR | After the announcement:

The above images are that of AUD/INR currency, where we see before the news announcement, the market is in a downtrend, and currently, the price is at its lowest point. Technically, we should be looking to sell the currency pair after a price retracement to the nearest’ resistance’ level or an appropriate Fibonacci ratio. Therefore, depending on the volatility change due to the news release, we will take a pair.

After the news announcement, the volatility emerges to the upside, and we see a sudden rise in the price that also goes above the moving average. This was a result of the weak GDP Growth Rate that made traders to ‘long’ in the currency pair by selling Indian Rupees. The news release hurts the currency where the weakness persists for a while, but later, the downtrend continues.

We hope you understood the concept of “GDP Growth Rate” and its impact on the Forex price charts after its news release. All the best. Cheers!

Categories
Forex Fundamental Analysis

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

Introduction

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

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

What is the GDP per Capita?

GDP 

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

GDP Per Capita

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

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

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

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

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

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

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

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

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

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

Impact on Currency

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

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

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

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

Economic Reports

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

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

Sources of GDP per Capita

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

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

GDP & GNP – FREGDP per Capita

Real GDP per Capita – FRED

GDP per Capita – World Bank

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

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

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

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

USD/JPY | Before the announcement:

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

USD/JPY | After the announcement:

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

NZD/JPY | Before the announcement:

NZD/JPY | After the announcement:

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

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

EUR/JPY | Before the announcement:

EUR/JPY | After the announcement:

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

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

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

Categories
Forex Fundamental Analysis

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

The Impact Of ‘GDP Constant Prices’ News Announcement On The Forex Market

Introduction

GDP Constant Prices is the primary indicator used by Government Agencies, Economists, Investors, Traders for year-to-year analysis of economic progress. GDP Constant Prices is the real scorecard for a country’s progress. 

It is a national level indicator and is closely watched by the market. The most important fundamental indicator Real GDP Growth Rate is derived from GDP Constant Prices. Hence, overall it is very critical for us to understand GDP Constant Prices and its nuances for correct interpretation.

What is GDP Constant Prices Indicator?

Gross Domestic Product (GDP) 

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

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

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

GDP Constant Prices

It is the inflation-adjusted GDP value. It is the total monetary value of all goods and services produced, excluding the effects of inflation in prices. It is also called Real GDP, Constant Dollar GDP, Inflation-Corrected GDP, or only Constant Prices. The raw value of the economic output is called the Nominal GDP, whereas Real GDP accounts for inflation effects and is a more accurate measure of growth.

GDP Constant Prices or Real GDP is obtained by dividing the Nominal GDP with a GDP deflator. The GDP deflator is an inflation measurement from a fixed base year. Real GDP is inflation-adjusted to compare on an as-if basis with the base year GDP. It means GDPs are compared as if the prices remained the same as the base year and see if the GDP has improved due to increased economic activity.

Calculating GDP Deflator is a bit tedious process, that is best left to the experts like the Bureau of Economic Analysis. The Real GDP is made up of the following components and is affected by them:

A) Consumer Spending: It represents spending associated with the end-consumers or the general population. It makes up about 69% of the total GDP in the United States.

B) Business Investment: Economic Output of the Business Sector makes up 18% of the total GDP in the United States. 

C) Government Spending: It involves all the expenditures incurred by the Government to maintain and stimulate economic growth and run its operations. It accounts for 17% of the total economic output for the United States.

D) Net Exports: It is the difference between the total exports and imports. The United States has a -5% Net Exports of the total GDP, meaning it is a net importer.

How can the GDP Constant Prices numbers be used for analysis?

Inflation is the underlying fire that drives capitalist economies. In general, a low inflation rate of 2-3 % a year is good for the economy. A stable inflation rate of 2-3% will stimulate economic growth to achieve a 3-5% annual GDP growth for developed economies.

As prices increase year-over-year, the economic output will also seem inflated even though it is the same as the previous year. Hence, Real GDP is a more accurate measure of scoring the economic output of a country.

Nominal GDP is useful when comparing economic output within a year among different quarters, while it is more sensible to use Real GDP for year-over-year comparison. Policymakers use both Nominal and Constant Prices GDP for economic assessment and implementing policy reforms as deemed necessary.

When inflation is positive (which is the cast most of the time), the GDP Constant Prices will be lesser than Nominal GDP. When there is deflation in the economy (during slowdowns or recessions), the GDP Constant Prices may be higher than the nominal GDP value.

GDP Constant Prices is better for assessing long-term growth, or knowing whether the economy has grown over the previous year or not. With Nominal GDP, it is difficult to tell whether an increase in the figures is due to an expanding economy or just a factor of inflating prices of goods and services.

Impact on Currency

GDP data is essential for almost everyone. Economists use for macroeconomic analysis and Central Bank planning. Policymakers are committed to maintaining a steady Real GDP Growth. Hence, Central Authorities also watch it tightly.

Investors make decisions based on GDP data. Businesses hold their expansion plans based on economic stability and market stability, as indicated by GDP. Traders heavily trade once GDP estimates and actual figures are published.

Hence, overall it is a high impact indicator. It is a proportional macroeconomic indicator, meaning higher GDP Constant Prices are suitable for the overall economy and currency. The opposite also holds. 

Lower Real GDP prints indicate weakening economy, businesses hold hiring or investment plans, spending is reduced, and in extreme cases, it can lead to a recession. All of this leads to currency depreciation.

Economic Reports

In the United States, the Bureau of Economic Analysis publishes quarterly and annual Nominal and Real GDP reports on its official website. It is released almost 30 days after a quarter ends. The schedule of release is available on the website. The headline number is the GDP Constant Prices figure, GDP Growth Rate figure.

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

Sources of GDP Constant Prices

For the United States, the BEA reports are available here 

The St. Louis FRED keeps track of all the GDP and its related components in one place on its official website here:

GDP & GNP – FRED

Real GDP – FRED

The World Bank GDP Constant Prices with base year as 2010 in US Dollar terms are available here:

GDP Constant Prices (2010 US$) – World Bank

OECD – GDP Constant Prices and other variants

We can find a consolidated list of most countries’ GDP Constant Prices here.

Impact of the ”GDP Constant Prices” news release on the Forex market

GDP Constant Prices, also known as real GDP, is a measure of GDP that has been adjusted for the price level. Current prices measure the GDP using the actual prices we notice in the economy. Current prices make no adjustments for inflation. However, constant prices adjust to the effects of inflation. Using persistent prices enables us to measure the actual change in the outcome and not just rise due to inflation’s effects. The real GDP is calculated by dividing nominal GDP over a GDP deflator. When nominal is higher than real, inflation is occurring, and when real is higher than nominal, deflation is occurring. Fundamentally speaking, nominal GDP matters to investors when taking a position in currency or the stock market.      In today’s lesson, we will analyze the impact of GDP on various currency pairs by observing the change in volatility before and after the news announcement. For that purpose, we have collected the GDP data of Canada, where the below image shows the month-on-month GDP data released recently. Let us find out the market’s reaction to this data.

USD/CAD | Before the announcement:

We will start with the USD/CAD currency pair to observe the impact of GDP on the Canadian dollar. The above image shows the state of the chart before the news announcement, where we see that the market is in a downtrend, and recently the price has reversed to the upside. Either could result in a reversal of the trend or a continuation of the current trend. The impact of GDP will decide the direction of the market and so our position. 

USD/CAD | After the announcement

After the news announcement, the price drops below the moving average, and the market falls considerably owing to the positive GDP data. Even though there was a decrease in the GDP, it was only a tad bit lower and much around the market expectations. Hence, it proved to be bullish for the Canadian dollar, and the market goes lower. One should confirm the continuation of the trend using technical indicators before taking a ‘short’ trade.

GBP/CAD | Before the announcement:

GBP/CAD | After the announcement:

The above images represent the GBP/CAD currency pair, where we see in the first image that the market has broken out from a downward ‘channel’ and is moving higher and higher from then on. It very likely that the up move will continue further, which makes us wait for a price retracement to take a buy trade. Based on the volatility caused by the news release, we will have a clear idea about the direction of the market.

After the news announcement, volatility slightly increases to the downside, and the market falls by a few pips. The bearish ‘news candle’ is a consequence of the positive GDP data, mostly on expected lines. We need to note that the news release did not change the overall trend of the market, where the uptrend is still intact.    

CAD/CHF | Before the announcement:

CAD/CHF | After the announcement:

The above images are that of CAD/CHF currency pair, where we see that before the news announcement, the market has reversed from an uptrend to a downtrend and is currently on the verge of continuing the downward move. Since the GDP has a high impact on the currency (indicated by the red box), it is advised not to take any position before the news release.

After the news announcement, the price moves higher by a small amount and manages to close on a bullish mark. The GDP data was close to what was expected, it leads to bullishness within a currency, and hence the Canadian dollar gains strength for a short while.

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

Categories
Forex Daily Topic Forex Fundamental Analysis

Heard Of Germany’s ‘ZEW Economic Sentiment Index’?

Introduction

ZEW Economic Sentiment Index is a leading economic indicator that specially focuses on Germany and a few other countries. The correlation of the index with the growth is healthy. Hence, like any other business sentiment index, it is handy for our fundamental analysis to predict near-term economic activity, and identify potential opportunities.

What is the ZEW Economic Sentiment Index?

The ZEW Economic Sentiment Index is a sentiment index compiled out of the ZEW Financial Market Survey.  ZEW stands for Zentrum für Europäische Wirtschaftsforschung, which means the Center for European Economic Research.

ZEW Financial Market Survey 

It was introduced in 1991. A survey of about 350 analysts working at banks, insurances, and significant industrial firms are surveyed in a time frame of about two weeks. The proportion of participants from different sectors generally remains constant. It collects the general German sentiment or expectations with regards to the development of six international financial markets, especially Germany.

The panel of financial experts selected for the survey express their near-term expectations of the business cycle growth and progress, inflation rates, short and long term interest rates, stock market, exchange rates, and the oil prices. The survey questions aim to answer the situations in Germany, the USA, Japan, France, Great Britain, Italy, and the Euro-zone as a whole.

The experts are finally asked to assess the profitability of many economic sectors like banks, insurances, trade, construction, vehicle industry, chemistry, electronics, mechanical engineering, utilities, services, telecommunication, and information technology. Each expert forecasts on every category form a fraction that reflects different assumptions in percentages. The score from each individual in percentages are summed together to give an overall sentiment.

The results of this method, when it is applied to forecasted changes in the economic situation in Germany, is known as the “ZEW Indicator of Economic Sentiment.” The ZEW Indicator of Economic Sentiment is obtained from the results of the ZEW Financial Market Survey. It is computed as the difference between the percentage share of analysts that are bullish and those that are bearish towards the German economy in six months.

For instance, if 30% of the survey respondents predict the German economic situation to deteriorate, 20% expect it to remain the same as before, and 50% expect it to improve. The overall score of the survey would be a positive value of 20. It is a bullish reading and suggests that financial experts see positive signs for growth in the medium term.

Note: The IFO Business Climate Index is also a similar survey-based index that is popular in Germany. It is also a monthly report that surveys over 7,000 companies in Germany to obtain business condition sentiment for the near term. It measures business confidence and is also a leading indicator. It is a weighted index, meaning company scores are weighted in based on their contribution to the economy’s revenue.

However, the ZEW panel comprises of financial experts and is more diverse in its area of coverage as it also publishes estimates about other economic zones outside of Germany. IFO is business sentiment, while ZEW is economic sentiment, economic sentiment is a broader gauge, and hence, for our fundamental analysis, it is more useful.

How can the ZEW Sentiment Index numbers be used for analysis?

Sentiment Index in any country or any sector is the leading economic indicators for traders, investors, economists, and policymakers. Since the ZEW Sentiment Index is composed of a panel of financial market experts, people who are well-versed with the economy and business cycles throughout their career, their assessments generally have a strong correlation with actual GDP growth.

As with any sentiment index, the ZEW index also tends to be overly sensitive to changes in the economy, meaning the results sometimes would seem exaggerated but in the right direction. For our analysis, the direction of the economy is essential, and the magnitude can be understood over time with historical data.

Overall, the Economic Sentiment Index is helpful for us to predict the upcoming six-month changes with a good amount of certainty.

Impact on Currency

Market volatility is sensitive to Economic Sentiment Indexes. Significant moves in the index cause volatility in the market. It is a leading indicator. The above picture is a snapshot of ZEW for the past one year.

High Positive Economic Sentiment Index figures translate to improving economic prospects, which will translate to higher GDP prints and currency appreciation. Low or NegativeEconomic Sentiment Index figures translate to possible business slowdowns in the near-term, in extreme cases, even a recession. It will translate to the contracting economy, and lower GDP print, and thereby leading to currency depreciation.

Economic Reports

The ZEW Economic Sentiment Index is released every month on its official website, with insightful comments on different sectors. The IFO reports and ZEW Economic Sentiment Index are the two popular Sentiment Indexes in Germany.

Other companies also publish Economic Sentiment numbers, and IHS Markit Group is one such company that puts out numbers on the international scale for many countries. Internationally, IHS Markit business surveys are popular, but within Germany, ZEW is more popular amongst the traders, investors, policymakers.

