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Forex Fundamental Analysis

EUR/CHF Global Macro Analysis – Part 1 & 2

Introduction

Introduction

Introduction

In conducting the global macro analysis of the EUR/CHF pair, we’ll focus on endogenous economic factors that contribute to the growth of GDP in the EU and Switzerland. Exogenous factors that influence the exchange rate of the EUR/CHF in the forex market will also be analysed.

Ranking Scale

A sliding scale of -10 to +10 will be used to rank the impact of endogenous and exogenous factors.

The ranking of the endogenous factors will be based on their correlation analysis with the GDP growth rate. A negative score implies that they resulted in the contraction of the economy hence depreciating the domestic currency. A positive score implies that they led in economic expansion hence appreciation of the domestic currency.

The exogenous factors are ranked based on their correlation with the EUR/CHF exchange rate. A positive score means that the pair lead to an increase in the exchange rate, while a negative ranking means that the exchange rate has decreased.

EUR Endogenous Analysis – Summary

The EUR’s endogenous analysis has a score of -3. This implies that the Euro had marginally depreciated in 2020.

CHF Endogenous Analysis – Summary

The change in the level of employment covers the quarterly developments in the labour market in Switzerland. The statistic includes the changes in both fulltime and parttime employment. Typically, changes in employment is a result of changes in business activities.

In Q3 of 2020, 5.08 million people were employed in Switzerland compared to 5.02 million in Q2. The employment level is still below the 5.11 million registered in Q1. We assign a score of -4.

  • Switzerland GDP Deflator

Switzerland GDP deflator is used to calculate the change in real GDP in terms of prices of all goods and services produced within the country. This is a comprehensive measure of inflation compared to measures like CPI and PPI, which only focus on a small portion of the economy.

In Q3 2020, Switzerland GDP deflator rose to 98.8 from 98 in Q2.  Up to Q3, the GDP deflator has increased by 0.8 points. The increase in inflation can be taken as an indicator that the economy is bouncing back from the economic shocks of the coronavirus pandemic. We assign a score of 3.

  • Switzerland Industrial Production

This indicator shows the changes in output for firms operating in the manufacturing, mining, quarrying, and electricity production. Although Switzerland is not heavily dependent on industrial production, it is still an integral part of the economy.

In Q3 2020, the industrial production in Switzerland increased by 5% from a drop of 9% in Q2. The YoY industrial production for Q3 was down 5.1%. For the first three quarters of 2020, the industrial production is down 3.8%. We assign a score of -3.

  • Switzerland Manufacturing PMI

This is an indicator of the economic health of the Swiss manufacturing sector. The purchasing managers are surveyed based in a questionnaire which covers the output in the sector, suppliers’ deliveries, inventories, new orders, prices, and employment. A PMI of above 50 shows that the Swiss manufacturing sector is expanding, while below 50 shows that the sector is contracting.

In November 2020, Switzerland manufacturing PMI rose to 55.2 from 52.3 in October. This is the highest reading since December 2018 and the fourth consecutive month of expansion since July. We assign a score of 7.

  • Switzerland Retail Sales

The retail sales measure the consumption of final goods and services by households in Switzerland. The expenditure by households drives the aggregate demand in the economy, which results in the changes in GDP.

In October 2020, Switzerland retail sales increased by 3.2% from a drop of 3.2% in September. YoY retail sales increased by 3.1% in October from 0.4% in September. Up to October 2020, the average retail sales has increased by 0.84%. We assign a score of 1.

  • Switzerland Consumer Confidence

About 1000 Swiss households are surveyed in January, April, July and October. They are evaluated based on their opinions about the economy, job security, financial status, inflation, and purchases. Consumer confidence tends to be higher when the economy is expanding and low during recessions.

In Q4 2020, the Swiss consumer confidence dropped to -12.8 from 12 in Q3. Although it is higher than it was in Q2 at the height of the pandemic, it is still lower than in Q1. The expectations on households’ financial situation also dropped to -6.6 from -4.2 in Q2. Households were increasingly pessimistic about the labour market and their job security. this can be attributed to the uncertainties that surround the ongoing coronavirus pandemic. We assign a score of -2.

  • Switzerland Government Gross Debt to GDP

This is the total amount that the Swiss government owes to both domestic and international lenders is expressed as a percentage of the GDP. It helps us to understand and evaluate the size of the debt relative to the size of the economy. At below 60%, the government is seen as being able to service its debt obligations and have room to acquire more debt without straining the economy.

In 2019, the Switzerland government gross debt to GDP was 41% same as in 2018. In 2020, it is expected to range between 49% and 51% due to aggressive expenditure to alleviate the shocks of coronavirus pandemic. We assign a score of -1.

In the very next article, you can find the exogenous analysis of the EUR/CHF Forex pair. Please check that and let us know if you have any questions below. Cheers.

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Forex Fundamental Analysis

What Is Long Government Bond Auction and What Should You Know About It?

Introduction

Introduction

Introduction

Every government must finance its expenditures with a mixture of debt and revenue. Through debts, governments issue a mixture of short-term and long-term debt instruments to the public. When these debt instruments are being issued, they have an interest rate, one which government will pay the debt holders until maturity. For economists and financial market analysts, the interest rate paid can be used to analyze the government’s creditworthiness and the expected rate of inflation.

Understanding Long Term Bond Auction

A bond in finance is a fixed-income asset issued by an entity to borrow money from investors. Investors get to receive a fixed interest depending on the quantity they purchase. This fixed interest, called a coupon,  is usually paid at predetermined intervals until the bond reaches maturity.

Maturity is the duration in which an investor must hold the bond before they can redeem and get their principal back. It is the bond’s maturity that determines whether it is categorized as a short-term or long-term bond.

Long-term bonds are bonds that have maturities of more than one year.

On the other hand, long bonds are bonds with the longest possible maturity that the issuer can issue. For most governments, long bonds usually have a maturity of up to 30 years.

Long bond auction refers to when bond issuers offer the sale of long bonds to the public. It is at these actions where the rate is fixed. This rate is what bondholders will receive for holding the long bonds until maturity.

Bond yield is the return an investor can expect to receive from buying a bond. The bond yield usually comes into consideration when the bond starts trading in the secondary market. We will later see how this yield can be used for analysis.

Here is a list of long government bonds for the developed economies.

  • Austria 10-year bonds
  • The US 30-year bonds
  • Dutch 10-year bonds
  • Portugal 10-year bonds
  • Spain 50-year Obligation
  • France 30-year OAT
  • UK 30-year Treasury Gilts
  • Germany 30-year Bunds
  • Italy 30-year BTPs

The rate attached to these long bonds during auctions can tell us a lot about investor sentiment of these economies.

Using Government Long Bond Auction in Analysis

The rate ascribed to the bond at auction is what bondholders will expect to receive at predetermined intervals until maturity. Comparing this rate with the rates on past auctions, we can form an opinion about the debt situation of the country and the expected rate of inflation by the investors.

For investors, buying a bond is the equivalent of owning an asset that has a predetermined future cash flow. Since it is virtually unheard of for governments to default on interest rate payments or the repayment of principal upon maturity, long government bonds can be said to be risk-free. With this in mind, the only potential risk that bondholder faces is inflation. In fact, inflation has been called the “bond’s worst enemy.”

You see, a rise in inflation means that some percentage will erode the future purchasing power of money. This erosion of the value of future cash flows means that investors must demand a higher interest rate at long bond auctions. At the back of their minds, investors envision that the rate they demand at bond auctions must also include the expected inflation rate. Effectively, higher rates on bonds help mitigate the erosion in purchasing power of their future cash flows.

Source: St. Louis FRED

At the auction, the bond buyers would feel the need to bid for higher rates if they believe that the rate of inflation will remain relatively stable. In this scenario, they can be assured that the purchasing power of their expected cash flows won’t be eroded. So, what does long bind auction tell us about inflation? The rate at an auction will increase compared to the previous auction if investors believe that future inflation will rise. Conversely, the rate at the auction will decrease when investors hold the conviction that future inflation will remain relatively stable.

The other way government long bond auction can be used for analysis is by using the bond yield. For most economists and financial analysts, the yield is the most closely monitored aspect of a bond. The reason for this is because bond yield offers broad information about a country’s debt situation. Here’s the formula for calculation the bond yield.

Let’s use some simple calculations to illustrate how this works.

Say when the bond is being issued, it has a price of $1000 with an annual coupon payment of $50. Remember that the coupon payments are fixed and cannot change; investors can expect to receive this $50 until maturity.

In this case, the bond yield is 50/1000 * 100 = 5%

Now, imagine that the economic situation of a country is worsening, and it becomes increasingly indebted. In this case, the price of the bond will decrease, let’s say to $900, which means that the yield on the bond increases to 5.56%. Conversely, if the country’s economic performance improves, the bond prices will increase, meaning that the yield will fall. In our example, if the price increased to $1050, the yield will decrease to 4.76%.

Impact of Government Long Bond Auction on Currency

Using the yield on the long government bonds published during an auction, we can determine the economic performance. Therefore, when the yield increases, it means that economic performance in the country is worsening. To forex traders, this can be taken as a deep-seated economic contraction, which will make the domestic currency depreciate relative to others. On the other hand, if the yield falls during an auction, it could be considered a sign of economic prosperity. In this case, the domestic currency will appreciate.

Sources of Data

Globally, the central banks are responsible for auctioning long government bonds. Trading Economics has an exhaustive list of global government bonds and their yields. The United States Department of the Treasury, through TreasuryDirect, publishes the data on the US bond auctions.