Sources of ZEW Economic Sentiment Index

We can monitor the reports on the official website of the ZEW.

We can also go through the Sentiment Index of other countries here.

We can also find the aggregated statistics of all business confidence indexes for various countries here.

Impact of the ”ZEW Economic Sentiment Index” news release on the Forex market

In the previous section of the article, we understood the ZEW Economic Sentiment fundamental indicator, which essentially rates the outlook of an economy for a six-month period. On the index, a level above zero indicates optimism, below indicates pessimism. It is a leading indicator of economic health.

The reading is compiled from a survey of about 350 German institutional investors and analysts. Therefore, it is given a fair amount of importance from investors, especially when analyzing growth in the Eurozone. The ZEW financial market survey covers a number of areas, sectors, and regions which are used to create the ZEW Economic Sentiment.

In this part of the article, we will examine the impact of the ZEW Economic Sentiment indicator on the value of various currencies involving the EUR and witness the change in volatility. For that, we have collected the latest data of ZEW Economic Sentiment, which was published in the month of April. We can see in the below image that the index jumped by a huge margin in April 2020, which was well above market expectations.

EUR/USD | Before the announcement

Let us start with the EUR/USD currency pair to observe the impact of the ZEW Economic Sentiment Indicator on the value of EUR. The above image shows the state of the chart before the news announcement, where we see that the price is in a downtrend, and very recently, the price has formed a ”range.” Just before the news release, the price is at the bottom of the ”range,” so we can expect buyers to come back in the market, initiating some strength in the Euro.

EUR/USD | After the announcement

After the news announcement, market crashes below the ”support” of the ”range” and volatility increases to the downside. Although the ZEW Economic Sentiment was extremely positive for the economy, market participants do not by Euro immediately at the ”news candle,” but instead, we see a rally in the price after the close of ”news candle.” Thus, we witness moderate volatility in the currency pair after the news release.

EUR/CAD | Before the announcement

The above images represent the EUR/CAD currency pair, where, in the first image, we see that the market is in an uptrend signifying strength in the Euro. Currently, the price is at its highest point, crossing the previous ”higher high.” As per the technical analysis, we should wait for price retracement to a ”support” or ”demand” area in order to join the trend. Depending on the impact of the news release, we will position ourselves in the currency.

EUR/CAD | After the announcement

After the news announcement, the price initially falls lower due to volatility, but it does not sustain at that level where the buyers immediately take the price higher. We can see that the market bounces exactly from the moving average and continues to move higher. The market is seen to react oppositely to the ZEW Index at the time of release, but one should not conclude the impact of news from just one candle.

EUR/AUDBefore the announcement

 

EUR/AUD | After the announcement

The above images are that of the EUR/CAD currency pair, where we see that before the news announcement, the market is in a strong uptrend again, signifying the great amount of strength in the Euro. Just before the release, the price appears to be at the ”supply” area, which means we should expect some selling pressure from this point. A breakout trade is possible if the price sufficiently breaks the ”supply” area.

After the news announcement, we witness slight bearishness in the currency but was not large enough to cause a reversal of the trend. We see that the price only hovers at the ”supply” area, with no major impact, which results in a breakout.

That’s about the ‘ZEW Economic Sentiment Index’ and the relative impact of its news announcement on the Forex price charts. Let us know if you have doubts regarding the article in the comments below. Cheers!

Categories
Forex Daily Topic Forex Fundamental Analysis

The Impact Of ‘Factory Orders’ News Release On The Forex Price Charts

What are Factory Orders?

Factory orders are the dollar value of all orders received by factories. The U.S. Department of Commerce reports the number of new orders every month. Factory orders are divided into four parts: new orders, unfilled orders, shipments, and inventories. It includes information about durable goods and non-durable goods. Factory orders data is often not very surprising because the report of durable goods orders comes out one or two weeks earlier.

Dividing Factory Orders        

The factory orders data is divided into four sections:

  • New orders, which indicate whether orders are increasing or decreasing
  • Unfilled orders, indicating a backlog in production
  • Shipments, which indicate produced and sold goods
  • Inventories, which indicate the strength of future production

The figures are mentioned in billions of dollars and also as a percent from the previous month and previous year. Factory orders data is often dull, mostly because the durable goods orders come out a couple of weeks earlier, and people have an idea of factory orders for the current month. However, the official factory orders data gives more detailed information on orders estimate and fulfillment.

The factory orders report includes information about both durable and non-durable goods. Durable goods have a life span of at least three years and often refer to items not purchased frequently, such as machines, garden equipment, motor vehicles, and electronics. In contrast, non-durable goods include fast-moving consumer goods such as food, clothes, footwear, medication, and cleaning items.

Investors get an insight into the growing trend of the economy with the help of factory orders report, which largely influences their investment decisions. Factory orders give an early indication of the growth in the economy, and its impact is felt on the equity market.

Analyzing the data

When it comes to the fundamental analysis of a currency pair, it is important to understand how factory orders are analyzed to make proper investment decisions. Factory orders are analyzed by comparing the previous and current readings, where, if we notice a consistent drop in the ‘orders,’ it could signal a slump in the overall demand.

These factory orders are not just used for analyzing one country but also for comparing the economic growth of any two countries. Investors shift their funds to countries where there is a growth in the factory orders, and demand is high. One needs to remember to compare countries with the same economic status. For example, factory orders of a developed country should not be compared with that of a developing nation.

The economic reports

Factory orders are released monthly by the Censuses Bureau of the U.S. Department of Commerce. The full name is “Full report on Manufacturers’ Shipments, Inventories and Orders” but is commonly referred to as Factory Orders. This report usually follows the Durable Goods Reports, which provides data on new orders received from more than 4,000 manufacturers of durable goods.

The factory orders report is more comprehensive than the durable goods report, where it examines the trend within industries. For example, the durable goods report may account for a broad category, such as industrial equipment. In contrast, the factory orders report will provide details about the hardware, software, semiconductors, and raw materials. This lack of information in a durable goods report is attributed to its release speed.

Impact on currency

Factory orders are an important economic indicator. When factory orders increase, the economy usually expands as consumers demand more goods and services. High demand, in turn, requires retailers and suppliers to order more things from factories. This is interpreted as positive for the economy by foreign investors who then invest in the country through the stock market or currency.

An increase in factory orders could also mean that inflation is just around the corner. When factory orders decrease, the economy is usually contracted, which means there is less demand for goods and services, so retailers will not place a lot of orders. When this is reflected in reports, investors tend to have a negative on the economy and think twice before investing in such economies.

Sources of information on Factory Orders 

The factory Orders data is closely watched by investors around the world, which is why the report is immediately available on most of the open-source economic websites and some of the broker’s websites. The official source of information is the U.S. Census Bureau, where it provides statistical information of all the information related to factory orders.

Links to ‘Factory Orders’ information sources

GBP (Sterling) – https://tradingeconomics.com/united-kingdom/factory-orders

USD – https://tradingeconomics.com/united-states/factory-orders

EUR – https://tradingeconomics.com/germany/factory-orders

Factory orders are a key economic indicator for investors and others monitoring the health of economies. It provides information on how busy factories may be in the future. Orders placed in the current month may provide work in factories for many months to come as they will have to work to fill the orders. Businesses and consumers generally place orders when they are confident about the economy.

An increase in factory orders signifies that the economy is trending upwards. It tells investors what to expect from the manufacturing sector, a major component of the economy. The factory orders data often tend to be volatile with revision in the methodology now and then. Hence, investors typically use several months of averages instead of relying too heavily on a single month’s data.

Impact of the ‘Factory Orders’ news release on the Forex market

In the previous section of the article, we understood the factory orders economic indicator and saw how important it is for foreign investors. As defined earlier, it is a report which shows the value of new factory orders for both durable goods and non-durable goods. The survey is usually released a week after durable goods orders report. The report tends to be predictable, with only non-durable goods appearing as the new component compared to the previous report. Thus, investors would have priced in most of the information even before the official release. Still, it causes some volatility in the currency pair during the news announcement.

In today’s lesson, we will analyze the impact of the factory orders news announcement on various currency pairs and witness the change in volatility due to the news release. The below image shows the latest factory orders data of the United States, where it can be seen that the orders were better than expectations but were lower than last time. A higher than expected reading is considered to be bullish for the currency, while a lower than expected reading is considered negative. But, let us find out how the market reacts to this data.

EUR/USD | Before the announcement

Let us start with the EUR/USD currency pair to observe the impact of factory orders on the U.S. dollar. The above image shows the 15 minutes time-frame chart of the currency pair where the market is in a strong uptrend before the news announcement. Recently the price has formed a ‘range,’ and the price is at the top of the ‘range’ at this moment. Technically, this is an ideal place for going ‘short’ in the market, but since a news announcement is due, it is advised not to take any portion before the announcement.

EUR/USD | After the announcement

After the news announcement, the price initially moves higher, but this is immediately sold, and the market erases all the gains. The ‘news candle’ finally closes at the price where it had opened. Therefore, the factory orders data brought about a great amount of volatility in the currency pair, which is evident from the wick on top of the ‘news candle.’ One should wait for the volatility to settle down before taking a position in the market.

USD/CAD | Before the announcement

USD/CAD | After the announcement

The above images represent the USD/CAD currency pair, where we see that the market is extremely volatile before the news announcement, and there is no clear direction of the market. As a point of a tip, it is not advisable to trade in currency pairs where the volatility is more than normal as there are a lot of risks associated with trading in trading such pairs.

After the news announcement, the currency pair gets exceedingly volatile where essentially the price drops greatly, but buyers pressure from the bottom takes the price back to its opening level. Therefore, the factory orders data had a major impact on the pair where the price continued to move lower a few minutes after the news release.

AUD/USD | Before the announcement

AUD/USD | After the announcement

The above images are that of the AUD/USD currency pair, where the price is retracing the overall uptrend of the market. In such market situations, we should be looking for trend continuation candlestick patterns to confirm that the market will continue moving up.

After the news announcement, the price sharply moves higher and leaves a wick on top of the ‘news candle.’ Since volatility is high on both sides of the market during the announcement, we cannot ascertain if the factory orders data was positive or negative for the currency. As the market continues to move higher after the close of the ‘news candle,’ one should look for going ‘long’ in the market a few hours after the news announcement.

This ends our discussion on the ‘Factory Orders’ Fundamental driver. It is crucial to know its impact on the Forex price charts before trading this market. Cheers!

Categories
Forex 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

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

Introduction

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

What is Services PMI?

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

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

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

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

How is the Services PMI calculated?

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

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

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

How can the Services PMI be Used for Analysis?

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

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

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

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

Impact on Currency

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

Sources of Services PMI Reports

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

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

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

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

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

AUD/JPY | Before the announcement:

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

AUD/JPY | After the announcement:

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

EUR/AUD | Before the announcement:

EUR/AUD | After the announcement:

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

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

AUD/HKD | Before the announcement:

AUD/HKD | After the announcement:

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

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

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

Categories
Forex Fundamental Analysis

Significance Of ‘Wage Growth’ As A Forex Fundamental Driver

Introduction

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

What is Wage Growth?

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

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

Measuring Wage growth

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

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

Factors affecting Wage Growth Rate

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

Demand and Supply

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

Government Regulation

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

Training and Development Cost

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

The Economic Reports

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

Analyzing the DATA

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

Impact on Currency

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

Sources of information Wage Growth

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

Links to Wage Growth Information Sources   

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

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

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

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

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

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

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

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

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

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

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

USD/RUB | Before the announcement:

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

USD/RUB | After the announcement:

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

EUR/RUB | Before the announcement:

EUR/RUB | After the announcement:

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

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

GBP/RUB | Before the announcement:

GBP/RUB | After the announcement:

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

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

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

Categories
Forex Daily Topic Forex Fundamental Analysis

Importance Of ‘Construction Output’ As An Economic Indicator

Introduction

Construction activity is the beginning phase of an expected economic growth, which is more vividly evident in the developing economies than developed economies. New infrastructures, buildings, renovations are all part of an expanding economy. Construction is an important economic indicator to assess economic health.

What is Construction Output?

Construction Output is the measure of building and civil engineering work in monetary terms. It is the amount of construction work done measured as the money charged to the customers. It refers to the construction work performed by an enterprise whose principal activity is classified as Construction. Since a measure of the amount of work is proportional to fees charged for the activity, it is measured in the domestic currency of the region where the construction activity was undertaken.

Overall, Construction Output is a measure of the amount charged to customers for construction activity by construction companies in a specific period ( monthly, quarterly, annually). The UK Construction Output is based on a sample survey of 8,000 businesses employing over 100 people or having an annual turn over greater than 60 million sterling pounds. The Construction Output excludes the Value Added Tax (VAT) and payments to subcontractors.

The Construction Output data reporting based on sectors, new or existing renovations, seasonal adjustments, volume, value-based, etc. precisely as illustrated for reference below:

(Picture Credits – Ons.gov)

The Construction Output data is also reported in the index format, where the base index period is 2016, for which the score is 100, and subsequent reports would be scored in comparison to this index period. Typically, it is widely discussed in terms of percentage changes concerning the previous month.

How can the Construction Output numbers be used for analysis?