How Government Long Bond Auction Affects The Forex Price Charts

The recent auction of the US 30-Year Bond was on October 8, 2020, at 1.00 PM EST and accessed at Investing.com. Low volatility is expected upon the release of the auction date.

In the October 8, 2020, auction, the yield on the US 30-year bond auction was 1.578% higher than the 1.473% of the previous auction.

Let’s see if this auction impacted the USD.

EUR/USD: Before Government Long Bond Auction on October 8, 2020, 
just before 1.00 PM EST

The EUR/USD pair was trading in a steady uptrend before releasing the US 30-Year Bond Auction yield. The 20-period MA can be seen rising with candles forming above it.

EUR/USD: After Government Long Bond Auction on October 8, 2020, at 1.00 PM EST

The pair formed a 5-minute bearish “hammer” candle immediately after the publication of the US 30-year bond yield. Subsequently, the pair traded in a subdued uptrend. The release of the data had no impact on the USD.

The auction of long government bonds serves a vital role in the economy. However, as we have observed in the above analyses, their impact on the forex market is not significant.

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Forex Fundamental Analysis

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

Introduction

Introduction

Introduction

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

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

Understanding PCE Price Index

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

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

How PCE is Measured? 

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

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

Purpose of the PCE Data

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

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

Difference between PCE Price Index and the CPI

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

Source: St. Louis FRED

Using PCE Data in Analysis

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

Source: St. Louis FRED

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

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

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

Impact on Currency

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

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

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

Sources of Data

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

How PCE Price Index Data Release Affects Forex Price Charts

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

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

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

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

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

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

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

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

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Forex Course

154. Understanding Hawkish and Dovish Central Banks

Introduction

Introduction

Introduction

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

What is Hawkish Central Bank?

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

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

What is the Dovish Central bank?

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

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

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

Decision

Hawkish

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

How Hawkish and Dovish Tone Affect the Forex Market

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

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

Conclusion

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

[wp_quiz id=”86379″]
Categories
Forex Fundamental Analysis

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

Introduction

Introduction

Introduction

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

Understanding New Home Sales

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

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

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

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

How to use New Home Sales Data for Analysis

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

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

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

Source: St. Louis FRED

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

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

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

Impact on Currency

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

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

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

Sources of Data

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

How New Home Sales Data Release Affects Forex Price Charts

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

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

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

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

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

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

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

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

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

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

Categories
Forex Fundamental Analysis

Everything You Should Know About ‘Retail Sales YoY’ Macro Economic Indicator

Introduction

Introduction

Introduction

The computation of gross domestic product takes into account the consumption by households. In the households’ consumption, the retail sales data is considered to be the best leading indicator. Retail sales account for the majority of consumption by households. Retail sales are estimated to account for up to 70% of the US economy. It is, therefore, important for forex traders to understand how it affects the economy and the currency.

Understanding Retail Sales YoY

Retail Sales: the definition of retail sales is the purchase of finished goods and services by the end consumers. As an economic indicator, retail sales are used to measure the changes in the value of the goods and services bought at the retail level. This change can be monthly (retail sales MoM) or over the previous twelve months (retail sales YoY).

Retail Sales YoY: covers the retail sales made to consumers for the preceding 12 calendar months. It measures the rate of change in the value of purchases made by households.

How Retail Sales YoY is Measured

The data collected for the YoY retail sales cover all retail outlets from physical stores to e-commerce. It also includes data from the services sector, such as hotels and restaurants. According to the US Census Bureau, retail sales are divided into 13 categories, which include: e-commerce retailers, department stores, food and beverage stores, health and beauty stores; furniture stores; hospitality, apparel, building stores, auto dealers, and gas stations.

In the US, the measurement of the annual retail sales is done using the Annual Retail Trade Survey (ARTS). The ARTS is aimed at giving the estimates of the national total annual sales, sales taxes, e-commerce sales, end-of-year inventories, purchases, total operating expenses, gross margins, and end-of-year accounts receivable for retail businesses. This survey is conducted annually.

The retail sales YoY tends to be influenced by the seasonality of the economic activities since it covers more extended periods. These seasons including the holiday shopping seasons account for about 20% of the retail sales YoY. As a result, retail sales YoY cannot be expected to provide the most current and up-to-date retail data.

How Retail Sales YoY can be used in Analysis

As aforementioned, the retail sales account for about 70% of the GDP, making it a vital leading indicator.

Consumer spending drives the economy. An increase in retail sales implies that more money is circulating in the economy. This increase could be a result of increased wages, which increases the disposable income, increase in the rate of employment; and accessibility to loans and credit. All these factors increase the aggregate demand within an economy. The increase in demand leads to an increase in aggregate supply. This increase leads to the creation of more employment opportunities due to the expansion of businesses. Therefore, a steady increase in the retail sales YoY signifies that the economy has been steadily expanding over the long term.

Source: St. Louis FRED

Declining retail sales YoY is an indicator that the economy might be contracting. The decrease in retail sales implies that there is less disposable income within the economy, either as a result of low wages or job cuts. Subsequently, there will be reduced demand for the finished goods and services in the economy, which will, in turn, compel producers to cut the output to avoid price distortion. The reduction in the production will force them to scale down their operations, leading to more unemployment. Thus, a continually decreasing retail sales YoY could be an indicator of a looming economic recession.

Since the retail sales YoY are spread out over 12 calendar months, it provides a comprehensive outlook for the central banks to monitor the effectiveness of their monetary policies. In the US, the Federal Reserve Board uses the accounts receivable data in monitoring retail credit lending.

Monitoring the retail sale YoY enables the Federal Reserve to keep an eye on the rate of inflation. A continually increasing retail sales YoY, if left unchecked, could lead to an increased rate of inflation beyond the target rate. Thus, to ensure this does not happen, the central banks consider this data when making the interest rate decision.

Conversely, since a continually decreasing retail sales YoY forebode a possibility of a recession, this data encourages governments and central banks to implement expansionary fiscal and monetary policies. These policies, such as cutting the interest rates, are meant to reduce the cost of borrowing and increase access to credit hence spurring demand within the economy.

Impact on Currency

As established, an increase in the retail sales YoY is synonymous with an increase in economic activities and an expanding economy. A country’s economic growth leads to an increase in the value of its currency. Thus, increasing retail sales YoY results in currency appreciation.

Conversely, the declining retail sales YoY forebodes a looming recession and a possible interest rate cut in the future. More so, this decline signifies an increase in the unemployment levels and a contracting economy. All these factors contribute to the depreciating of a country’s currency.

In the forex market, the retail sales YoY is a low-level economic indicator. It is overshadowed by the MoM retail sales data, which represents the more recent changes observed within the economy.

Sources of Retail Sales YoY Data

In the US, the retail sales YoY data is released monthly by the United States Census Bureau, along with the monthly updates. A comprehensive breakdown of the US retail sales YoY can be accessed at St. Louis FRED website. Statistics on the global retail sales YoY can be accessed at Trading Economics.

How Retail Sales YoY Data Release Affects The Forex Price Charts

The most recent retail sales YoY data was released on August 14, 2020, at 8.30 AM ET. A more in-depth review of the data release can be accessed at the US Census Bureau website.

The screengrab below is of the retail sales YoY from Investing.com. On the right is a legend that indicates the level of impact the fundamental indicator has on the USD.

As can be seen, the retail sales YoY data release is expected to cause low volatility on the USD.

In the 12 months to July 2020, the retail sales YoY in the US increased by 2.74%. This increase is higher compared to the previous increase of 2.12%. In theory, this increase should appreciate the USD relative to other currencies.

The screengrab above shows the simultaneous release of the monthly retail sales data and the retail sales YoY data. It is to be expected that the monthly retail sales data will dampen any impact that the retail sales YoY would have had on the price action.

EUR/USD: Before the Retail Sales, YoY Data Release on 
August 14, 2020, Just Before 8.30 AM ET

As we can see from the above 15-minute EUR/USD chart, the pair was trading in a weak uptrend. This trend is proved by the 15-minute candles crossing above the slightly rising 20-period Moving Average.

EUR/USD: After the  Retail Sales, YoY Data Release on 
August 14, 2020, at 8.30 AM ET

After the news announcement, the pair formed a 15-minute bullish candle. This candle indicates that the USD weakened against the EUR. Subsequently, the pair continued trading in a renewed uptrend as the 20-period MA rose steeply.

GBP/USD: Before the Retail Sales YoY Data Release on 
August 14, 2020, Just Before 8.30 AM ET

Before the data release, the GBP/USD pair was trading in a steady uptrend. This trend is evidenced by a steeply rising 20-period MA, with bullish candles forming further above it.

GBP/USD: After the  Retail Sales, YoY Data Release on 
August 14, 2020, at 8.30 AM ET

Similar to the EUR/USD, the GBP/USD pair formed a long 15-minute bullish candle after the news release. The pair continued to trade in the previously observed uptrend before peaking and slowly flattening.

NZD/USD: Before the Retail Sales, YoY Data Release on 
August 14, 2020, Just Before 8.30 AM ET

NZD/USD: After the  Retail Sales, YoY Data Release on 
August 14, 2020, at 8.30 AM ET

Before the retail sales YoY data release, the NZD/USD pair was trading in a similar trend as the EUR/USD pair. The 15-minute candles were crossing above a flattening 20-period Moving Average. After the news announcement, the pair formed a  long 15-minute bullish candle as did the EUR/USD and GBP/USD pairs. Subsequently, the pair traded in a renewed uptrend as the 20-period MA rose steeply with candles forming further above it.

Bottom Line

The retail sales YoY provides vital long-term data about the economic outlook of the households and their consumption patterns. In the forex markets, however, the retail sales YoY data is overshadowed by the retail sales MoM data, which is release concurrently. From this analysis, the increase of the retail sales YoY data for July 2020 had no impact on the price action since the markets reacted to the negative monthly retail sales data.

Categories
Forex Fundamental Analysis

How The ‘Corruption Rank’ Data Impacts A Nation’s Currency

Introduction

Introduction

Introduction

Corruption can very well be defined as seeking private gain through abuse of power that one has been entrusted. The biting effects of corruptions include:

  • Erosion of confidence in the monetary and economic system;
  • Hampering economic development;
  • Increase in current account deficits; and
  • Encouraging the growth of shadow economies

So, how does this affect a country’s currency valuation? Well, through GDP, of course! This correlation is explained in detail later on in this article.

Understanding Corruption Rank

Corruption rank is the ranking of countries worldwide based on how the countries’ public sector has been corrupted. It measures the extent of corruption by politicians and other public officials. Due to its nature of illegality and secrecy, there is no single indicator that directly measures the levels and extent of corruption in each country. The best measure of corruption rank is the Corruption Perceptions Index (CPI) published by Transparency International.

The CPI is used to rate the countries based on perceived levels of corruption on a sliding scale from 0 to 100. A score of 0 is considered the most corrupt. A country with a score of 100 is considered to be clean of corruption. The CPI is constructed based on the opinions of business executives, public policy experts, financial journalists, and risk analysts globally.

The CPI is a result of 13 rigorous assessments and surveys on wide-ranging issues on corruption collated by several reputable institutions around the world, including the World Bank and African Development Bank. These assessments and surveys are conducted in the two years preceding the publication. They incorporate a combination of qualitative and quantitative analysis which captures the manifestations of corruption, including:

  • Misuse of public resources;
  • Effectiveness of the prosecution of corruption cases by the judiciary;
  • The extent of bribery by firms and individuals to secure contracts, avoid taxations and payment of duties;
  • Bureaucratic loopholes that foster corruption; and
  • The effectiveness of anti-corruption measures implemented by the government

How Corruption Rank Impacts the Economy

To better understand how the corruption rank of a country influences its currency, we first must understand how corruption impacts a country’s economy.

Corruption inherently impacts the economy negatively. A specific study by the World Bank shows that the GDP per capita in countries with low CPI is about 60% less than for countries with a higher CPI. The negative effects of corruption are:

Overreliance on debt

Corruption results in a significant leakage in the budget. A country is thus forced to rely on debt, usually denominated in foreign currency. The interest payment leads to a higher share of revenue allocated to repayment in the short term instead of economic investments. This higher share of foreign borrowing also results in the local currency crisis.

Inefficiencies in the allocation of resources

Through bribery, the allocation of tenders is usually awarded to individuals and firms who are not qualified. As a result, most public projects are not completed, and the benefits to the economy foregone.

Creation of a shadow economy

Corruption facilitates the growth of several firms that avoid official registrations. As a result, the economy experiences a deficit in terms of taxation, import, and export duties payable. Consequently resulting in low GDP.

The exit of investors

Corruption leads to investors pulling their businesses out. This exit leads to reduced economic activities and accompanied by job losses.

A lower share of foreign direct investment (FDI)

Foreign investors often shun countries with rampant corruption since they seek a fair operating environment. Donor agencies such as IMF and World Bank also reduce their total outflows into such countries. Therefore, the recipient countries’ economy fails to benefit from such investments, which would have a multiplier effect within the economy. Also, because FDI is usually denominated in foreign currency, it usually boosts the recipient countries’ currency strength.

Reduced innovation

Corrupt countries offer very little protection in terms of patents and copyright protection. The lack of legal protection framework results in massive exportation of technology from such countries, thus denying the local economies the growth benefits.

Increase in current account deficits

Corruption creates a disincentive to invest in the local manufacturing and production industries. Apart from the drop in job creations, this leads to overreliance on importation to fill the local demand.

There is a direct inverse relationship between corruption levels in a country and its currency. The inverse correlation is because countries with higher perceptions of corruption have poor economic performance, while those with lower perceptions of corruption have better economic performance.

Consequently, a change in the corruption ranking is often accompanied by a corresponding change in the country’s GDP. In 2019, Sweden dropped in ranking from position 3 to position 4; this was coincided by a 6.37% drop in its annual GDP. During the same period, Malaysia ranked position 51 from 61, a period which coincided with a 1.68% annual GDP growth.

Source: ResearchGate 

How Corruption Rank Impacts a Currency

Although it is a rarely observed indicator, forex market investors should keep an eye on the annual release of the corruption rank. Because the corruption rank is based on two years’ worth of data, it is evident that the corruption rank signifies the underlying fundamental changes in a country’s economy.

High levels of corruption typically tend to be accompanied by a deteriorating economy. It is a known fact that the strength and fluctuation of a country’s currency are tied to its economic performance. Therefore, this is accompanied by a reduction in the valuation of the currency in the forex market.

Any improvements in the rank could forebode that the economy has been performing better, which will be accompanied by a significant appreciation in the country’s currency. Conversely, a drop in the corruption rankings signifies a deterioration in the economic conditions, which will result in the long-term changes in the currency’s value.

Sources of Data

The corruption perceptions index and the corruption rank are released annually by Transparency international. The corruption perceptions index can be accessed here and the corruption rank here.

How Corruption Rank Release Affects The Forex Price Charts

The corruption rank published annually by Transparency International rarely moves the forex market. It is, however vital for the forex traders to keep an eye out for CPI rank. As we have already discussed in this article, the CPI provides crucial information about the conditions of the underlying fundamentals of a country’s economy. The corruption rank is released annually following a two-year assessment and analysis. The latest CPI data for 2019 ranking 198 countries was released on January 23, 2020. A highlight of the release can be found on the Transparency International’s website.

Below is a snapshot of the top and bottom performers. The legend indicates the level of corruption in the country.

In 209, the US fell in rankings by one position, from 22 to 23 out of the 198 countries that were ranked. The screengrab below shows this position.

EUR/USD: Before Corruption Rank release on January 23, 2020

On the above chart, we have plotted a 20-period Moving Average on the EUR/USD chart. As can be seen, the pair had been on a consistent downtrend on the four-hour candlestick pattern. This downtrend is evident since the candlesticks are trending below the 20-period Moving Average. This similar downtrend on the four-hour candlestick chart can be observed on GBP/USD and NZD/USD, as shown by the charts below.

AUD/USD: Before Corruption Rank release on January 23, 2020

NZD/USD: Before Corruption Rank release January 23, 2020

For long-term traders, the pattern offers a great opportunity to go short on the above pairs, since the prevailing downtrends would favor them. Let’s now see how the price responded to the release of the corruption rank by Transparency International.

EUR/USD: After Corruption Rank release on January 23, 2020

After the release of the corruption rank, a persistent downtrend in the EUR/USD pair can still be observed. As shown on the daily chart above, the EUR/USD pair had a bullish candle on January 23, 2020. This strength is even though the US dropped in the corruption rank. Its CPI score dropped from 71 in 2018 to a score of 69 in 2019.

However, against the AUD, the USD can be observed to have weakened momentarily. The pair later regained its bullish trends. It is worth noting that the momentary strength in the AUD is because Australia performed better in the corruption ranking by climbing one position, as shown by the snapshot below.

The chart below shows the daily price action of the AUD/USD pair after the news release.

AUD/USD: After Corruption Rank release on January 23, 2020

The USD weakened against the NZD after the release of the corruption ranking. This weakness can be attributed to the fact that New Zealand ranked first with a score of 87. This ranking is shown by the screengrab below.

As can be seen on the daily chart below, USD weakened against the NZD after the news release.

NZD/USD: After Corruption Rank release on January 23, 2020

Corruption rank can be seen to have some mild effects on the price action of the selected pairs, but not enough to alter to the trend observed before its release. Although most forex traders rarely observe it due to the annual nature of its release, corruption rank provides vital information about the underlying fundamentals of an economy. All the best!

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 […]

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 […]

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

Introduction

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

Everything You Should Know About ‘GDP Per Capita PPP’ Macro Economic Indicator

Introduction GDP per Capita PPP is the popular macroeconomic indicator for comparing economic prosperity and wellbeing of its citizens amongst countries, especially those with different currencies. As currencies can be managed lower or higher, GDP per Capita PPP is the most commonly used metric by economists for comparison and analysis. GDP and its related metrics […]

Introduction GDP per Capita PPP is the popular macroeconomic indicator for comparing economic prosperity and wellbeing of its citizens amongst countries, especially those with different currencies. As currencies can be managed lower or higher, GDP per Capita PPP is the most commonly used metric by economists for comparison and analysis. GDP and its related metrics […]

Introduction

GDP per Capita PPP is the popular macroeconomic indicator for comparing economic prosperity and wellbeing of its citizens amongst countries, especially those with different currencies. As currencies can be managed lower or higher, GDP per Capita PPP is the most commonly used metric by economists for comparison and analysis.

GDP and its related metrics are the most important economic indicators for macroeconomic analysis, especially for traders’ fundamental analysis. Hence, it is imperative to understand GDP per Capita PPP to better understand relative economic prosperity in the international market place.

What is GDP Per Capita PPP?

GDP

Gross Domestic Product helps in measuring a country’s total economic output. It is the total monetary value of all the goods and services produced within the country regardless of citizenship (resident or foreign national).

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

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

GDP Per Capita

It is a metric 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. 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.

Purchasing Power Parity (PPP)

It is an economic theory that compares different countries’ purchasing power through a basket of goods common in both countries. By evaluating the cost of a particular good in both countries, the PPP is calculated. For example, comparing the price of 1 gallon of milk in two countries would help us know the purchasing power parity. Parity means a state of being equal, and all things being equal, how much currency is required to procure identical goods in both countries helps understand the purchasing power of that country.