The Construction Output is a significant economic indicator in the United Kingdom, that is closely watched by both private and public sectors, especially by the Bank of England and HM Treasury. The Construction Output figures assist them in policy reforms and economic-decisions. Growth is a process of emergence of new and better things and discarding old inefficient ones. Construction, in this sense, is just that. Construction involves the erection of new buildings, infrastructures, renovations, expansions of existing infrastructures.

Increased Construction Output implies more people employed, better wages in the construction sector, more demand for raw materials for the Construction, etc. The very act of Construction has a ripple effect on the economy.

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

All these improvements correlated with Construction Output also stimulate consumer confidence and encourages consumer spending, which further stimulates the economy and boosts growth. The importance of Construction Output is also evident from the fact that it is taken into account for the compilation of the GDP monthly estimate.

New Orders in the Construction Industry

It is a quarterly report produced by the administrative data provided by the Barbour ABI. Construction Output data reflects immediate short term health of the economy as it accounts for the construction work that has already taken place. Whereas, the New Orders report from the ONS provides more a forward-looking estimate of the potential construction activity in Great Britain.

New Orders are also crucial in gaining insight into the upcoming economic trends. Hence, it is advisable to use the New Orders report in conjunction with Construction Output report data to assess current and ongoing economic trends more precisely. It is a quarterly report. It is also presented as an index report for which the base index period is 2016, i.e., the New Orders score for 2016 is 100, and all subsequent reports are reported in comparison to this index value.

Impact on Currency

The Construction Output is a coincident indicator in the short-run. Still, it can also be used to gauge upcoming economic trends based on the type of Construction Activities are being undertaken. Also, if we take the New Orders report, both together can act as a leading economic indicator.

Construction Output reflects the current economic conditions by showing the value of the Construction Activity that has already taken place every month.  It is a proportional economic indicator, meaning an increase in Construction Output figures is good for the economy and correspondingly for the currency and vice-versa.

Economic Reports

The Construction Output reports are published approximately six weeks after the reference month by the Office for National Statistics (ONS) on its official website.

Monthly Construction Output reports go back to 2010 for the United Kingdom. A derived data set going back to 1997 can be obtained from monthly GDP data sets. The Construction Output reports are available in seasonally adjusted and unadjusted formats, and at current prices and chained volume measures (excludes effects of inflation).

For the United States, the Bureau of Economic Analysis releases GDP by Industry quarterly and annual estimates, which serves as a close or relatable statistic for the Construction Output of the United Kingdom. As such, there is no Construction Output dedicated nationwide statistics in the United States. Hence, GDP by Sector analysis helps us to analyze the Construction Industry’s performance in the United States.

Sources of Construction Output

We can find the latest Construction Output statistics for the United Kingdom can be found below.

For the United States – Gross Output of Private Industries: Construction

Construction Output reports for various countries are available here.

Impact of the ‘Construction Output’ news release on the price charts

By now, we believe that you have understood the significance of Construction Output in an economy, which essentially includes construction work done by enterprises that are used for measuring the growth of the construction sector. It gives an insight into the supply on the housing and construction market. The Construction industry is one of the first to go into recession when the economy declines but also to recover as conditions improve. The Construction Sector has a marginal influence on the GDP of an economy. Thus, investors do not give a lot of importance to the data when it comes to the fundamental analysis of a currency.

In today’s illustration, we will explore the impact of the Construction Output news announcement on different currency pairs and compare the change in volatility. The below image shows the previous, forecasted, and latest data of the United Kingdom, where we see a reduction in total output in the month of March. Let us look at how the market reacted to this data.

GBP/USD | Before the announcement:

The first pair we will look into is the GBP/USD currency pair, where the above image shows the characteristics of the pair before the news announcement. The market is in a strong uptrend and has started moving in a range with the price at the bottom of the range at the moment. Thus, we can expect buyers to show up any time from this point. As economists are expecting healthier Construction Output data, traders can take a ‘long’ position with a strict stop loss below the ‘support.’

GBP/USD | After the announcement:

After the news announcement, the market drops slightly owing to weak Construction Output data, and the volatility is seen to increase on the downside. But since the impact of this news release is less, the effect will not last long on the currency pair, and we cannot expect the market to break key technical levels. This is why the price reacts strongly from the ‘support’ and bounces off. Traders need to analyze the pair technically and trade accordingly.

GBP/AUD | Before the announcement:

GBP/AUD | After the announcement:

The above images represent the GBP/AUD currency pair, where we see that before the news is announced, the market was in a strong downtrend indicating a great amount of weakness in the British Pound. Currently, we can say that the price in the ‘demand’ area and thus we can expect bullish pressure to come back in the market at any moment. It is not recommended to buy the currency pair as the downtrend is dominant, and there are no signs of reversal.

After the news announcement, the price quickly moves up and closes as a bullish candle. In this pair, the Construction Output data get an opposite reaction from the market where the volatility increases to the upside soon after the announcement. Traders can take a ‘short’ position in the market after a suitable price retracement to a key technical level.

EUR/GBP | Before the announcement:

EUR/GBP | After the announcement:

The above charts belong to the EUR/GBP currency pair, where we see that the market is in an overall downtrend before the announcement, and currently, the price is in a retracement mode. Since the British Pound is on the right-hand side of the pair, a down-trending market means the currency is extremely strong. Looking at the price action, we can say that the downtrend will continue and now we need to find the right place to enter the market.

After the news announcement, the price initially goes lower, but the currency gets immediately bought into, and volatility increases to the upside. This was a result of poor Construction Output data were traders bought the currency pair by selling British Pound. As the impact is least, the up move does not sustain, and the downtrend continues.

That’s about ‘Construction Output’ and the impact on its news release on the Forex price charts. Shoot your questions in the comments below, and we would be happy to answer them. Cheers!

Categories
Forex Fundamental Analysis

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

Introduction

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

What is Employment?

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

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

How is the Employed Persons’ Statistic calculated?

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

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

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

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

Why is the Employment Situation important?

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

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

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

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

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

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

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

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

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

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

Sources of Employment Reports

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

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

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

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

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

EUR/CHF | Before the announcement:

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

EUR/CHF | After the announcement:

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

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

USD/CHF | Before the announcement:

USD/CHF | After the announcement:

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

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

GBP/CHF | Before the announcement:

GBP/CHF | After the announcement:

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

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

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

Categories
Forex Daily Topic Forex Fundamental Analysis

Everything About ‘Exports’ & The Impact Of Its News Release On The Forex Market

Introduction

Exports make one half of a country’s International Trade Balance. In today’s modern economy, with many countries pursuing their economic growth through the main focus on their exports, we must understand Export and its implications on the domestic as well as the global economy. The big words that are thrown around in the media like “Currency Wars,” “Trade Wars,” etc. all revolve around the exports among countries. A thorough understanding of the International Trade and Balance of Payments of countries can help us gauge economic growth on a macroeconomic level very well.

What is Exports?

The sale of locally produced goods to foreign countries is called Exports. Goods and Services produced in one country only when sold to other countries it is called an Export. Countries generally export goods and services that they have a competitive advantage over other countries. For example, Germans export Cars, America export Capital Goods, China export electronic goods, Jamaica exports Coffee, etc.

The advent of Globalization led to an increase in international trade opening doors for domestic industries to tap into the global market. The journey has not been smooth, during the Great Depression, and the following World War II slowed down international trade where many countries closed off their doors to foreign goods as part of protectionist strategies.

Before the 1970s, countries were following an import substitution strategy for growth where countries believed in self-sustenance by producing their goods and services without relying on foreign countries. After the 1970s, the countries began to realize the failure of import substitution and started opting for Export-led growth strategy, and that has been the case to date.

In general, a trade surplus, i.e., a country’s exports, exceeds its imports, is good for the economy. Although, it may not always be necessary as countries may import more than their current exports to build future and long term projects that will assist them in their economic prospects in the long run. In today’s world, China, the United States, Germany, Japan, and the Netherlands are the biggest exporters in the world in terms of revenue.

How can the Exports numbers be used for analysis?

Exports are crucial for today’s modern economies because of the many-fold that it brings with it to the exporting country. The following are the benefits and impacts of exports on the economy:

Broader Market – Companies always want to sell more and increase their profits. By exposing them to a broader range of audience gives them a much better chance of making profits than with a limited audience. By tapping into foreign markets, the domestic companies have to evolve to meet the local demands of other nations and learn how to mix what they sell and what is required by the world well. All this makes the companies grow more robust and overall increases their size and revenue a lot faster than what they would have achieved through operating domestically.

Wealth – Exports increase demand and, consequently, profits. It ultimately leads to employment, increases in wages, and ultimately raises the standard of living. Governments actively promote and encourage exports by reducing tariffs and use protectionist strategies like import barriers to protect their domestic business.

Foreign Reserves – As the trade happens between two countries with different currency regimes, where the payment can be in the domestic or foreign currency, this increases the Central Bank’s currency reserves. With sufficient currency reserves, the Government can manipulate exchange rates to control inflation and deflation by increasing or decreasing currency volume in the global market whenever needed.  During times of substantial exports, countries intentionally peg their currency value lower to make their products appear cheaper and increase the returns on their exports. China has been accused of this low pegging their currency in their favor. Subsequently, other countries have retaliated by lowering their currencies as well. It is what is being called “Currency Wars.”

Trade Surplus – It is always better to be owed money than to owe money as an individual. The same, in general, applies to countries that want to be net creditors to the world than net debitors. Increasing trade deficits can pile up the country’s debt, which can multiply over the years and can be very difficult to overcome. A healthy level of exports, in general, brings more money into the country and keeps the economy going at a steady and healthy growth rate.

Impact on Currency

Today’s global currency markets are free-floating and self-adjusting. Any sudden surge in exports will be followed by a rise in the currency value to compensate for the increased demand on the global market for its currency. A decline in exports will be followed by decreased demand for the currency, and accordingly, the currency depreciates.

Although the market forces are self-adjusting, frequent Government interventions to speed up the correction process to keep the output of the business constant is common.

Economic Reports

Exports form part of a country’s Trade Balance, which is reported under the Current Account Section of the International Balance of Payments Report of the country. The Balance of Payments reports is released quarterly and annually for most countries. The Trade Balance reports are published every month, which consists of Exports and Imports figures.

For the United States, the Bureau of Economic Analysis publishes the monthly Trade Balance reports on their website in the 1st week of every month for the previous month.

Sources of Exports

Impact of the ‘Exports’ news release on the price charts

In the previous section of the article, we understood the importance of Exports in an economy and saw how it contributes to the growth of the country. Exports are nothing but goods and services that are sent to the rest of the world, including merchandise, transportation, tourism, communication, and financial services. A nation that has positive net exports experiences a trade surplus, while a negative net exports mean the nation has a trade deficit. Net exports may also be called the balance of trade. Economists believe that having a consistent trade deficit harms a nation’s economy, creating pressure on the nation’s currency and forcing lowering of interest rates.

In today’s lesson, we shall analyze the impact of Exports data on different currencies pairs and observe the change in volatility due to the news release. A higher than expected number should be taken as positive for the currency, while a lower than expected number as negative. The below image shows the total Exports of Australia during the month of March and April. It is evident that there was an increase in Exports in the current month by 20%. Let us look at the reaction of the market to this data.

AUD/USD | Before the announcement:

We shall begin with the AUD/USD currency pair to witness the impact of Exports on the Australian dollar. The above image shows the state of the chart before the news announcement, where we see that the market is in a downtrend, and recently the price has displayed a reversal pattern indicating a possible reversal to the upside. Based on the Exports data, we will look to position ourselves in the currency.

AUD/USD | After the announcement:

After the news announcement, the market moves higher and volatility increases to the upside. The sudden rise in the price is a result of the extremely positive Exports data where there was a rise in the value by 20% compared to the previous month. This brought cheer in the market, making traders to ‘buy’ Australian dollars and thus, strengthening the currency. One can go ‘long’ in the market after the news release with a stop loss below the recent ‘low.’

AUD/NZD | Before the announcement:

AUD/NZD | After the announcement:

The above images are that of AUD/NZD currency pair, where we see that the market is in a downtrend that began just a few hours ago, and recently the price has shown sharp reversal from its recent ‘low.’ Technically this is an ideal reversal pattern that signals a reversal of the trend. One can take a risk-free ‘long’ position if the news announcement does not change the dynamics of the chart.

After the news announcement, the price sharply rises and closes, forming a strong bullish candle. As the Exports were exceedingly high, traders bought Australian dollars and increased the volatility to the upside. This could be a confirmation sign of the trend reversal, where we can expect the market to move much higher.

EUR/AUD | Before the announcement:

EUR/AUD | After the announcement:

The above images represent the EUR/AUD currency pair, where the first image shows the state of the chart before the news announcement. From the chart, it is clear that the overall trend of the market is up, but recently the price has shown a strong reversal pattern to the downside. Looking at the price action, we will prefer taking a ‘sell’ trade depending on the impact of the news release.

After the news announcement, the price falls lower, with an increase in volatility to the downside. The bearish ‘news candle’ is a consequence of the upbeat Exports data, which came out to be exceptionally well for the economy. Since the Australian dollar is on the right-hand side of the pair, traders sold the currency pair in order to strengthen the Australian dollar. This is a perfect ‘sell’ for all.

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

Categories
Forex Fundamental Analysis

The Importance Of ‘Government Revenue’ As An Economic Indicator

Introduction

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

What is Government Revenue?