It measures how much a particular set of goods and services cost in each country, instead of the exchange rates that can be manipulated by speculative trading, or central authorities’ intervention.

A wide range of goods and services are taken into account to develop the PPP, and hence the process is complicated, but once generated, the PPP remains mostly constant in the long run.

GDP Per Capita PPP

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 PPP numbers be used for analysis?

Using nominal GDP values for economic growth comparisons would be misleading as currencies are often manipulated in favor of countries by the governing agencies. For example, China frequently devaluates currencies to increase their income through exports and offer their goods at a competitive price in the international markets.

Hence, using the GDP per Capita PPP is a more sensible approach as PPP values stay stable over more extended time frames and better understand and analyze economies with different currencies. The below table proves our above analysis.

It is important to understand we use PPP for making a fair comparison, but PPP is not perfect, it has the following limitations:

Taxes: Tax policies differ from country to country and consequently affects the price of goods and services, thereby making the PPP skewed.

Transportation: Goods need not be available across the planet at the same level. The import of goods from the manufacturing site would add to the prices of the goods differently to different countries. 

Tariffs: Governments can intervene to impose tariff barriers for economic reasons like protecting domestic businesses, which may again impact the imported product prices, making it costlier in the concerned country.

Non-Traded Services: Cost of Labor, utility, or equipment costs variation can also induce price differences in the reference goods.

Market Competition: Popularity in particular areas can give companies an edge and enable them to price higher than in other countries. Established reputation can change prices, which varies from its market presence duration. On the international scale, the popularity of a good is not the same across all economies and hence can skew prices.

All the above factors limit PPP in some ways, but PPP is still better than nominal GDP comparisons. So, GDP per Capita PPP may not be perfect, but currently, there is no better metric for economic prosperity comparisons amongst countries.

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 PPP to understand its people’s economic wellbeing in contrast to other economies. GDP Growth Rate is primarily used by Traders, Business people, and Investors to make business decisions.

GDP per Capita PPP would likely be more useful for Policymakers, and Business people. Business people can use this as a wealth metric and consequently decide the products to 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.

The PPP value can be used to base exchange rate fluctuations and identify signs of strengthening or weakening of currencies. 

It is a proportional high impact indicator. Higher GDP per Capita PPP 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. Also, GDP per Capita PPP is a yearly statistic and is more relevant for long term investment decisions than short-term currency trading decisions.

Economic Reports

Major international organizations like the World Bank, International Monetary Fund, OECD, etc. actively maintain track of most countries’ GDP figures on their official website. The World Bank maintains the GDP per Capita PPP for most countries. Every three years, the World Bank announces a report comparing the productivity and growth of different countries based on PPP. It is a yearly data.

Sources of GDP per Capita PPP

GDP per Capita PPP – World Bank

GDP per Capita PPP – CIA World Factbook

GDP per Capita PPP – the United States – FRED

We can find a consolidated list of the same here as well.

Impact of the ‘GDP Per Capita PPP’ news release on the price charts 

In the previous section of the article, we understood the definition of GDP based on PPP and how it is different from the nominal GDP. PPP based GDP is converted to international dollars using purchasing power parity rates and divided by the total population. 

Purchasing Power Parity (PPP) between two countries, X and Y, is the ratio of several units from country X’s currency required to purchase in country X. The same quantity of an excellent/service as one unit of country Y’s currency will purchase in country Y. It can be used mostly to compare inflation in two and, to some extent, the economic growth. But the nominal GDP is one that taken into consideration while making investment decisions.

In today’s example, we will observe the impact of GDP on various currency pairs and witness the change in volatility due to the official news release. The below image shows the GDP in the Euro Zone during the fourth quarter, where we see the GDP was as in the previous quarter. Let us find out the reaction of the market. 

EUR/USD | Before the announcement:

We shall start with the EUR/USD currency pair to analyze the impact of GDP on the Euro. It is clear from the preceding illustration that the market is not trending in any direction, which means there is confusion concerning the market trend. Therefore, until we have clarity in the market, it is smart not to take any trade.

EUR/USD | After the announcement:

After the news announcement, the price gets volatile as it moves in both the directions and finally, closes near the opening price. The GDP data did not strengthen or weaken the currency where the ‘news candle’ closed, forming an indecision candlestick pattern. As the news release did not bring about any significant change to the currency pair, one should analyze the currency based on technical indicators.    

EUR/JPY | Before the announcement:

EUR/JPY | After the announcement:

The above images represent the EUR/JPY currency pair, where we see that the overall trend of the market is up, and recently it is has shown signs of reversal before the news announcement. One needs to wait for confirmation before taking a trade as the news event can cause significant changes to the existing chart pattern, resulting in an unnecessary loss. Until the price is below the moving average, the uptrend shall not continue.

After the news announcement, the price initially moves lower, but it gets immediately bought and closes with a wick on the bottom. There is some volatility seen, which eventually takes the market lower. The GDP data came out to be as expected, where it was the same as before. Since there was no improvement in the GDP, we can ascertain that it was negative for the currency.    

EUR/AUD | Before the announcement:

EUR/AUD | After the announcement:

The above images are that of EUR/AUD currency pair, where we see that before the news announcement, the market is in a strong downtrend, and currently, the price is on the verge of continuing the downward move. However, since a significant news announcement is due, there is a possibility that it can change the trend, hence need to take a position based on the impact of the news.

After the news announcement, market shoots up, and volatility increases to the upside. Here we see that the GDP data has a positive impact on the Euro, and the currency strengthens after the news release. Now it is clear that selling the currency pair is no longer valid.

We hope you understood all about the ‘GDP Per Capita PPP.’ Do let us know your thoughts in the comments below. Happy Trading!

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Forex Fundamental Analysis

The Impact Of ‘GDP From Agriculture’ News Announcement On The Forex Price Charts

Introduction

Introduction

Introduction

Economic output from the Agriculture Sector is non-negotiable for the economy. The increasing population must be fed and meet the demands of consumption at all times. Hence, the Central Government is committed to making positive growth in the Agriculture Sector. Agriculture Sector is the primary sector where Government Spending goes.

Since food is an essential commodity, it is an ever-green industry that will never run out of demand. Hence, understanding this sector can help us understand dependent industries’ performance and expenses associated with personal consumption.

What is GDP from Agriculture?

Gross Domestic Product 

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

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

Agriculture Sector

Also, it accounts for all the activities associated with crop production called the Primary Sector of an economy. From the point of cultivation to end-marketing of the food products all are accounted under the Agriculture Sector. It primarily includes farming, fishing, and forestry.

The quick increase in the world population has put pressure on the Agriculture sector to bring innovations through science and technology to increase crop yield. Agriculture Sector is the primary source of food for a country’s population.

The Agriculture Sector goes beyond farm business and includes farm-related industries like Food Service and Food Manufacturing (Packaged Foods, Processed Foods).

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

The agriculture sector contributes about 6.4% of the World GDP. The most significant contributor to this being China, followed by India. China accounts for 19.49%, and India accounts for 7.39% of total agricultural output. The United States is in third place. 

It is necessary to understand the economic output of Agriculture is a function of population, as China, India, and the USA are ranked in population terms in the same order.

The three sectors of the economy, namely, primary Sector, secondary (Industry) Sector, and tertiary (Service) sector, contribute to the overall GDP. It is common for developed nations to have a high contribution to GDP from the Service Sector. Developing economies like China, Japan would have higher contributions from the Industry Sector. The underdeveloped economies would have Agriculture or Primary Sector as a leading contributor to GDP.

In the United States, the entire Agriculture Sector contributes about 5.4% of the GDP. The farms have only contributed 1% of GDP, and the rest is contributed to by the dependent industries that rely on agricultural input to produce goods. The Food Service, Textiles, Beverages, Processed Foods, Tobacco products, etc. contribute the remaining 4% to the GDP.

11% of the total U.S. employment is accounted for by the Agriculture Sector, which is about 22 million jobs in 2018. Food accounts for 13% expenditure of an average American Household. 

It is essential to understand that food is an essential requirement for conducting our livelihood. Hence, Government Spending first prioritizes the Agriculture Sector and releases benefit programs to assist the sector and maintain and grow its economic output. The society and Government will quickly collapse if the Agriculture Sector slows down, and that is why it is called the “Primary Sector.”

The Government Outlays on Food Programs and Nutrition Assistance exceeds that of any other federal program. Improper management and assistance to the Agriculture Sector can lead to price hikes in the food industry. It would trigger a negative response from the public that could cost them in the next elections. Hence, the Government is committed to assisting the Agriculture Sector at all times, good or bad.

Impact on Currency

GDP from Agriculture in itself is not a high impact indicator, as the broader measures like Real GDP and GDP Growth Rates are more important for the Currency Markets. 

GDP from Agriculture does not paint the full picture of the economy, but can be an essential tool for the Central Authorities to keep track of Agriculture Sector performance. Businesses dependent on Agriculture input may use this data to understand potential business opportunities amongst different countries. Still, for the International Currency Markets, it does not serve as a useful indicator.

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

Economic Reports

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

In the full report, we can extract the GDP from Agriculture figures. We can also go through GDP by Industry to get the Construction Industry performance in the report. Major international organizations like the World Bank, CIA World Factbook, etc. actively maintain GDP by Sector figures of most countries on their official website.

Sources of GDP from Agriculture

For the United States, the BEA reports are available in the sources mentioned below. 

GDP -BEA | GDP by Industry – BEA | FARM – GDP

The St. Louis FRED keeps track of all the GDP and its related components in one place on its official website here. World Bank also maintains the Agriculture Sector as a percentage of GDP on its official website. We can find GDP sector composition for different countries here. We can find the consolidated list of Agriculture – GDP figures for most countries here.

Impact of the “GDP from Agriculture” news release on the Forex market

The agricultural sector plays an essential role in the process of economic development of a country. It contributes to the economic prosperity of advanced countries, and its role in the economic development of underdeveloped countries is of vital importance. In other words, countries where per capita real income is low, the emphasis is laid on agricultural and other primary industries.

History tells us that agricultural prosperity contributed considerably to the national income and the GDP. When we are talking about the impact of this contribution on the currency, we will have to say that it is least and not of much importance to investors. They look at broader data, which is the GDP, and make decisions based on the reading. 

In today’s example, we will examine the impact of GDP on different currency pairs and observe the volatility due to the news announcement. The below image shows the latest quarter GDP data of Australia, where it was more or less the same as in the quarter. Let us find out the reaction of the market to this news release.

AUD/USD | Before the announcement:

We will first look at the AUD/USD currency pair to observe the impact of GDP on the Australian dollar. In the above image, we see that the market is in an uptrend, and recently the price seems to have retraced the up move. This is an ideal chart pattern for joining the trend, but since a significant news announcement is due, we need to wait to understand the impact it creates on the chart.

AUD/USD | After the announcement:

 

After the news announcement, the market moves higher, where the price rises sharply above the moving average. The bullish ‘news candle’ is a consequence of better than expected GDP data, which was higher by 0.2%. Although it was marginally less than the previous quarter, it turned out to be positive for the currency. This is a confirmation sign of trend continuation where one can expect a new ‘higher high.’      

AUD/JPY | Before the announcement:

AUD/JPY | After the announcement:

The above images represent the AUD/JPY currency pair, where the market moves within a ‘range’ before the news announcement. We also notice an initial reaction from the ‘support’ where the price has moved higher from the ‘low.’ Since economists have forecasted a lower GDP estimate in the fourth quarter, it is not recommended to take a ‘long’ position before the news release.

After the news announcement, we see that the price quickly moves up, and market surges to the upside. As the GDP data was beyond expectations, traders bought Australian dollars and strengthened the currency. Therefore, the news release has a hugely positive impact on the currency pair. In this pair, once needs to be cautious before taking buy trade as the price is at the top of the ‘range.’ 

GBP/AUD | Before the announcement:

GBP/AUD | After the announcement:

The above images are that of GBP/AUD currency pair, where we see that before the news announcement, the market has retraced the downtrend by more than half, indicating that the Australian dollar has gained strength newly. After the occurrence of trend continuation candlestick patterns, it could result in a flawless sell trade. However, there is also a probability that the news release could change the dynamics of the chart.

After the news announcement, market crashes and the price significantly moves lower. As the GDP data was positive for the economy, it leads to bullishness in the Australian dollar resulting in the price fall. One could take a risk-free ‘short’ position at this point, expecting the market to move much lower.

That’s about ‘GDP from Agriculture’ 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!

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Forex Daily Topic Forex Fundamental Analysis

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

Introduction

Introduction

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/AUD | Before 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?

What are Factory Orders?

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 Daily Topic Forex Fundamental Analysis

Understanding ‘Electricity Production’ & Its Importance As A Forex Fundamental Driver

Introduction

Introduction

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.

GBP | AUD | USD | CAD | NZD | JPY

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

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

Introduction

Introduction

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

How The ‘Government Debt’ Numbers Impact A Nation’s Currency Value?

Introduction

Introduction

Introduction

Government Debt as an economic indicator has recently been gaining more attention from economists, investors, and traders. Many economies have chosen to actively take on debts to boost economic growth. Hence, it has become a metric & also a concern for many.

Just like a piling up debt is terrible for a householder, huge government debt is a negative sign for any economy. How the debt is used to run economic activities, methods deployed to repay it, all these have a long-term financial impact. In this sense, Government Debt is a critical metric by itself that needs to be watched out for, as investors decide to lend money to governments, basing this also as one of the reasons.

Government Debt levels have consequences that are many-fold to understand. Hence, understanding Government Debt now is more important than ever as the world’s largest economies are taking on debts beyond their revenues.

What is Government Debt?

Government Debt, also called Sovereign Debt, Country Debt, National Debt is the total public Debt and intragovernmental Debt owed by the governing body of the country. It is the money that the Government owes to its creditors.

            Government Debt = Public Debt + Intragovernmental Debt

Public Debt – It is the Debt held by the public. The Government owes this Debt to the buyers of the government bonds, who can be its citizens, foreign investors, or even foreign governments.

Intragovernmental Debt – It is the Debt owed by the Government to other Government departments. It is generally used to fund Government and citizen’s pensions. The Social Security Retirement account would be one such typical example.

Whenever the Government spends more than its generated revenue, it creates a budget deficit and adds to the total Government Debt. To operate in this budget deficit mode, the Government has to issue treasury bills, notes, and bonds, which are promissory notes to lenders that the Government shall pay back the amount along with interests.

Hence, The National Public Debt is the net accumulation of all annual budget deficits of the Federal Government.

How can the Government Debt numbers be used for analysis?

The Governments depend mainly on public spending to stimulate growth in the economy by assisting businesses and individuals in the form of unemployment compensations, wage hikes, etc. This leaves Government no choice but to fall back on taking on more Debt and keep paying interests from the tax revenues and other income sources.

The piling Debt may let things continue smoothly now but will inevitably tighten the belt for the economy in the future. When Debts go out of hand, it can lead to economic collapse, as default on Debts leads to reduced credibility and may lead to a lack of funds during times of need.

When support is lost for the Government, it has to fall back on assets, selling them and thus going to the brink of bankruptcy. At this stage, a nation is vulnerable as enemy nations can also use this situation to their advantage to wage wars in extreme cases. When there is no monetary support, business slowdowns and recessions are unavoidable.

The following are some strategies the Government may opt to reduce the debt burden:

📎 Low-Interest Rates: By lowering interest rates through open market operations, the Government can make borrowing money easy for the business and people in the economy to boost the economy. This has been the case in the United States. Prolonged low-interest-rate environments have not proven to be an effective solution to Debt-ridden Governments.

📎 Monetization: Countries like the United States, whose currency is not pegged to any other currency or commodity, can print off money and clear Debt. But this can lead to hyperinflation and currency depreciation. Hence, it is not preferable.

📎 Spending Cuts: This is the hard pill to swallow that actually works. It is the spending that leads to an increasing debt burden. If the Government cuts back on spending, which is equivalent to cutting back of money supply into specific segments or programs, that will lead to deflationary situations in the economy that can lead to a recession. Furthermore, when the Government cuts back on spending, they lose the support of citizens and fear losing favors in elections by businesses and the population.

📎 Tax Raises: The main culprit is failing to cut back on spending. As the spending continues to rise year after year, increased tax revenues do little to help reduce the burden of Debt. It is the most common practice but is not effective in the long run.

📎 Pro-Business/ Pro-Trade: By selling off real assets like real estate, gold, and military equipment, the Government can reduce the burden. It is like selling your house to pay off the mortgage. This type of solution is not applicable to all countries, but some like Saudi Arabia reduced their Debt significantly from a debt 80% of GDP to 10% in seven years by selling off oil.

📎 Debt restructuring or Bailouts: When the solvency of the Government is at the brink, Debt restructuring (renegotiating the terms of Debt, or partial payments) is one final option. It is a pseudo-defaulting case. This is not also a practical solution, as the credibility is damaged after this, as it tells the world that the economy is weak.

📎 Default: Defaulting may seem the most effective way to get rid off Debt. This is considered only when there are no other options for the Government. This leads to a lack of future monetary support from the rest of the world. Defaulters like Pakistan, Greece, and Spain are good examples of this. Defaulting occurs when the Debt burden crosses way beyond the tipping point, which is 77%. For the United States, it has already passed 100% in recent years.

Impact on Currency

The National Debt is an increasing concern in recent years as the repayments are starting to take more massive proportions of the Government’s revenue. What method the Government decides to opt for to tackle its debt burden in a given year directs the growth for that business year.

The Government Debt is a proportional indicator, meaning higher Government debt numbers are more stimulating for the economy, and appreciating for the currency and vice-versa. The vital thing to note here is that as long as the Debt has not gone way out of control that the Government cannot afford to pay the interests also. For the United States, the Debt burden will be unbearable by 2034, at which point they have to cut back on spending and raise taxes.

The Government Debt is a lagging and reactionary number. It is taken on to solve an issue and is not an initiative effort. Debt numbers follow the already ongoing situation. Hence, it has a low market impact. The more direct implications of the taken Debt are manifested through press releases and other news reports like wage growth, employment statistics, etc.

Economic Reports

The Treasury Department has the “Debt to the Penny” section on their website which shows, the daily Debt after all purchase and sale of the Government Bonds.

The U.S. Treasury Department releases quarterly, end of the period, the Federal Government’s Debt reports.

Sources of Government Debt

The Office of Management has a historical tables section where we can find Federal Debt records. Some of the most reliable sources are given below.

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

Government Debt which also known as the national debt, is the public and intergovernmental debt owned by the federal government. The government may take a loan from the World Bank and or from other financial institutions for a variety of reasons. It could be required for fulfilling the needs of the people, for defense purposes, or for stabilizing the economy. A moderate increase in debt will boost economic growth, but too much debt is not good for the economy.