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

Taxes

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

Rates or Rental Incomes

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

Fees

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

License Fees

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

Public Sector Surplus

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

Fines and Penalties

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

Gifts

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

Borrowing

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

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

(Picture Source – Fiscal Treasury)

How can the Government Revenues numbers be used for analysis?

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

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

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

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

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

Impact on Currency

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

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

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

Economic Reports

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

Sources of Government Revenues

United States Monthly Fiscal Policy statements can be found below.

Monthly Treasury Statement – United StatesGovernment Revenue as a percent of GDP

We can find Government Revenues for the OECD countries below.

Government Revenues – OECDWorld Bank – Government Revenue data

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

Trading Economics – Government Revenues

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

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

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

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

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

USD/BRL | Before the announcement:

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

USD/BRL | After the announcement:

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

EUR/BRL | Before the announcement:

EUR/BRL | After the announcement:

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

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

BRL/JPY | Before the announcement:

BRL/JPY | After the announcement:

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

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

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

Categories
Forex Basic Strategies Forex Daily Topic

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

Introduction

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

What is External Debt?

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

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

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

How can the External Debt numbers be used for analysis?

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

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

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

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

Impact on Currency

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

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

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

Economic Reports

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

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

Sources of External Debt

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

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

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

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

USD/SEK | Before the announcement:

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

USD/SEK | After the announcement:

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

EUR/SEK | Before the announcement:

EUR/SEK | After the announcement:

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

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

AUD/SEK | Before the announcement:

AUD/SEK | After the announcement:

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

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

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

Categories
Forex Daily Topic Forex Fundamental Analysis

The Importance of ‘Fiscal Expenditure’ as a Macro Economic Indicator

Introduction

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

What is Fiscal Expenditure?

Fiscal Policy

It is a strategy or scheme followed by the Government to manage its tax revenues and allocate those funds appropriately as Government spending to manage economic conditions for a fiscal year. Fiscal Policy is the action plan of a Government that decides how the inflow of the Government from tax revenue is channeled into different Government Spending programs. Fiscal Policy is analogous to Monetary Policy.

Monetary Policy is an economic lever used by the Central Bank of a nation using Money Supply and Interest Rates to influence the economy. Whereas, Fiscal Policy is an economic lever used by the Central Government of a nation using Taxation Policies and Public Spending to influence and manage the economy.

The revenue received through taxes is called Federal Receipts, and Government Spending is called Federal Outlays. The difference between the two is called the Federal Deficit or Surplus. When the spending exceeds the revenue, the Government is said to be running a deficit, and when the revenue exceeds the spending, it is said to be running a surplus.

It is preferable to balance out the spending and receipts for optimal growth. Excess revenue by holding down spending slows down the economy, and excess spending accumulates debt.

Fiscal Expenditure

It is a one-half component of the Fiscal Policy, and it refers to the outlays part of the Fiscal Policy. The proportion of revenues allocated to different sectors within the economy determines the amount of stimulus and support from the Government, helping them become profitable quickly. Fiscal Expenditure is public spending by the Government.

How can the Fiscal Expenditure numbers be used for analysis?

Apart from the mandatory spending like Medicare, Social Security, etc. the remainder of the revenue and the additional debt taken by the Government to invest in public spending to keep the economy vibrant determines the growth rate and GDP print for the year.

The Central Authorities can manipulate the taxation rules to increase its revenue, which generally puts the burden on the citizens. The second lever is the Fiscal Expenditure, where the Central Authorities may decide based on the economic situation to borrow money to finance its Public Spending programs.

When the Government Spending is increased, through forms like, for example, building a bridge. Such a project would increase employment, increase spending as more people are employed, pumping more money into the economy, and thereby making the economy stimulated. The Government can also implement tax cuts, as that leaves more money in the consumer’s hands and encourages spending and hence, stimulating the economy.

Tax Cuts and Fiscal Expenditure are both levers that the Government has to influence the economy. But these are no hard-and-fast guarantees of economic stimulation. The effectiveness of the Fiscal Expenditure lever depends on what the current economy is going through. It is useful for a stagnant economy that has slowed down. Spending acts as a fuel to the fire and rekindles the business environment in the economy, thus keeping the GDP print back on track. As shown below, during recent times, the Government has tried to increase its spending by creating deficits through increased Fiscal Expenditure.

On the other hand, Fiscal Expenditure can be reduced, coupled with increased tax cuts to curb inflation and faster than the normal growth rate. It is a cool down measure used by the Government when the economy is hyper-inflating, which leads to too much money in the economy, and goods and services prices inflate quickly beyond their value. The Government’s Debt also plays a vital role in Fiscal Expenditure. After the mandatory payments, the interest payments for the Debt and Debt itself are what takes a portion of the pie (Government revenue).

The higher the amount dedicated to service interest and debt payments, the lesser the spending for the economy. It leads to a slowdown in the economy, and deflationary conditions start to appear in the economy. When the interest rates are either low or kept low (by suppressing interest rates lower through Central Banks), it leaves a more significant room for spending on public welfare that gains favor amongst the citizens but piles up debt for the future.

In this way, the Government is stuck between a rock and a hard place. A slowing economy and piling debt. It is the case with most developed economies where their spending outstrips their revenue and thereby run large deficits running huge debts that have to be serviced in the future. As the Government keeps stimulating the economy by spending beyond its means, the Government and the country is slowly being cornered into a debt trap that can be avoided through only a massive surge in GDP prints.

The only way to manage debt is to increase revenue through GDP that has proven to be difficult in recent times for most mature economies. Hence, Fiscal Policy and mainly its components revenue and Fiscal Expenditure are being closely watched by investors today to predict economic growth and assess the risk of default by the Governments.

Impact on Currency

Fiscal Expenditure is an inverse leading indicator meaning that the currency appreciates when Fiscal Expenditure depreciates in the short-term. When money is infused into the economy in the form of Fiscal Expenditure, it stimulates the economy, prevents deflation (inflationary conditions), leading to currency depreciation in the short-term.

While the Government chooses to avoid deflation and keep the economy going by paying the price in terms of currency depreciation as people and economy take precedence over the currency.

Economic Reports

For the United States, the Treasury Department releases monthly and annual reports on its official website. The treasury statements detailing the Fiscal Policy containing receipts and outlays are released at 2:00 PM on the 8th business day every month.

Sources of Fiscal Expenditure

United States Monthly Fiscal Policy statements can be found in the below-mentioned sources – Monthly Treasury Statement – United StatesFederal Surplus or Deficit – St. Louis FRED

The monthly Fiscal Expenditure statistics of countries across the globe can be found here.

Impact of the ‘Fiscal Expenditure’ news release on the price charts

After getting a clear understanding of the Fiscal Expenditure fundamental indicator, we will now extend our discussion and discover the impact of the news release on different currency pairs.  Fiscal Expenditure refers to the sum of government expenses, including spending on goods, investment, and transfer payments like social security and unemployment benefits. This indicator is very useful in measuring the steps taken by the Government for the welfare of the country. Investors consider this data to be an important determinant of the growth of the economy.

In today’s lesson, we will be looking at the Fiscal Expenditure of New Zealand that was published on 8th October 2019 and analyze the impact on the New Zealand dollar. The below image shows an increase in government expenditure for the previous fiscal year. A higher than expected number is considered to be positive for the currency while a lower than expected data is considered as negative. Let us find out the reaction of the market to this data.

NZD/USD | Before the announcement:

We will start will the NZD/USD currency pair for examining the change in volatility due to the announcement. In the above chart, it is clear that the market is in a strong downtrend, and recently the price seems to have a retraced near the ‘resistance’ area. Technically, we will be looking to sell the currency pair after the appearance of suitable trend continuation patterns. However, it is possible that the news announcement can cause a reversal of the trend.

NZD/USD | After the announcement:

After the news announcement, the market initially reacts positively to the news data and shows some bullishness, but later the sellers take the price a little lower and close the ‘news candle’ with a wick on the top. The volatility is seen in both the directions of the market, but the price manages to close in ‘green.’ We still cannot say if the positive news outcome will cause as reversal as the price has not indicated any reversal patterns in the market. This is how technical analysis should be combined with fundamental analysis.

GBP/NZD | Before the announcement:

GBP/NZD | After the announcement:

The above images represent the GBP/NZD currency pair, where we see that before the news announcement, the market is in an uptrend, and recently, the price has pulled back to the ‘support’ area. There is a high chance that the price will bounce on the upside from here and continue the trend. Technically, this is an ideal place for joining the trend by going ‘long’ in the market, but depending on the news data, we will decide if we can do so.

After the news announcement, the price falls lower, and volatility increases to the downside, which is the consequence of positive Fiscal Expenditure data. Since the Fiscal Expenditure was increased in that month, traders sold the currency and bought New Zealand dollars, thereby strengthening the quote currency. Now that the price is exactly at the ‘demand’ area, one needs to be very careful before taking a ‘short’ trade.

NZD/JPY | Before the announcement:

NZD/JPY | After the announcement:

Lastly, we discuss the NZD/JPY currency pair and observe the change in volatility due to the announcement. From the first image, it is clear that the market is in a strong downtrend, and presently the price is at its lowest point. Since, at this point, buyers took the price higher last time, we can expect the buyers to activate again. Thus, aggressive traders can take a few ‘long’ positions with strict stop loss.

After the news announcement, the price goes higher in the beginning but immediately comes lower and closes near the opening price. We witness a fair amount of volatility on both sides of the market, and finally, the ‘news candle’ closes, forming a ‘Doji’ pattern. Since the news release did not have any major impact on the currency pair, one can go ‘long’ under such situations.

That’s about ‘Fiscal Expenditure’ 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 Fundamental Analysis

Bank Lending Rate – How Important Is It To Know This Fundamental Driver?

Introduction

Bank Lending Rate serves as a useful metric to assess the liquidity of the banking sector and the overall economy. Bank Lending Rate helps us to understand the ‘cost of money’ or how expensive the money is in the economy.

The Lending environment within the economy determines whether the consumer and business sentiment is bearish (save more spend less) or bullish (spend more save less), which will have a multitude of impacts in various sectors. Investors, Traders, Economists use these rates to assess the current ease of flow of money within the economy and its corresponding consequences.

What is Bank Lending Rate?

Bank Lending Rate, also called the Prime Rate, is the interest rate at which the commercial banks are willing to lend money to their most creditworthy customers. The most creditworthy customers would usually be the corporate companies that have an outstanding past credit record.

At the top of the lending, chain sits the Central Bank, which determines the rate at which banks lend each other money in the interbank market. In the United States, the Central Bank is the Federal Reserve, and it influences the interbank rate, also called the Fed Funds Rate, by purchasing or selling government securities.

When the Federal Reserve purchases bonds, it results in the injection of money into the system, thereby increasing the liquidity of the bank market, and correspondingly the overall economy. When the Banks have more money to lend, the banks will lend this newly injected money at a lower rate, as a result of competition, and excess reserves.

On the other hand, when the Federal Reserve sells the bonds, it takes money out of the system, where banks become less liquid and thereby increasing their interest rates to get the best price for their remaining funds.

Hence, the Fed Funds rate serves as the base for the Prime Rate or Bank Lending Rate. This Prime Rate serves as the basis for all other subsequent forms of loans like a personal, business, student, or even Mortgage loans. The below diagram is illustrative of the above points.

The below diagram summarizes the hierarchy of the rates. The lower cell type of interest rate derives its value from its upper cell interest rate.

How can the Bank Lending Rate numbers be used for analysis?

The Prime Rates change based on the Fed Funds Rate, which is decided by the Central Bank based on economic factors.

The remaining forms of loans are derived from the Prime Rate and a percentage spread that is charged by banks for lending the money. The spread (or profit) varies from bank to bank and also on the customer’s credit score. Hence, there is no single Prime Rate as the best customers of the banks vary, and hence, usually, the quoted Prime Rate is the rate published daily in the Wall Stree Journal.

The Prime Rate is seen as a benchmark for commercial loans. In most cases, that would be the lowest rate available to the general public and business corporations, and it is not a mandatory minimum. In the end, banks can tweak their rules in their favor. A decrease in Fed Funds rate does not necessarily guarantee that a subsequent drop in the Prime Rates, but due to competition amongst banks, the general trend is that the Prime Rate follows the Fed Funds Rate.

We must understand that a Bank’s primary motive is to make money out of money. They make their profit on the difference between the Lending Rate and the Deposit Rate, also called the Net Interest Margin. A variety of factors come into play before a loan is sanctioned. The risk associated with the borrower (credit score, income source, assets, and existing liabilities), fluctuating market and economy, general consumer and business sentiment, etc. all add to the decision-making process of setting the Prime Rate, or other loan forms derived from it.

The ease at which loans are available to the public determines the type of monetary policy. In a loose lending environment, the Bank Lending Rates are typically low, which encourages consumers to borrow more and spend more into the economy. On the contrary, when the Rates are high, it discourages consumers from borrowing and encourages saving more.

The Central Bank regulates money flow through its interbank operations to manage inflation and deflation. In developed economies, a loose lending environment promotes growth & avoids possible deflationary threats. The tight lending environment is a strategy to slow down or cool down an overinflating economy.

The affordability of loans determines how much money is in people’s hands to spend. Low Prime Rates ensure high spending environments that are good for businesses and promote growth and higher GDP prints and vice-versa.

The effectiveness of the Prime Rate changes is not immediate, as the changes in the Fed Funds Rates, Prime Rates take time to come into effect. There is generally a 4-12 months time lag before the intended changes start to play out, and yet there is no guarantee that these levers will work.

Impact on Currency

Higher Bank Lending Rates is deflationary for the economy, and currency appreciates. On the other hand, Low Bank Lending Rates are inflationary for the economy, and the currency depreciates in the short-run.

Although, the low rates are typically set to boost the economy, which will cancel out the depreciation effect on a longer time frame, the immediate effect is as stated above.

Economic Reports

For the United States, the Federal Reserve publishes daily Selected Interest Rates, which includes the Prime Rate figures also. Weekly average and monthly Prime Rate figures are also available. In general, weekly and monthly data are monitored by the market.

The data is posted from Monday to Friday at 4:15 PM every day for the Daily Selected Interest Rates.

Sources of Bank Lending Rate

Selected Interest Rates – Daily – Federal Reserve

Selected Interest Rates – Weekly Monthly – Federal Reserve

The St. Louis FRED also keeps track of Prime Rates, and it is available here

Bank Lending Rates for various countries are summarized together and available here

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

In the previous section of the article, we learned about the ‘Banks Lending Rate’ fundamental indicator, which talks about the change in the total value of outstanding bank loans issued to customers and businesses. A country that lends more to people and companies is said to encourage economic growth by giving more money in the hands of people. This directly stimulates consumer spending and promotes the overall development of the country. This is one of the key parameters, if not very important, which investors look at before taking a position in the currency.

In the following section of the article, we shall look at the impact of the Bank Lending Rate announcement on various currency pairs and examine the change in volatility due to the announcement. The below image shows the previous and latest data of Japan, where the rate was reduced from the previous month. Let us analyze the impact of the same on some major Japanese Yen pairs.

EUR/JPY | Before The Announcement

We shall start with the EUR/JPY currency pair for discovering the impact of the Bank Lending Rate on the currency. The above image shows the characteristics of the chart before the announcement was made, and we see that after a high volatile move, the price has developed a small ‘range.’ Currently, the price is at the ‘support’ where we can expect to pop up any time. Thus, the bias is on the ‘long’ side.

EUR/JPY | After The Announcement

After the news announcement, the price suddenly goes higher and closes as a bullish candle. The spike in volatility to the upside was a result of the negative Bank Lending Rate, which was slightly reduced as compared to the previous month. As the rate was not increased, traders bought the currency and sold the Japanese Yen. But since the data was largely poor, the ‘news candle’ was immediately retraced fully, and volatility increased on the downside. Thus, we need to wait for the volatility to subside in order to make a trade.

AUD/JPY | Before The Announcement

 

AUD/JPY | After The Announcement

The above images are that of the AUD/JPY currency pair, where we see that before the news announcement, the pair in a strong uptrend with nearly no retracement of any sort. This means the Japnese Yen is extremely weak, and irrespective of the news data, a ‘short’ trade is not recommended whatsoever.

After the news announcement, the price initially moves higher, but later volatility increases to the downside and goes below the moving average. This shows that the Bank Lending Rate news was not bad for the Japanese Yen, which is why traders bought the currency later on. We need to be careful by not taking a ‘short’ trade as the overall trend is up and that the impact is not long-lasting.

CHF/JPY | Before The Announcement

CHF/JPY | After The Announcement

The above images represent the CHF/JPY currency pair, where we see in the first image that the market is clearly ‘range’ bound and is not trending in any direction. Just before the announcement, the price is near the top of ‘range,’ which means we can expect sellers to get active any moment from now. We shall wait and see what the news release does to the currency pair and then take a suitable position in the market based on the data.

After the news announcement, the price moves higher, similarly as in the above currency pairs, but gets instantly retraced. The currency pair forms a ‘Rail-Road Track’ candlestick pattern, which indicates that the pair is going to continue its downward move. Hence traders can take ‘short’ after noticing such a pattern after a news announcement. Technically also the place is supportive of a ‘sell.’

That’s about ‘Bank Lending 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

Do You Know That The ‘Car Production’ Data’s News Release Impacts The Forex Price Charts?

Introduction

Car Production figures are used by economists and investors as a measure of wealth per capita. Among all the Industrial Production figures, which covers different sectors, Automotive industry production figures’ implications are different from industries producing essential goods like (Food, daily needs goods). An increase in vehicle production is indicative of an increase in per capita income, and other economic conditions. Hence, individual analysis of Car Production figures can help investors, and economists to analyze economic health, and standard of living in the country.

What is Car Production?

Car Production is the total Auto output of Automative Industries in a given economic region for a specific period. The number of motor vehicles manufactured is assessed and categorized based on the type of vehicle. A typical automotive industry would generally have multiple classes of vehicle manufacturing ranging from 2-wheeler bikes to 18-wheeler trucks. Car Production statistic is the production of Cars (called Auto in the statistics) and excludes Trucks and two-wheeler bikes.

In this statistic, Car Production has a separate and special significance. Consumers make up 66% of the private sector, and businesses make up 34% in the United States. Owning a car is more important to people than owning a house. In today’s mobile world, with different modes of transportation available, the car is still an essential expense for the average public. 85% of the Americans own a car, which indicates its significance in day-to-day life. We cannot deny the importance of having a car for commuting as per our convenience.

How can the Car Production numbers be used for analysis?

In the developing economies like India, the number of households that own a car is just 11% as per a survey in 2016, which is a 200% increase from its previous survey in 2011, where it was only about 5%.

Hence, Car Production can be used to draw multiple conclusions, which are as follows:

Standard of living: As the standard of living increases, more and more people can afford luxury goods. While owning a car might not seem like a luxury, but for the developing economies, it does. Also, the range of cars today that are available for purchase, it mirrors the wealthiness of the economy.

Dependent Industries: A car production typically involves several parts that are obtained from other industries, like the car body requires steel, tires require rubber, etc. Hence, Steel Production figures are influenced by the demand from Car Production figures. One-fifth of American Steel Production and three-fifths of rubber manufactured goes to the Automotive Industry. Machine tools, petroleum refining technology industries, paint, plate-glass industries are all stimulated through the Automotive industry.

Indirect Dependent Industries: Increased Car Production signals more cars or vehicles are going to be on the road, or need to be delivered, which brings business for freight operators, and road construction firms. As traffic increases, Fiscal policymakers intervene and fund road projects to build a better network of highways to solve this issue.

Investors can look at Car Production figures and analyze the stimulus it brings on industries dependent directly or indirectly. For example, a general trend in the local production of Cars increase can signal that a construction company like L &T could obtain a contract for road betterment, or a tire company like MRF could see a spike in their business due to increased demand. The cause-effect analysis can help investors make the right stock decisions.

Car is a convenience and not essential like Food. But it has gained the status of an essential item in developed economies. While the developing economies are also getting there, economists can see the changes in Car Production figures. By doing this, they can understand the change in spending patterns of consumers from saving to purchasing Cars. If these numbers increase, it is an indication of an increase in consumer sentiment, business sentiment, employment, wage growth, an increase in disposable income, or improvement in the standard of living.

In the United States, the Car Production figures are part of the Industrial Production reports. The Industrial Production figures tell the overall macroeconomic picture, about how business production and capacity utilization is increasing but does not tell us what sectors growth are increasing or decreasing and its corresponding implications. Car Production figures, in this sense, paints a better picture.

For example, an increase in Coal production could only imply an increase in exports, which is good for the economy, but an increase in Car Production figures indicate more and more people are coming into the middle-class from lower sections and can afford cars. It implies that the overall standard-of-living is increasing.

Also, the automotive industry is a vital element in many industrialized economies like the United Kingdom, France, Germany, Japan, etc. where healthy amounts of Car Production is essential to maintain International Trade balances.

With more and more emerging economies like China, India, Japan, etc. improving their economic conditions aggressively through export-led growth in the international markets, the overall number of people above the poverty rate is increasing, which would ultimately translate into increasing Car Production and Steel Production figures in the upcoming times. The below plot justifies our conclusions above.

Impact on Currency

Car Production statistic is a proportional indicator; meaning increase or decrease in the statistic is followed by currency appreciation or depreciation, respectively. Although, it is essential to note that Car Production is a lagging indicator as the corresponding increase would have already been implicated through leading and coincident indicators like Consumer, business surveys, or improvement in the Disposable Income figures.

Hence, it is a low impact indicator. It is more useful in the long-term understanding of trends and can help investors with stock-portfolio decisions in the stock market having their stake in the dependent industries, which could be affected by the Car Production figures. It can overall act as a double-check for our fundamental analysis but not as a metric to predict future economic growth.

Economic Reports

The “Industrial Production and Capacity Utilization – G17” reports are published at 9:15 AM every around the middle of the month by the Federal Reserve in the United States on its official website. The reports are in the formats of estimates and revised estimates. Under this section, the report titled “Table 3 Motor Vehicle Assemblies” contains the Autos figures, which we are interested in our analysis.

The International Organization for Motor Vehicle Manufacturers also provides an aggregate summary of vehicles produced on its website.

Sources of Car Production

The monthly Car Production 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, which are available here. We can also find global Car Production figures for various countries in statistical formats here and here.

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

In the previous section of the article, we understood the Car Production economic indicator and saw how investors use it for analyzing the economic state of a country. Car Production numbers are a critical component of industrial growth, which highlights the state of the automation sector of the country. The auto industry contributes 3-3.5% to the overall Gross Domestic Product (GDP) and employs a large number of people across different divisions in the industry. Cars manufacturing is a major contributor to this sector, and thus investors give a reasonable amount of importance to this data.

In today’s example, we will be analyzing the impact of Car Production on British Pound, and the below image shows the percentage fall in total production as compared to the previous year. We see that Car Production dropped by 0.8%, which was slightly better than the previous reading. This may be mainly due to slower demand in the local and foreign markets. Let us look at the market’s reaction to this data.

GBP/USD | Before the announcement:

We will begin our evaluation by analyzing the GBP/INR currency pair. The above image shows the behavior of the pair before the announcement is made. We see that the market is resiliently going up with minimum retracement. This means the British Pound is very strong, or the U.S. dollar is really weak. At this point, we cannot take any position in the market as technically; this would mean chasing the market.

GBP/USD | After the announcement:

After the news announcement, the price rallies further, and volatility expands on the upside. The Car Production data was taken well by the market players who took the price higher and closed the ‘news candle’ with a decent amount of bullishness. As a result, the uptrend gets extended further due to the positive news data. In order to trade the pair, one needs to wait for the price to retrace to the nearest’ support’ and then analyze accordingly.

GBP/NZD | Before the announcement:

GBP/NZD | After the announcement:

The above images are that of GBP/NZD currency pair, where in the first image, we see that the market is in an uptrend, and recently the price has retraced to a ‘support’ area. Technically, this is an ideal place for going ‘long’ in the market with a small stop-loss loss. The volatility, before the announcement, appears to be on the higher side, so conservative traders need to be cautious while trading the currency pair.

After the news announcement, volatility surges, and the price significantly moves higher within no time. This reflects the positiveness in the Car Production data, which was better than last time. After this sharp reversal, traders can take ‘long’ positions with a stop loss below the ‘news candle.’

EUR/GBP | Before the announcement:

EUR/GBP | After the announcement:

Lastly, we shall analyze the impact on the EUR/GBP currency pair and see the change in volatility. Here, before the news announcement, the market is in a strong downtrend with almost no ‘pullback,’ indicating a remarkable amount of strength in the British Pound. Since we only see nothing but red candles, selling at any point would mean chasing the market. From a risk aversion perspective, we should always trade the retracement of a trend and not when the trend itself.

After the news announcement, the market falls further and reacts similarly to the above currency pairs. The positive Car Production data increased the volatility to the downside by further strengthening the British Pound. We will be able to take a sell trade only after the price retraces to the nearest’ resistance’ or ‘supply’ area.

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

Categories
Forex Fundamental Analysis

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

Introduction

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

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

What is Cement Production?

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

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

How can the Cement Production numbers be used for analysis?

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

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

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

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

(Source)

(Source)

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

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

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

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

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

(Source)

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

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

Impact on Currency

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

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

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

Economic Reports

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

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

Sources of Cement Production

Cement Production – National Bureau of Statistical of China

Global Cement Production – globalcement.com

Cement Production statistics for various countries can be found here

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

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

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

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

USD/INR | Before the announcement:

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

USD/INR | After the announcement:

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

GBP/INR | Before the announcement:

GBP/INR | After the announcement:

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

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

EUR/INR | Before the announcement:

EUR/INR | Before the announcement:

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

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

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

Categories
Forex Fundamental Analysis

‘Disposable Personal Income’ – Understanding The Macro Economic Indicator

Introduction

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

What is Disposable Personal Income?