It dampens growth over the long term. Higher debt means a higher rate of interest and, thus, more burden on the government while repaying the loan. Investors compare the debt held by the government and its ability to pay it off. Based on this data, they have a short to long term view on the currency. However, traders do not react violently to the Government Debt news release and make few adjustments to their positions in the market.

In today’s article, we will be analyzing the impact of the Government Debt announcement on Turkish Lira as traders identify the debt of the Turkish Government. The below image shows the previous and latest Government debt of Turkey, which indicates an increase in debt from last month.

USD/TRY | Before The Announcement

The above image represents the USD/TRY currency pair before the news announcement. We see that the chart is in an uptrend and the price has broken many resistance points. Currently, it is approaching a major resistance area from where the market has reversed earlier. High volatility on the upside could be an indication that the market is expecting a weak Government Debt data. One can join the uptrend only after the market gives a retracement.

USD/TRY | After The Announcement

As soon as the Government Debt data is announced, the market violently moves higher, and price rises quickly to the top. The reason behind the increase in volatility to the upside is that the Government Debt increased by almost $70B for the month of March. As a rise in Debt is considered to be negative for the economy, this explains why traders and investors sold Turkish Lira and bought U.S. dollars after the numbers were announced. The bullish ‘news candle’ is a sign of trend continuation, and thus one can go ‘long’ in the pair after a suitable price retracement.

TRY/JPY | Before The Announcement

TRY/JPY | After The Announcement

Next, we will discuss the impact of the news on the TRY/JPY currency pair, where we see that the market is moving in a range, and the overall trend is up. As the Turkish Lira is on the left-hand side, a ranging market indicates an indecision state of the market. Before the news announcement, price is at the ‘resistance’ area, and thus one can expect some selling pressure from this point, which can take the price lower. In such a market scenario, aggressive traders can take a ‘short’ trade in the market, expecting bad news for the economy.

The news release resulted in volatility expansion on the downside as the market reacted negatively owing to poor Government Debt data. The price crashed and closed as a strong bearish candle. But this was immediately retraced by a bullish candle, which could be due to the reaction from ‘support’ of the range. Thus, one should go ‘short’ in the pair after the price breaks key levels as the overall trend is up.

EUR/TRY | Before The Announcement

EUR/TRY | After The Announcement

The above images are that of the EUR/TRY currency pair, and here too, the market is range-bound where the overall trend is down. Since the Turkish Lira is on the left-hand side, a ranging market indicates a moderate strength in the currency. Just before the announcement, price is at the ‘bottom’ of the range, and one can expect some buying strength in the market, which can take the price higher from here. The safer approach is to wait for the shift in volatility due to news release and then trade based on the data.

After the data is released, the market, just as in the above pairs, moves higher sharply, and traders sell Turkish Lira. The bullish ‘news candle’ indicates that the Government Debt data was extremely bad for the economy and thereby prompting traders to go ‘long’ in the pair. As now the price is at resistance, one should wait for a breakout and then ‘buy.’

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

Categories
Forex Fundamental Analysis

Does The News Release Of ‘Gasoline Prices’ Impact The Forex Market?

Introduction

Introduction

Introduction

Despite the advent of alternate and renewable sources of energy, Oil remains the largest consumed non-renewable energy resource on the planet. Even after the Greenhouse effect debates, pollution, etc. we are still using Oil in a big way.

Although a shift has begun, a complete switch out of Oil will definitely take some decades and a lot of technological innovations. Gasoline Price is very closely tied to Consumer Expenditure, and many industrial activities, volatility in Gasoline Prices, affects the economy directly. Hence, understanding of Gasoline Price changes, its causes and consequences are essential for us in assessing macroeconomic indicators like Inflation, Personal Consumption Expenditures, or Consumer Prices Index, etc.

What is Gasoline Price? And Why is it important?

Gasoline is a carbon-based fuel that is extracted from Crude Oil through a process of distillation and refinement. Crude Oil is dark, heavy, and a sticky liquid that is naturally formed inside Earth. It is extracted, boiled to varying degrees, to distill away impurities to obtain purer forms like Diesel, Petrol (or Gasoline), or Fuel Oils, etc. Gasoline is lighter and is more in demand in the market.

As shown below, Oil is still the largest consumed energy source in the world, accounting for about 34% of all energy sources consumed. Gasoline is one of the first products that is obtained from Crude Oil. The general population and many industries depend on Gasoline heavily to conduct their lifestyle. Today almost, every household has a car or bike that requires Gasoline.

Changing Gasoline prices have a direct effect on the general public and dependent industries like Transportation sectors. Increasing Gasoline prices are always followed by a bitter reaction from the public as it increases their daily expenditures, how industries ship goods.

Gasoline prices are dependent on the following critical factors

(Source: gaspricesexplained.com)

Crude Oil Prices: The raw material used for Gasoline production primarily drives the Crude Oil Price as per the United States Energy Information Administration. Crude Oil is available on almost all the continents, except Australia, where it is quite less relatively. Countries like Saudi Arabia, Venezuela have the most abundant reserves of Crude Oil and are essential players in the global Oil market.

The process of extraction is also dependent on terrain where Crude Oil is found. For example, in Canada, the sandpits of Alberta make it challenging to extract Crude Oil that makes it relatively expensive.

Refining: The number of impurities present in the extracted Crude Oil also categorizes the Oil into “sweet or sour Oil.” Sweeter/Lighter Crude Oil contains lesser impurities and hence is easier to refine. The heavy or sour Oil is more abundant and relatively less in demand. The sweet is the more preferred Oil and is the standard when we see Crude Oil pricing. Refining costs vary seasonally as different parts of the world have to follow different mandates on pollution levels, refining technologies available in the regions. Other ingredients like ethanol that are mixed into Gasoline are also minor factors.

Taxes: Taxes add to the Gasoline prices. The Governing body of the country imposes the excise taxes that add to the final consumer price. As of now, on average, all taxes, i.e., federal and local state taxes, included average to 17% of the total Gasoline price.

(Picture Credits: gaspricesexplained.com)

Transportation: Most of the Gasoline is shipped from refineries by pipeline to terminals near consumer regions. It is delivered through tanker trucks to individual gas stations. The price of all this transportation cost and profits are included in the final price. The taxes and transportation costs remain largely constant relative to the Crude Oil price volatility.

Organization of the Petroleum Exporting Countries (OPEC): It is an organization of 12-oil major producing countries that make up 46% of the world’s oil production. They regulate the price of fuel to sustain this non-renewable resource for an extended period.

Speculation: Energy traders speculate Oil prices frequently that drive up or down the Oil prices based on their projected views about the future Oil prices. The volatility is increased due to speculation and tends to create an asset bubble.

How can the Gasoline Price numbers be used for analysis?

There is a positive correlation between Gasoline and Crude Oil prices in general. The dependency on Gasoline, a high growth rate of the emerging countries, increasing world population, etc. all have increased the demand for Gasoline overtime. For now, there is no significant alternative to compete with Gasoline. Other options like Natural Gas, Electric vehicles are in their budding state and would take some years before they can become worthy alternatives.

Gasoline is a daily consumption, a non-durable commodity that is required by every country. There is no country as of now that is entirely Gasoline-independent. Every country uses Gasoline for one or the other purposes as it has 84% fuel efficiency when burnt (meaning 84% of it is converted into energy).

As attempts to significantly switch to alternate sources of energy are being made, there is still some time left before we see renewable alternatives to Gasoline.

Impact on Currency

An increase in Gasoline Prices is reflected in the Personal Consumption Expenditures reports. As fewer people are able to afford highly-priced Gasoline, Industries dependent on Gasoline mainly observe a cut in their profits that slows down their business. To avoid this, they may increase prices of their end product to compensate for this increase, which again inflates the economy further. The rising costs of Gasoline are terrible for the economy and the currency. It leads to price rises lead to currency depreciation.

Lowered Gasoline prices, stimulate consumption, and increases expenditure in other sectors by public and dependent industries. Changes in Gasoline prices due to Crude Oil price changes take about 4-6 weeks to translate. Gasoline prices are lagging indicators for the Energy traders and have a low impact on the Energy trading community. On the other hand, prolonged increases in Gasoline prices has long term depreciating impact on the currency and the economy.

Economic Reports

Gasoline prices are available daily on the internet on many websites. For the United States, The United States Energy Information and Administration releases the weekly Petroleum status report on its official website.

The OPEC’s Monthly Oil Market Report details the significant causes affecting the world Oil Market that is published on the 12-16th of every month on their website.

Sources of Gasoline Prices

Global Oil market prices & News can be found in the below-mentioned sources.

Oil Prices | OPEC – Oil Prices and reserves data | OPEC MOMR | Global Gasoline Prices – Trading Economics | EIA – Weekly

Impact of the ‘Gasoline Prices’ news release on the price charts 

Gasoline Prices have a major role to play went it comes to the development of the nation. Everyone knows that higher Gas Prices will make each of to pay more at petrol bunks, leaving less to spend on other goods and services. It not only has an effect on the public on an individual level, but higher gas prices also have an effect on the broader economy. Economists and analysts also believe that there is a direct correlation between consumer confidence, spending habits, and gas prices. As gas prices decrease, a large percentage of institutional traders feel that the economy is ‘getting better.’ By this, we can say that the announcement of Gasoline Prices have a major impact on the currency pairs and can cause moderate to high volatility in the pair.

In today’s article, we will be analyzing the impact of Gasoline prices of North America on the U.S. dollar. The Gasoline Prices are published on a Weekly, Monthly, and Annual basis by the U.S. Energy Information Administration. They also provide a statistical analysis of the report. The above image shows the weekly retail Gasoline Prices.

AUD/USD | Before The Announcement

We start our analysis with the AUD/USD currency pair, and the above image shows the state of the chart before the Gasoline Prices are announced. The market essentially is moving in a ‘range’ where the price is repeatedly reacting from ‘resistance’ equals ‘support’ area. Also, the overall trend remains to be up. In such a market scenario, it is prudent to wait for the news announcement and then trade based on the change in volatility in the market. As the Gasoline Price economic indicator is a highly impactful event, there can be extreme movements in the market on either side. However, technically, the bias is on the ‘buy’ side.

AUD/USD | After The Announcement

After the weekly Gasoline Prices are released, price drops sharply, and volatility increases on the downside, owing to a decrease in the Gasoline Prices compared to the previous week. As the U.S. dollar is on the right-hand side of the pair, to buy the U.S. dollar, we need to sell the currency pair. This is why we see a fall in the price after the data is announced, which was positive for the U.S. economy. Even though the market reacted to the news release on expected lines, we should not forget that the price is exactly at the bottom of the range. It is not surprising to see buying strength from here, and therefore we should wait for key levels to be broken to trade based on the News.

EUR/USD | Before The Announcement

EUR/USD | After The Announcement

The above images represent the EUR/USD currency pair. Looking at the first image, we can say that the market is in a downtrend that began recently. Since the selling pressure is above average in the pair, a news announcement that is positive for the U.S. economy is favorable for taking a ‘short’ trade in the pair. On the other hand, we can look to ‘buy’ the pair only if the news release is extremely bad for the U.S. economy.

After the announcement is made, the market falls, and what we see is a firm bearish candle. A decrease in Gasoline Prices is considered to be positive for the economy and, thus, the currency, which is why traders sell Euro and buy U.S. dollars. One can sell the currency pair after a retracement of the price to the moving average.

USD/CAD | Before The Announcement

USD/CAD | After The Announcement

Lastly, we discuss the USD/CAD currency pair where before the news announcement, we see that the market is in a very strong uptrend and currently at a place from where the market had reversed earlier. The continuous bullish green candles suggest a great amount of strength in the U.S. dollar. Thus, a negative Gasoline Price indicator data that is bad enough to cause a reversal in the trend is an appropriate situation for going ‘short’ in the pair. Technically, the chart is more supportive of going ‘long’ in the pair.

After the data is released, we see that the price breaks out above the resistance area and closes as a ‘bullish’ candle. Here too, the market reacted similarly to the above pairs based on the robust Gasoline Prices. One should be ‘buying’ this pair only after the price retraces to the moving average and bounces off from the line. In this way, we will be trading along with the trend, and the stop loss will be below the ‘news candle.’

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

Categories
Forex Fundamental Analysis

Importance of ‘Consumer Spending’ as an Economic Indicator

Introduction

Introduction

Introduction

Consumer Spending is a significant contributor to the annual GDP of an economy. It is released ahead of GDP numbers and hence is widely used by traders and investors alike to make investment decisions. Consumer Spending is what drives the economy mostly. Imagine if consumers stopped spending on anything apart from the basic needs, it would result in the closure of many businesses and services. Hence, understanding the importance and impact of this advanced indicator is crucial for our Fundamental Analysis.

What is Consumer Spending? 

Consumer Spending refers to the amount spent to meet their daily needs and personal expenses. In other words, it refers to the money paid for goods and services by the general public. The products and services can include all that we, as an individual, consume to live our lives. The groceries, the movies, the drinks, the internet, phones, etc. all these are part of our lives that the Consumer Spending measures.

The money we SPEND on CONSUMPTION of goods and services by CONSUMERS is Consumer Spending. A nation in its core is its people, and what those people spend on is what runs the market. What you and I spend on is what will drive the market. Consumer Spending makes up 66% of the total Gross Domestic Product in the United States, and business and government spending contribute to the rest.

Consumer Spending depends on the macro scale on the below vital factors:

Mortgages and Debt: In the United States, almost all the citizens have debt in one form or another, be it student loan, education loan, house mortgage, or healthcare insurances. The more the debt, the lesser the consumer has left for his spending, thereby tightening his pocket on extra expenditures.

Disposable Income: It refers to the remaining part of an individual’s income left after deductions of all federal taxes. It is the difference between the average salary and tax deductions—higher the charges lesser the money available for spending.

Per Capita Income: It tells us the income per individual within the country. Only when the overall income per person is sufficiently large enough to exceed meeting the basic requirements only then will people have a budget for spending. Rising Per Capita Income indicates that the standard of living is improving, which automatically enhances consumer spending.

Income Disparity: The imbalance in the wages of different sections of society is bad for the economy. A sufficiently rich person’s increase in income will not lead to higher spending as he or she will tend to invest or save to accumulate more wealth. Only when the wages of the lower sections of the society increase will the spending increase as they are the ones cutting back on expenditures due to lack of money. Reformation can be brought about in the country if the government focuses more on benefiting the lower sections more than other parts of the society.

Consumer Sentiment: It is the people of the nation who know better than traders and investors about the economic prospects as they are the ones working on the ground and going about their daily routine facing all kinds of situations. Whatever analysts, investors, and traders assess a nation’s economy, it cannot beat the first-hand experience of the people themselves. The Consumer Sentiment tells what the general people feel about the prospects of their jobs, growth, and security.

If a consumer feels his income will increase steadily and is secure, he will tend to spend more now. Conversely, if the consumer is not sure of his job status and not confident about his future employment status, then he or she will tend to save more to meet their needs during times of unemployment. Thereby decreasing spending now and saving more for later.

How is the Consumer Spending Report obtained?

The Bureau of Economic Analysis releases monthly reports on the percentage of changes in the average Consumer Spending titled “Personal Consumer Expenditures.” BEA releases this report at a national level on a quarterly and annual basis. The Bureau of Labor Statistics also releases a report titled Consumer Expenditure Survey in August every year with little variations. They calculate using the statistics form the United States Census Bureau to arrive at this survey report.

Is Consumer Spending important?

It is one of the most significant indicators to predict GDP. It is an advanced indicator meaning it predicts future economic conditions rather than reflecting current or past industrial activities. Since it is a significant driver for the Gross Domestic Product, it is one of the top economic indicators amongst all. Consumer Spending tells us about the strength of the economy and the standard of living of the country’s citizens.  It almost drives 70% of the GDP figure; hence there is no doubt that it is a must for Fundamental Analysis.

Below is a plot of the percentage change in Consumer Spending vs. Real GDP from the St. Louis FRED website to demonstrate this indicator’s importance in comparison to the rest.

(Chart Source)

How can Consumer Spending be Used for Analysis?

What the consumers are willing to spend on can make or break the markets. By analyzing the spending trends and recognizing what sector of goods and services consumers purchase can tell us which market is going to flourish and stagnate. Consumer Spending represents the demand side of the supply-demand market, where supply is the providers or manufacturers of the goods.

When Consumers increase spending, this increases demand, which leads to business growth, increased employment, improved wages to meet the demand. This increase will again lead to increased spending by the newly employed and adjusted salaries, and all this becomes a positive feedbacking loop and continues till it saturates. When demand outpaces supply, we will have inflation, which is terrible for the economy as the increasing prices will make consumers increase spending now than later it will again result in price inflations. The primary job of the Federal Reserve is to prevent this vicious cycle of price inflation.

On the other end, low consumer spending reduces demand for goods and services, which stagnates business and hence the economy contracts and results in lower levels of GDP, which is also not good.

Traders can use the Consumer Spending Surveys, Indices to relatively compare economic situations of nations and also with previous periods to assess currency valuation or devaluation direction in the coming months. Investors can make investment decisions based on which sectors are experiencing increased demand looking at the spending patterns. Consumer Spending can also direct us in Stock Market evaluations of different companies.

Sources of Consumer Spending Reports

We can obtain the Consumer Spending monthly releases from the BEA, and that data can be found here. For illustration, you can refer to this link to see what the U.S. population spends more on. You can also check the University of Michigan’s Consumer Sentiment Index here.  As discussed, it is a primary driver of Consumer Spending.

Impact of the ‘Consumer Spending’ news release on the price chart 

In this section of the article, we will analyze the impact of the Consumer Spending economic indicator on the value of a currency. As we understood in the previous that the Consumer Spending measures the change in the inflation-adjusted value of goods expenditures by consumers, now we shall see how important the data is for traders and investors. Consumer Spending is one of the major economic activities in a country. However, looking at the below image, it seems like traders do not give a lot of importance to the data (Yellow box indicates less important) and may not make significant changes to their positions in the currency. In any case, let us see how the market reacts to the data release.

Below is the image showing the latest Consumer Spending data of France, which will have an effect on the EURO. The National Institute of Statistics and Economic Studies collects and disseminates information on the French economy and society. A higher than expected reading is considered to be positive for the economy, and a lower than expected reading is taken to be negative.

EUR/AUD | Before The Announcement

We start our analysis with the EUR/AUD currency pair, and as we can see in the image above, the chart is a strong uptrend, and the market has retraced recently. One of the reasons behind the violent up move is that the market participants are expecting a better Consumer Spending data for the month of February. Since the market has retraced quite a bit, aggressive traders can go ‘long’ in the market before the news announcement due to optimism in the market.

EUR/AUD | After The Announcement

After the Consumer Spending data is released, the market falls, but it leaves a wick on the bottom, and the price forms a ‘Doji’ candlestick pattern, which essentially indicates indecision in the market. As the data was far below what was predicted, we should wait for more confirmation from the market to notice the change in volatility. We see that that the volatility expands on the upside and goes above the moving average. This is an indication that the news outcome is digested by the market and will continue its trend. Thus, we can enter for a ‘buy’ after the price potently moves higher with a stop loss below the ‘low’ of news candle.