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

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

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

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

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

Economic Reports

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

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

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

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

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

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

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

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

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

Impact on Currency

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

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

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

Sources of Disposable Personal Income Reports

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

Personal Income and Outlays

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

Disposable Personal Income – Seasonally Adjusted Quarterly

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

Personal Income – FRED

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

DPI Trading Economics

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

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

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

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

EUR/USD | Before the announcement:

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

EUR/USD | After the announcement:

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

USD/JPY | Before the announcement:

USD/JPY | After the announcement:

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

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

USD/HKD | Before the announcement:

USD/HKD | After the announcement:

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

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

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

Categories
Forex Fundamental Analysis

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

Introduction

Imports are one of the components of International Trade. The Import and Export figures determine whether a country is running a Trade Surplus or Deficit. What and how much a country is importing in contrast to its exports mainly drives economic growth. It is crucial to understand Import’s role in a country’s International Trade Balance and Balance of Payments and its pros and cons.

What is Imports?

The foreign goods and services sold to domestic consumers are called Imports. Goods and Services manufactured in a foreign country consumed by the domestic population all come under Imports. When a country is importing more compared to its exports, it is said to have a trade deficit. A trade deficit is generally bad for the economy as it means it is consuming more than it is earning.

An import is noted as a debit in the Balance of Payments in the Current Account Balance Reports. When a country imports money flows out of the country. An export brings money into the economy. Hence, Import is analogous to an individual’s monthly expenses, and exports are analogous to his income. It is not ideal for us to spend more than we earn for long periods as it could pile up a massive debt from which we may not be able to recover. A country running a trade deficit is no different.

A country needs to borrow capital to finance its excess import or net import (imports minus exports). It is always preferable for mature economies to be a net exporter than a net importer.

A trade deficit is not a bad thing always as countries might be importing raw materials for future projects and constructions whose output is not yet recorded. The United States has continued to be a net importer and has been running a trade deficit since 1975. Hence, what a country is importing and for what purposes is vital to understand its implications on the economy.

How can the Imports numbers be used for analysis?

A country imports generally the goods that they either cannot produce domestically or as cheap as other countries. Countries that naturally do not have the natural resources may import their raw materials from nations that are abundant in it. For example, China imports Iron Ore, which Australia exports for its manufacturing industries.

Countries may also import goods for which labor cost is expensive in the home country compared to other countries. For example, NAFTA agreement shifted Car and Automotive parts manufacturing to Mexico from the United States and Canada due to cheap labor availability.

Countries also often import goods and services in which they do not have a competitive edge in the global market. For example, even though Apple is an American Company, its production of phones is done in China as the production cost is low due to well-established infrastructure for electronic and chip manufacturing industries.

Imports are to be offset by corresponding levels of exports ideally, otherwise end up having a trade deficit which can be harmful in the long run. As the country keeps borrowing, the piling debt slowly starts crippling the economy as much of the revenue goes into servicing interest payments and debt repayments in the long run.

The heavy dependence of an economy on imports from a particular foreign nation or small group of nations can be dangerous as the economy’s function becomes dependent on the trades. It would be more crippling if the Imports are necessities like food or energy. For example, the USA faced an oil shortage and went into recession when OPEC cut its oil supply to the USA.

Imports are subject to trade tariffs and trade agreements. Imported goods and services compete with local produce, and the selling price of the corresponding goods differs based on the import tariffs implemented by the Government.

On the one hand, importing goods at a lower price rather than producing domestically at a higher price seems reasonable to some as it gives consumers goods and services at a lower rate avoiding inflation effects. On the other hand, imports affect the local manufacturing sectors in the same category. Foreign Competition can wipe out local businesses, which can, in turn, slow down the economy.

In the long run, exports stimulate growth while imports impede growth. Hence, Import is a double-edged sword that needs to be handled carefully in conjunction with exports to strike a correct-balance in the Balance of Trade.

Impact on Currency

When a country imports the country pays for it, and hence currency flows out of the country. When a country’s imports outweigh its exports (net importer), the domestic currency is in oversupply in the global market, and hence currency value depreciates.

A sudden surge in imports over exports is followed by currency depreciation and vice-versa. The global FOREX market is self-regulating and adjusts to such shocks, and the Government can intervene to peg their currency higher to reduce the cost of imports. Japan and China are good at winning this type of Currency War games in the global markets where they peg their currency high during imports and low during exports to maximize benefits in their favor.

Economic Reports

Imports form part of a country’s Balance of Trade, which is reported under the Current Account Balance part of the International Balance of Payments Report of the country. The Balance of Payments report is released quarterly and annually for most countries. The Balance of Trade reports are published every month, which consists of Exports and Imports figures.

For the United States, the Bureau of Economic Analysis publishes the monthly Balance of Trade reports on their official website in the first week of every month for the previous month.

Sources of Import Reports

Data related to U.S. Imports can be found here. The World Bank also publishes the World Trade reports of many countries categorized by different sectors in their World Integrated Trade Solution’s official website. We can also get the statistical data of Imports and Exports of various countries from the International Monetary Fund’s official website.

Visual representation of a country’s imports can be accessed here. Below is the illustration of the same. 

Impact of the ‘Imports’ news release on the price charts 

Until now, we have learned all about imports and the different ways it can affect the economy and the currency. Imports offer many benefits to the consumer of the importing nation, such as greater choices, a wide range of quality, and access to lower-cost goods and services. Imports create healthy competition in the domestic market, forcing local producers to improve their quality or by reducing costs. Therefore, if imports are kept at a reasonable level, they can be beneficial to companies, consumers, and the economy. We need to change the method in which the value o trade is measured.

In today’s illustration, we will be analyzing the impact of Imports on different currency pairs and see the change in volatility before and after the news announcement. The below image shows the latest Imports data of the United States, where it says that there has been a reduction in the net Imports from the previous month. Let us find out how the market reacts to this data.

USD/JPY | Before the announcement:

The first pair we will be discussing is the USD/JPY currency pair and where the above image shows the state of the chart before the announcement. We see that the market does not appear to be moving in any single direction, which means there is volatility on both sides, and there is confusion prevailing in the market. Traders need to watch the impact of the news announcement and then take a suitable position.

USD/JPY | After the announcement:

After the news announcement, the price sharply falls lower, and volatility expands on the downside. As there was a reduction in the value of Imports, the market reacted negatively to this data by causing weakness in the U.S. dollar. The long bearish ‘news candle’ is an indication of the continuation of the downward move, and so, one can take a ‘short’ position in the currency after the news release with a stop loss above the recent ‘high.’

GBP/USD | Before the announcement:

GBP/USD | After the announcement:

The above images represent the GBP/USD currency pair, where we see that, in the first image, the market again is not trending in any direction, and currently the price is at the ‘supply’ area. Therefore, we can expect sellers to come back into the market and stimulate selling pressure. Since the impact of Imports data is moderate to high, it is advised to wait for the news release to see what changes it will cause in the price. After the news announcement, there is a sudden surge in the price where the ‘news candle’ closes with a fair amount of bullishness. Since the U.S. dollar is on the right hand of the pair, a rise in the price indicates weakness in the currency. As the Imports were lower, traders increased the volatility to the upside by selling a lot of U.S. dollars. From a ‘trade’ point of view, we will go ‘long’ in the market only after the price breaks the ‘supply’ area and moves higher.

AUD/USD | Before the announcement:

AUD/USD | After the announcement:

The above images are that of the AUD/USD currency pair, where we see that the market is in an uptrend, and at present, it looks like the price on the verge of continuing the trend after a price retracement. The price is currently at the previous ‘high,’ so we can sellers become active at this point. Thus, we should not take any position before the news release. After the news announcement, the price goes higher and closes as a bullish candle. As the Imports are relatively weak, traders sold U.S. dollars and increased the volatility to the upside. This could be a confirmation sign of the continuation of the trend. Aggressive traders can take ‘long’ positions with a stop loss below the recent ‘low.’

That’s about ‘Imports’ 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

‘Households Debt to GDP’ – What Should You Know About This Economic Indicator?

Introduction

Households Debt to GDP is an indicator of ascertaining the financial soundness of the economy. There is a certain amount of healthy correlation between the Households Debt and GDP, and by understanding this ratio correctly, we can predict major economic events with reasonable confidence. This metric has gained more attention around the time of the global financial crisis of 2008. Hence, understanding this metric is important in understanding long-term macroeconomic trends.

What is Households Debt to GDP?

Household Debt

It refers to the total debt incurred by households only. All the monthly debt payments people owning a home are taken into consideration. The debt can be of any type like mortgage loan, student loan, auto loan, personal loans, credit cards. Any form of credit for which you are paying back from your income is a debt in this context.

But, merely measuring household debt without any relative quantity to ascertain the burden of debt to an individual is not useful. For example, a country earning 100 billion dollars in a year having a debt of 70 billion dollars can be burdensome. While a nation making 200 billion dollars would be comfortable paying off this debt and still afford to invest in public spending and other activities. It is this relative context that appropriately paints the macroeconomic picture of a nation in front of us.

On the Macroeconomic level, GDP is equivalent to the income of the nation, and the portion of that income that goes into servicing debt payments determines what is left for other activities. The debt burden can also be measured in different forms, like by taking the ratio of the debt to disposable income or pre-tax income (gross income).

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

The household debt impacts the Personal Spending (which is the amount left after deducting necessary expenditures from the Disposable Personal Income, DPI). High debt results in lower spending, which promotes saving and discourages spending. When spending is reduced, the demand falls in the market, and businesses enter a slowdown.   Expansionary plans are rolled back, and employees are laid off, resulting in deflationary conditions overall.

The financial crisis of 2008 – From 1980 to 2007, the increase in debts due to the low-interest rate environments stimulated the economy beyond its sustainable levels, which resulted in extended spending by individuals buying houses all over the United States.

Once the individuals bought their homes, till then, the market and economy were seeing a boom, but soon reality hit when people started repaying the debt, which reduced the overall spending that resulted in a slowdown of the overall economy. What happened here is, the government tried to give an artificial boost to the economy, which although sped up the economy for some time, it later dragged the economy back to the extent that even today, the economy’s growth rate is lower than it should be.

The debt burden led to a global financial crisis in many countries where loan defaults were becoming increasingly common. Many people just abandoned their house and debt, due to which the real estate market fell, the investors lost money, the stock market crashed. All this resulted in an economic collapse in the United States. Similar patterns followed throughout the world in many countries.

Historically, when the Households Debt reached 100% of GDP, the economy took a severe downturn and went into recession. The years leading up to the financial crunch, i.e., 2007, many industrialized countries experienced a major spike in Households Debt. Countries that experienced 100 and above percentage figures in the Households Debt to GDP ratio experienced the Credit Crunch and entered a prolonged slowdown period. In the below plot, we can see during the recession (shaded region), the Households Debt to GDP reached around a hundred percentage.

Impact on Currency

The Households Debt to GDP percentage figure is an inverse indicator. The higher numbers are bad for the economy and the currency. Lower values mean that either the debt has reduced, or the GDP has increased, or both. It is suitable for the economy, and the currency appreciates.

Since GDP is a quarterly figure, and hence the ratio numbers are also released quarterly. Also, the Households Debt to GDP is a long-term number, in the sense that the numbers will not rise or fall overnight. It may take years to build-up or go down. Hence it is a low-impact indicator as it is indicative of the long term trend and does not reflect the current short term trends in the economy.

But, Households Debt to GDP can be used to analyze severe economic downturns like that of 2008’s financial crisis. In this sense, investors, economists can use this statistic to predict any shocks that may occur in the future.

Economic Reports

The International Monetary Fund ( IMF) releases the Financial Soundness Indicators (FSI) for many economies based on the data they receive from the individual countries. There are no fixed release dates of the report’s release, as they compile and publish once they receive information from the source countries. The FSI data goes back to 2008 for many countries, but for some, it goes back to 2005.

The IMF FSI reports contain different types of loans and their ratios to GDP and other metrics that are available on their official website.

For the United States, the Board of Governors of the Federal Reserve System releases the report titled “Financial Accounts of the United States – Z.1”, also called Z1 reports, quarterly on their official website. This report gives the Households Assets and Liabilities and Net Worth, the charts show the balance sheet of households and non-profit organizations to DPI.

Sources of Households Debt to GDP

  • IMF FSI reports are available here.
  • United States Assets and Liabilities report can be found here.
  • The above-mentioned figures are available in the St. Louis FRED website.
  • Compilation of the Households Debt to GDP for all major economies is available here.

Impact of the ‘Households Debt to GDP’ news release on the price charts

After understanding the Household Debts to GDP economic indicator, we will now proceed and analyze the impact of the same on the country’s currency. The Household Debt to GDP is a metric that measures the country’s public debt to its Gross Domestic Product (GDP). From the definition, it is clear there exists an inverse correlation between the indicator and value of the currency. When there is an increase in the value of the indicator, it means people’s debts are increasing, and consumer spending is reducing. This negatively impacts the economy and, thus, the currency, whereas a decrease in Household Debts is positive for the currency.

In today’s example, let’s analyze the Household Debts to GDP data of India and find out the impact of the same on Indian Rupee. As we can see, India’s Household Debt accounted for 11.3% of the country’s Nominal GDP in March 2019, compared to the ratio of 10.9%  in the previous year. The year-on-year data is said to have a long term effect on the currency, and hence we are observing the impact on the ‘daily’ time frame chart.

EUR/INR | Before the announcement:

We first look at the EUR/INR currency pair, where we see that the price is in a major downtrend and has been moving in a range from the past two months. Just a few days before the news announcement, the market has retraced the downtrend partially and is on the verge of continuation of the trend. Technically, it is judicious to go ‘short’ in this pair as it is the best way to trade the trend. Now we only need confirmation from the market in terms of the market going below the moving average after the news release.

 EUR/INR | After the announcement:

After the news outcome, the market moves a little higher owing to weak Housing Debt to GDP data, and traders around the world sell Indian Rupee. There is an increase in volatility to the upside, but on the immediate next day, the market gets sold into. This means that even though the data was unhealthy for the Indian economy, it wasn’t as bad to take the price much higher and result in a reversal of the trend. Therefore, we enter the market for a ‘short’ trade only after the price slips below the moving average, and volatility increases on the downside.

GBP/INR | Before the announcement:

GBP/INR | After the announcement:

The above images represent the GBP/INR currency pair, and as we can see, the market has reversed the downtrend of 2018 and is currently in an uptrend. This up move started at the beginning of the year and has been new ‘highs. Before the announcement, the price seems to have made a top and might be going down to the ‘support’ area to resume the up move. Since we do not have the forecasted data of the indicator, we cannot take any position in the market. After the news announcement, the market does not fall much, nor does it go higher. This means the HOUSING DEBT TO GDP data was neutral for the economy and thus for the currency. As the change in HOUSING DEBT TO GDP was not drastic, we do not witness substantial volatility during the announcement. The ‘trade’ idea for this pair is similar to the above-discussed pair, where we go ‘short’ in the pair once the price goes below the moving average.

CAD/INR | Before the announcement:

CAD/INR | After the announcement:

In the CAD/INR currency pair, we see a retracement of the big downtrend of 2018 in the form of an uptrend, similar to the GBP/INR pair. One major difference is that the uptrend in this case not very strong and is unable to make new ‘highs. This means the down move is having more influence on the pair and that the up move might get sold into anytime. If the Housing Debt to GDP data were to be positive or neutral for the Indian economy, we could join the downtrend after suitable confirmation from the market. After the Housing Debt to GDP data is released, the price suddenly falls below the moving average, and volatility increases on the downside. A bearish ‘news candle’ shows the impact of the news on this pair, and we can conclude that Housing Debt to GDP data did not prove to be negative for this pair.

That’s about ‘Household Debts to GDP’ and how this economic indicator impacts the Forex market. For any queries, let us know in the comments below. Good luck!

Categories
Forex Fundamental Analysis

‘Leading Economic Index’ – Understanding This Forex Fundamental Driver

Introduction

Business people, Investors, and Politicians are often more interested in where the economy is heading than where it has been in the past or where it is right now. In this regard, the Leading Economic Index receives more attention than Coincident Index indicators or any individual economic indicators.

Leading Economic Index gives a more accurate snapshot of the future economic trend than any individual leading or coincident indicator. In this sense, the Leading Economic Index is essential to observe the economy’s ‘big picture’ better.

What is the Leading Economic Index?

Leading Economic Index is an amalgamation of multiple leading economic indicators that give us a better snapshot of the economic prospects of the country.

Economic Activity Index: The Economic Activity Index for the states presently includes five indicators, namely: non-farm employment, unemployment rate, average hours worked in manufacturing, industrial electricity sales, and real personal income minus transfer payments. It is a Coincident Economic Index that tells us the current economic situation in the broader sense. The below table summarizes the composition of the Economic Activity Index.

The Leading Economic Index uses the Economic Activity Index for each state as well as various state, regional, and national variables to predict the nine-month-ahead change in the state’s economic activity index. This estimate of the nine-month percentage change in the state’s current Economic Activity Index is the state’s Leading Index.

Hence, by using a mix of coincident indicators, leading indicators, and other variables, the Leading Economic Index is constructed. The below table summarizes the composition of the Leading Economic Index.

The Leading Economic Index has the base period 1992, i.e., the Leading Economic Index score for the year 1992 is 100. Based on this period, all subsequent index periods are scored.

A score below 100 is observed as contractionary. A score above 100 is seen as expansionary for the economy. The Leading Economic Index uses a time-series model (vector autoregression). The current and prior values of the forecast are combined to determine the future values of the index.

Below is a snapshot of the Leading Economic Index of the three districts and the USA:

(Source – Philadelphia Fed)

How can the Leading Economic Index numbers be used for analysis?

Individual economic indicators like Initial Unemployment Claims, Purchasing Manager’s Index from the Institute of Supply Management, Employment rate can often give conflicting signals.

No one indicator can give us the broader economic outlook that we are seeking to have. It is often preferred to have an idea on different sectors (private, public, or manufacturing, services, or business, consumer) and different economic indicators to obtain a complete macroeconomic picture.

An economy consists of many moving parts, imports, exports, jobs, businesses, banks, money supply, etc. all these economic levers push or pull the economy. With so many levers in place, it is indeed difficult for the common man to know for sure the overall economic condition. The geography also plays a part, a slow down in one state does not necessarily translate to the overall economic slowdown, it might even be the case ten other states have improved above average.

In this regard, the Leading Economic Index is useful to get the big picture more accurately. As shown in the below plot, for Pennsylvania, four recessions since 1970 have been preceded by a minimum of three negative readings. The Leading Economic Index is generally measured as a change in percentage concerning the previous month score.

(Source – ST Louis Fed)

 

Impact on Currency

Improvement in the Leading Economic Index figures signals an expansionary growth in the economy ahead, which is appreciating for the currency and vice-versa.

In this sense, the Leading Economic Index is a leading and proportional economic indicator, i.e., it forecasts growth and the increase or decrease in figures generally translate into improvement or deterioration of the economic growth.

The Leading Economic Index is a low impact indicator as the data from the individual indicators that make up the Leading Economic Index would have already been released a week before, and the corresponding market short-term moves would have already taken place. Although, the long-term trends and forecasting power of the Leading Economic Index makes it a suitable tool for investors and long-term traders to assess economic direction over a time horizon of 3-6 months better.

Economic Reports

The Federal Reserve Bank of Philadelphia releases the Leading Economic Index for all of the 50 states. The Indexes are released every month generally a week after the release of the composing coincident indicators. The release dates for the upcoming year’s Leading Economic Index reports are already posted on its website.

Sources of the Leading Economic Index

The State’s Leading Economic Index is available on the official website of the Federal Reserve Bank of Philadelphia:

Leading Economic Index – FRB -P

Release Schedule – Leading Economic Indexes

The Leading Economic Index and the Coincident Economic Activity Index are also available on the St. Louis FRED website:

Leading Economic Index – FRED

Coincident Economic Activity – FRED

The Leading Economic Index for various countries are available here in statistical and list form:

Impact of the ‘Leading Economic Index’ news release on the price charts

In the previous section, we described the Leading Economic Index fundamental indicator, where we said that it is a composite index that is based on nine economic indicators and is used to predict the direction of the economy. The data is gathered from economic indicators related to consumer confidence, housing, money supply, stock market prices, and interest rate spreads. The report tends to have a relatively muted impact on currency pairs because most of the indicators that are used in the calculation are released previously.

The below image shows the previous and latest data of Leading Economic Index indicator, where we see a decrease in 0.4% compared to the previous month. A higher than expected data should be taken to be positive for the currency and vice-versa. Let us observe the change in volatility due to the news release.

AUD/USD | Before the announcement:

The above image shows the chart of the AUD/USD currency pair before the news announcement. We see that the price is in a downtrend, and recently it has formed a ‘range.’ This looks like a retracement where the price may continue its downtrend after touching a key technical level. Depending on the news data, we shall take an appropriate position in the market.

AUD/USD | After the announcement:

After the news announcement, the price falls and goes below the moving average, indicating that the Leading Economic Index data was negative for the economy. As there was a decrease in the value, traders went ‘short’ in the currency pair and increased the volatility to the downside. This was accompanied by another news event that was positive for the Australian dollar, and hence we see the sharp rise in price. Nonetheless, the Leading Economic Index was bad for the economy due to which the currency weakened initially.

AUD/CHF | Before the announcement: 

AUD/CHF | After the announcement:

The above images represent the AUD/CHF currency pair, where we see that the characteristics of the chart are similar to the above-discussed pair before the news announcement. Here too, the market is in a downtrend signifying weakness in the Australian dollar, and the price has pulled back from its ‘lows’ recently. There is a possibility that the downtrend might continue depending on the outcome of the news. After the news announcement, the market moves lower, and the price closes as a bearish ‘news candle.’ Since this announcement followed another news release, one needs to be cautious before taking any position in the market. If we are to analyze this data alone, we can expect an increase in volatility to the downside, leading to further weakening of the currency.

EUR/AUD | Before the announcement: 

EUR/AUD | After the announcement:

The above images are that of the EUR/AUD currency pair, and here, the market is an uptrend before the news announcement. Since the Australian dollar is on the right- hand side of the pair, an up-trending market indicates weakness in the currency. The price is currently moving in a ‘range,’ and just before the news release, it is at the bottom of the range. Ideally, this is the ideal place for going ‘long’ in the market. Aggressive traders can take a ‘long’ position with a stop loss below the support. After the news announcement, we see that the market moves higher, and the bullish ‘news candle’ indicates weak ‘Leading Economic Index’ data where there was a reduction in the value for the current month. Compared to the other fundamental drivers, the Leading Economic Indices news release would have taken the currency higher, and high volatility would be witnessed on the upside. Therefore, we need to keep a watch on the economic calendar to be aware of all the news announcements.

That’s about the ‘Leading Economic 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

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

Introduction

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

What is Manufacturing Production?

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

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

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

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

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

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

How can the Manufacturing Production numbers be used for analysis? 

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

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

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

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

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

Impact on Currency 

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

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

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

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

Sources of Manufacturing Production

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

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

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

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

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

USD/JPY | Before the announcement:

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

USD/JPY | After the announcement:

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

GBP/USD | Before the announcement: 

GBP/USD | After the announcement:

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

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

USD/CAD | Before the announcement:

USD/CAD | After the announcement:

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

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

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

Categories
Forex Fundamental Analysis

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

Introduction

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

What is the “New Orders” number?

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

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

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

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

Special Consideration:

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

How can the New Orders numbers be used for analysis? 

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

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

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

Impact on Currency

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

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

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

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

Economic Reports

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

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

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

Sources of New Orders Reports

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

Impact of the ‘New Orders’ news announcement on Forex

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

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

USD/SEK | Before the announcement:

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

USD/SEK | After the announcement:

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

EUR/SEK | Before the announcement:

EUR/SEK | After the announcement:

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

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

SEK/JPY | Before the announcement:

SEK/JPY | After the announcement:

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

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

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

Categories
Forex Fundamental Analysis

Why ‘Core Consumer Price’ Is Considered A Crucial Macro Economic Indicator?

Introduction

The Core Consumer Prices are a sub-segment of the Consumer Prices, which is used by professionals and economists to get a more accurate picture of the inflation within the country. Understanding of Consumer Price movements can help traders predict inflation rates, industrial trends, identify demand, and supply gaps to invest in a particular section of goods and services. It is a widely used statistic and is one of the critical components in assessing economic expansion or contraction, thereby.

What is Core Consumer Price?

The ”Core “ Consumer Price is the generally called name for the “Consumer Price for All Urban Consumers: All Items Less Food and Energy.” This term comes up in the Consumer Price Index monthly published Reports where this is another variant of the CPI-U and is widely known as the “Core” CPI where CPI stands for Consumer Price Index.

What is the Consumer Price Index?

Consumer Price Index is a survey report which determines the average price of some of the most commonly purchased goods. These goods include toothpaste, grocery, fuel, etc. Instead of using a simple average, each good is assigned a specific weight based on the degree of their importance amongst the people. For instance, milk will have a higher weightage in the mean price calculation compared to the furniture.

Core Consumer Price Index is the same Consumer Price Index for all the commonly consumed goods and services except food and energy items. This distinction has arisen due to the highly volatile nature of food and energy prices.

Why are the food & energy prices volatile in the first place?

Let us talk about food first. In the short run, the supply of food cannot immediately accommodate the increase in demand for food. To meet the increased demand,  it has to result in the planting of more seeds and growing, which take somewhere about a few months to at least a year.

Due to this situation, we say the supply is inelastic to the demand, meaning it cannot stretch immediately to meet the demand. Hence, the demand-supply gap causes price volatility. For example, in India itself last year, the price of onions went up to 150 rupees per kg from its usual 30 rupees per kg. This volatility can also occur due to crop loss at the time of adverse weather conditions or due to some other issues like forest fires etc.

The same goes for energy items like crude oil. Industries or Countries that are heavily dependent on these sources have little choice but to pay higher prices when there is a shortage of supply. Switching from one source of energy to another or alternate forms of power is not a small task, nor is it a viable solution. The primary energy source areas have been historically subjected to political tensions, which have led to significant shocks in oil prices worldwide. Factors like weather conditions also hinder oil production, or unexpected incidents can lead to significant dips in the energy supply levels in the global market.

Below is a historical 70-year plot of Crude oil prices where shaded regions indicate periods of recession.

(Source: MACROTRENDS)

With such a massive rise and drops in prices, it is very easy to overlook the actual inflation or deflation within the economy. As the CPI takes into account the food and energy prices, there can be situations where the food and energy prices skyrocket while other items have observed deflationary trends in their prices to a scale that the volatility masks the deflationary trend or vice versa is also true.

To avoid this inaccuracy in CPI, the Core CPI comes into the picture, which is a more accurate inflationary measure than the CPI-U.

Economic Reports

The Bureau of Labor Statistics generally conducts a survey of 80,000 consumer item prices to create the Index and publishes it monthly.

BLS data collectors visit in person, or virtually through the internet, or call thousands of retail stores, service establishments, rental units, and doctors all over the United States. They do this to generate info on the prices of items and then measure price changes in the CPI.

How can the Core Consumer Prices be Used for Analysis?

The index data set goes as way back; for example, Core CPI goes as far back as 1957. With such a large data set, the reliability of the data set is high, and it usually depicts the macroeconomic picture of a country with reasonable confidence.

CPI changes are useful to ascertain the retail-price modifications associated with the Cost of Living. Hence it is widely used to determine inflation in the United States.

Many payment agreements are directly tied to CPI; it can affect the incomes of 80 million people. Social Security benefits, various pension payments are all indexed by CPI. Hence, CORE CPI is essential to understand current monetary conditions and can also be used to assess how the governments and policymakers will act to these changes.

Impact on Currency

In general, CPI is associated as a proportional indicator meaning higher CPI signals currency appreciation for traders and vice versa.

Below is a snapshot of CORE CPI plotted against GDP for the last 15 years, and we see this macroeconomic indicator’s importance in fundamental analysis:

Sources of Consumer Price Index

The U.S. Bureau of Labor Statistics releases all the indexes as mentioned here –

Consumer Price Index and Core CPI

CPIAUCSL: CPI for Urban Consumers: All Items in U.S. City Average: Broadly uses the statistic for a measure of overall inflation in prices. It includes Food and Energy prices, unlike CPIFESL. This info can be found here.

CPIFESL: Consumer Price Index for All Urban Consumers: All Items Less Food and Energy in U.S. City Average: It excludes volatile components like Food and Energy (Oil Prices) and gives more of a Core CPI change within the United States. This info can be found here & here.

Impact of the ‘Core Consumer Prices’ news release on the price charts

The Core CPI is not only an important indicator of inflation but that of the overall economy, thus it is sure to impact the value of the currency. In this section of the article, we will be discussing that impact and look to trade the news announcement. As we can see in the below image, core CPI is said to highly impact the currency when the numbers are being announced. The data released on a monthly and yearly basis, but today we will be analyzing the month-on-month core CPI data of the United States.

The below image shows the latest Core CPI data for the month of February, along with the forecasted and previous numbers. A higher than expected reading is considered to be bullish for the currency while a lower than expected reading is believed to be bearish. The latest figures show that the Core CPI numbers were unchanged from before, which was exactly predicted by economists. The CPI numbers are published by the U.S. Bureau of Labor Statistics, the official agency that carries out surveys and collections. Now let us analyze the impact it created on the U.S. dollar.

EUR/USD | Before The Announcement

We start with the most liquid forex pair in the world, which is the EUR/USD pair. Looking at the from a technical perspective, before the news announcement, we see a market reversal retracement on the downside with a retracement to the nearest ‘higher high’. One can assume that the market has factored in the Core CPI data as it is expected to remain the same as before. Hence, one should not expect a great amount of volatility during the announcement. Technically, we can take a ‘short’ trade in the above pair, but without having a lot of assumptions, it is advised to keep a wide stop loss to protect ourselves from spikes.

EUR/USD | After The Announcement

The Core CPI numbers are announced, and since it was on expected lines, the price falls a little, showing some bullishness for the U.S. dollar. As there was minimal volatility, we can confidently take a ‘short’ trade with a stop loss above the recent ‘higher high.’ The ‘take profit’ for this trade should be near the recent ‘low’ or ‘support’ area. We shouldn’t forget that earlier, it was said that it is a high impactful event, but due to subdued expectations, it did not induce high volatility.

USD/CAD | Before The Announcement

USD/CAD | After The Announcement

The above images represent the USD/CAD currency pair where it looks like, before the news announcement, the market is in a pullback mode, and this is the perfect scenario for going ‘long’ in the market. As the impact of Core CPI is high, it could turn the market either way; hence it is safer to wait for the news release and then a suitable position in the market.

After the news announcement is made, we see that the volatility expands on the upside, which takes the currency higher. This could essentially be the confirmation sign for trend continuation, and we can now enter for a ‘buy’ with a stop loss below the recent ‘low.’ Since there was no reduction in Core CPI numbers, it resulted in being positive for the U.S. dollar, and thus we see a bullish candle after the news release.

NZD/USD | Before The Announcement

 

NZD/USD | After The Announcement

Here, in NZD/USD currency pair, before the news announcement, we see an uptrend, and since the U.S. dollar is on the right-hand side, it shows the excessive weakness of the same. The behavior of this chart is different from that of the above-discussed pairs due to the strength in the New Zealand dollar.

Therefore, only a significant increase in the Core CPI can result in a reversal of the trend else we can witness volatility on both sides. Since the news announcement was mildly positive for the U.S. economy, the price drops but not enough. Hence, we can conclude that the news release did not cause much volatility in the pair, and the current trend is still intact.

That’s about ‘Core Consumer Prices’ and its impact on the Forex price charts after its news release. If you have any questions, please let us know in the comments below. Good luck!

Categories
Forex Fundamental Analysis

Comprehending ‘Credit Rating’ & Its Importance as a Macro Economic Indicator

Introduction

The credit rating of an institution, organization, the government is like a pseudo report card of its ability to pay back its debt. The credit rating process is thorough and detailed. The credit rating of a country or a government, in that case, can significantly impact the inflow of domestic and foreign Investments. It is one of the major indicators around which a lot of volatility occurs in the financial markets; therefore, understanding the credit rating system is important.

What is Credit Rating?

Credit Scoring

Among the general population, people who have a job are usually aware of a credit score that is attributed to them buy one or more agencies within that country. For example, in India, CIBIL, which stands for Credit Information Bureau (India) Limited, is the primary agency that assigns credit rating to individuals.

The credit rating of an individual largely determines the eligibility to apply for a loan from any financial institution. A high score would indicate that the individual is capable of repaying on time, and conversely, a low score would mean that there is a high risk of defaulting on repayment by the individual. The credit score of an individual takes into account the history of loans, repayment records and past defaulting records, and his current net income. Based on all these factors, the calculated score then tells their worthiness of credit.

For example, a CIBIL score greater than 750 in India is usually seen as a minimum requirement to be eligible for a loan by most banks. The individual usually seek out to maintain a high CIBIL score to be eligible to borrow a higher amount of loan and lower interest rates as a lower score would greatly diminish their loan eligibility, and even if they do get a loan, they will have to pay higher interest rate than people with a good CIBIL score.

Credit Rating 

Credit scoring applies to individuals within a country, whereas credit rating applies to institutions, organizations, and governments. Similar to credit scoring credit rating tells whether that organization is credit working or not.

Credit rating becomes important as here the borrowers are big institutions, government, large financial organizations, and the lenders are also big investors or foreign bodies. The loan amount is high, often ranging in millions and billions, and the duration of the loan is also long. Hence, investors actively seek credit ratings before deciding to purchase a particular Bond and lending their money.

How are the Credit Ratings calculated?

There are many globally popular credit rating agencies. In the United States, three companies, namely, Fitch Ratings, Standard and Poor’s Global (S&P Global), and Moody’s Corporation, are the most famous and sought after agencies.

The credit rating process is very thorough and accounts for the entity’s entire debt and its repayment history. The process requires credit rating from the agency to meet with the organization and going over their financial records to assess their current financial status and assess their eligibility. They also take into account that past loan repayments and spending patterns, their current financial assets, and future economic prospects.

After this, a group of credit raters will work out the credit rating for that organization. The process may take up to 4 weeks in general. When the credit rating is ready, it is given out to the company and for a press release. The credit rating agencies usually follow an alphabet combination rating system.

For example, according to Standard and Poor’s Ratings, an organization having AAA rating is said to be outstanding, which is the highest rating possible. Next below is AA+, which means excellent this goes down a rating of D, which is the lowest score. The formats of writing may vary slightly from company to company, but in general, they have an understandable notation of alphabet combinations.

Are Credit Ratings important?

The credit ratings became particularly important after the 1936 rule, which restricted Financial Institutions to lend money to speculative bonds, i.e., having low credit ratings in other words.

Many companies now actively seek to get their credit rating assessed to gain the confidence of investors. The financial markets also have seen enough market crashes, the system collapses, and payment defaults even by the most reputed organizations and nations also. The European debt crisis and the Greece default one of the most popular instances wherein national level collapse of financial institutions and debt default occurred in the recent times of 2010-2011.

In one sense, there is a link between capital inflow and credit rating, hence government and financial corporations, when requiring money, the credit rating becomes a significant number.

The credit rating is not a performance report for a particular set year; instead, it is a continuously updated statistic that tells the credibility of the entity at the current time. For example, a country with the best credit rating last year may not have the same rating this year. The credit rating cuts through all the false alarms and directly gauges the financial numbers, which always tell the truth.

Hence, once the agencies publish credit ratings for a particular sovereign body, there tends to be a lot of volatility as investors either become gain or lose confidence in that body. Conversely, a decreased credit rating than the previous number, also stirs down the market in a negative direction.

Credit ratings, particularly sovereign credit ratings, are major indicators for investors, and hence the government bodies take utmost attention to loan repayment to avoid defaulting and thereby spoiling their credit rating, which will cost them future monetary indentures. Government bodies are aware that decreased credit rating will result in foreign investors stepping back, and consequently, losing their funding, which can, in extreme cases, lead to a total collapse of the institution or an economy at a large scale.

How can the Credit Ratings be Used for Analysis?

An institution with a low credit rating is considered a high-risk investment as the prospects of that company being able to repay is low.

A decrease in the sovereign credit rating signals an economic slowdown from which the country may take a significant time to recover. Conversely, a high credit rating for sovereign bodies and conglomerates indicates that the economy is stable and growing, and there are ample financial resources to pay back the debt on time.

Credit ratings are released quarterly, usually, after the financial numbers of the organization are released. They can be used as current macroeconomic indicators and also be used to predict future expansion plans of the borrowing party, as an institution borrows money to expand or invest in its growth.

Sources of Credit Rating Reports

For reference, Fitch credit ratings are published frequently on their official website.

Since Credit Rating is a major indicator, media coverage is huge and is easily available across the internet. For reference, this is a rating table given in Wikipedia.

Impact of the ‘Credit Rating’ news release on the price charts 

After understanding the meaning and significance of Credit Rating in a country, we shall now see the impact it makes on the currency after the Ratings are declared. There are many agencies that give Ratings to different countries, but the two most reliable and followed are the Ratings given Fitch and Standard and Poor’s (S&P). In today’s article, we will be analyzing the Credit Rating of the United Kingdom announced in the month of December. Credit Rating is said to be a major event in both the forex and stock market, which has a long-lasting effect on the value of a currency. Therefore, the rating could largely determine the degree of volatility in the currency pair.

In forex trading, Credit Rating is used by sovereign wealth funds, pension funds, and other investors to gauge the creditworthiness of a county, thus having a big impact on the country’s borrowing costs. As we can see in the above image that Fitch’s Credit Rating for the United Kingdom was last reported at AA with a negative outlook. Since the rating was unhealthy for the economy, let us see how the market reacted to this.

GBP/CAD | Before The Announcement

As the Credit Rating announcement is one of the biggest data releases of a country, volatility caused by the news release can be witnessed more clearly on a daily time-frame chart. Likewise, we have considered the ‘daily’ chart of GBP/CAD that shows an uptrend market. As we do not have any forecasted data available for the same, we cannot take any position in the market based on predicted ratings. The only way we position ourselves in the market before the news announcement is through the ‘options’ segment, where we can essentially take advantage of the increase in volatility on either side.

GBP/CAD | After The Announcement

On the day of the Credit Rating announcement, we see that the market falls by more than 500 pips resulting in a complete reversal of the trend. This shows the extent of the impact of Credit Rating on a currency pair. The reason behind the collapse of the British Pound is negative Credit Rating given by the two most renowned agencies.

This rating is used by institutional investors and fund managers to decide if they want to park their cash in the economy. Therefore, when the rating is downgraded, investors withdraw their money from the market and sell British Pound. From a trading point of view, one can take a ‘short’ position in the market with a high much higher ‘take profit’ since the market has the potential to go much lower.

GBP/JPY | Before The Announcement

GBP/JPY | After The Announcement

The above images represent the GBP/JPY currency pair where the chart characteristics are almost the same as that of the GBP/CAD, but with a difference that, the uptrend is more extended in this pair. When the market is trending strongly in one direction, we need to cautious while making trades in the opposite direction of the market. Here too, since we are not sure of the Credit Rating data, we cannot position ourselves on any side of the market.

After the news announcement, the British Pound falls but as much as in the above case. There is an increase in volatility on the downside but not sufficient enough to take a ‘short’ trade. Another reason behind a lesser fall in price could be the weakness of the Japanese Yen. Also, the price, even after bad news, is still above the moving average.

GBP/NZD | Before The Announcement

GBP/NZD | After The Announcement