EUR/CHF | Before The Announcement

EUR/CHF | After The Announcement

Next, we discuss the EUR/CHF currency pair where before the news announcement, the market is in a strong downtrend, exactly opposite to the above currency pair. As the volatility is high on the downside, we should not expect a positive Consumer Spending data to cause a reversal of the trend. Whereas, a ‘bad news’ may take the currency much lower. We cannot take any position at this point, not even a ‘buy’ as we are in a strong downtrend, and there are no signs of reversal.

After the numbers are released, it is evident from the ‘news candle’ that there is an increase in volatility on both sides, and finally, the price closes near its opening price. The long wick on top of the ‘news candle’ is an indication that selling pressure is high due to poor Consumer Spending data. Therefore, at this point, one can go ‘short’ in the pair with a stop loss above the recent ‘high.’

EUR/SGD | Before The Announcement

EUR/SGD | After The Announcement

The above images represent the EUR/SGD currency pair, where the characteristics of the chart appear to be similar to that of the EUR/AUD pair. One major difference is that the uptrend is not as resilient as in the case of EUR/AUD. Before the news announcement, the market is at the key area of resistance equals support. This is the place where most traders go ‘long’ in the market and join the uptrend. But since the volatility is high, it is recommended to wait for the news release and then act accordingly.

After the news announcement, some selling pressure is witnessed as a result of weak Consumer Spending data, and the candle closes in red. But later, the ‘news candle’ is immediately is taken over by a bullish candle. This means, due to the bad news, the market initially reacted as per expectations, but this was not sufficient enough to cause a reversal in the market. As the impact of the news was less, we can trade with the trend, by going ‘long.’

This completes our discussion on Consumer Spending and the impact of its news announcements on the Forex price charts. If you have any queries, please let us know in the comments below. Cheers.

Categories
Forex Fundamental Analysis

Understanding The Impact Of ‘Crude Oil Production’ On The Forex Market

Introduction

Introduction

Introduction

Crude Oil is the primary mineral from which the most widely used petroleum products like Diesel, Petrol (or Gasoline) are produced. For most countries, Oil is a primary energy source. Any decrease or increase in the global production of Crude Oil creates significant Oil market price volatility.

There are many countries whose primary source of revenue is from Crude Oil production alone. Hence, changes in the Crude Oil Production levels hurt the buyers due to raised Oil prices and the sellers due to decreased income. Thus, Crude Oil Production statistics are critical metrics to predict expenditures of Oil Consumers and revenues of Oil Exporters.

What is Crude Oil Production?

Crude Oil

It is a naturally occurring, hydrocarbon mineral, unrefined petroleum product inside Earth. It is dark yellow-black in texture, and, based on the region of extraction, it can have different impurities with it. It is a non-renewable energy source and hence is limited.

If the impurities are more, it is called Sour/Heavy Oil and is generally abundant and is not preferred much due to the additional refining costs that are associated with it. If the impurities are less, it is called Sweet/Light Oil and is the preferred one over the Heavy one and is naturally costlier than its counterpart. Refining of Crude Oil and boiling it distills away the impurities to give useful petroleum products like Petrol, Kerosene, Diesel, etc.

Crude Oil Production

It refers to the process of Oil extracted from the ground after the removal of impurities and inert matter. It consists of Crude Oil, Natural Gas Liquids (NGLs), and additives. It is measured in a thousand tonne of Oil equivalent (toe). The final products, like Gasoline, are measured in the number of barrels produced. One barrel is equivalent to 42 Gallons, or 159 Litres, or 35 Imperial Gallons. The leading Oil Producing countries are the United States, Saudi Arabia, and Russia.

Organization of the Petroleum Exporting Countries (OPEC)

It is an organization of 12-oil major producing countries that make up 46% of the world’s oil production. They regulate the price of fuel to sustain this non-renewable resource for an extended period. In the early 21st century, the advent of new technologies (mainly Hydrofracturing) has led to a boom in the U.S. Oil production numbers, decreasing the influence of OPEC.

How can the Crude Oil Production numbers be used for analysis?

Crude Oil production is susceptible to the following factors:

Political Tensions: Many of the countries sitting on top of Crude Oil reserves are victims of political unrest. Crude Oil supply is drastically affected by political turmoil and wars. Iran-Iraq War, the Persian Gulf wars, Arab Oil Embargo, etc. are some typical examples.

Weather Patterns: Storms and Hurricanes have always threatened Crude Oil deposits and shipments. Oil spillage due to bad sea-weathers is the worst. An example would be the Deepwater Horizon Oil Spill in 2010, where approximately 480 tonnes of Crude Oil was spilled into the Ocean. This type of incident spikes the Crude Oil prices as the supply is reduced.

Exploration and Production: Crude Oil is a non-renewable energy resource. It will be exhausted after a certain period. Exploring new regions for drilling and extraction involves huge costs. Set up of Production units is also a hefty investment

Investments & Innovation: Poor technology and lack of funds can negatively affect Crude Oil Production. The United States gained back its dominance in Crude Oil Production through the innovation of Hydrofracturing that dramatically increased its Crude Oil Production.

Demand: Demand motivates companies and governments to invest more in Crude Oil Production. As the world starts to switch to other resources, it is the demand that will primarily drive the supply of Crude Oil in the long run. Application is linked to population growth and reliance on Crude Oil as an energy source. As emerging economies increase Oil consumption while alternate energy sources are being developed, the current Oil consumption is set to stay steady and, if not, increase more for now.

Impact on Currency

Investors purchase mainly two types of Oil contracts:

Spot Contract: In this, the price of Oil reflects the current market price of Oil. Commodity Contracts in the Spot market are effective immediately, i.e., Money is exchanged, and Oil delivery starts right then.

Futures Contract: This is the more common form of Contracts purchased by traders, as they speculate the price of Crude Oil based on many factors and algorithms. They agree to pay a certain amount for Oil at a set future date. Companies dependent on Crude Oil use these contracts to hedge the risk of price volatility.

In Northern America, West Texas Intermediate (WTI) is the benchmark for Oil futures traded on New York Mercantile Exchange (NYMEX). In the Middle East, Europe, the reference is the North Sea Brent crude exchanged on the Intercontinental Exchange (ICE).

A decrease in Crude Oil Production leads to a rise in oil prices, which is terrible for the economy and currency. As fuels become expensive, currency value depreciates. It creates inflationary conditions within the economy. All Oil dependent industries like textile, chemical, medicine industries increase the cost of their end-products to compensate for the price increase. Gasoline, Petrol, and Other Crude Oil end-products become less affordable.

A sufficient supply of Crude Oil is necessary to keep inflation in check. Hence, it is a proportional indicator. Although the Crude Oil market is more volatile than currency and stock markets, large scale price changes reflect in the currency and stock values over a period. The effect on currency is dependent on the degree of dependence of the nation on Oil. The more dependency, the more the volatility in the currency. Typically, Major currencies do not see a change in values as dramatic as the Oil price.

Economic Reports

Investors, economists, and traders closely watch OPEC’s Monthly Oil Market Report (MOMR). It is released in the middle of the month for the previous month. The International Energy Agency (IEA) Oil Market Report released monthly is also widely used by many. IEA was formed in 1983, and since then, it has been the source for official government statistics from all OECD and few non-OECD countries.

The Weekly Petroleum Status Reports from the United States Energy Information is also a famous report to monitor Crude Oil Inventory levels. The American Petroleum Institute’s Weekly Statistical  Bulletin (WSB) reports the United States and regional Crude inventories and data related to refinery operations.

Sources of Crude Oil Production

The Global Crude Oil Production and Trade statistics can be found in the sources provided below.

OPEC – MOMR | IEA – Oil Market Report

Enerdata – Crude Production | Crude Oil Production – OECD | EIA – Crude Oil Production

EIA Weekly Inventory Status Report | API WSB Report

Impact of the ”Crude Oil Production” news release on the price chart 

Crude Oil Production plays a significant role in the economic growth of a country and in determining the rate of inflation. It is especially important for monetary policymakers and Central banks who decide on the interest rates based on oil production. The fundamental factors of demand and supply influence the rise and fall of oil prices. This Crude Oil Production has a direct impact on the oil price.

Low production of crude oil increases the price of Oil, which increases the cost of production and transportation. This increases the cost of goods and services in the country and has an adverse effect on the value of a currency. As Crude Oil Production is such an important news release, it creates a great impact on almost currency pairs, but predominantly more on the U.S. dollar pairs.

In today’s article, we will be analyzing the impact of Crude Oil Production in the Gulf, where the data is published by the Organisation of the Petroleum Exporting Countries, famously known as OPEC. The below image shows the quantity of Crude Oil Production in Barrels for the month of March.

USD/JPY | Before The Announcement

First, we shall analyze the USD/JPY currency pair, and the above image shows the state of the chart before the news announcement.  Around three hours before the release, we see that the market is aggressively moving down, indicating a great amount of downward pressure. If we carefully observe, currently is at a place where this price was portraying as ‘support’ on the previous day. Therefore, we can expect ‘buying’ strength to come back into the market from this point.

USD/JPY | After The Announcement

After the Crude Oil Production data is announced, the price falls drastically, and the ”news candle” closes as a strong bearish candle. The market reacted very negatively because the Crude Oil Production was lower as compared to the previous month. This impacted the U.S dollar adversely, and traders sold the currency, thereby increasing the volatility on the downside. As mentioned in the previous paragraph, since the price at the key ”support” level, taking a ”short” trade can prove to be risky at this point. It is safer to ”sell” after a suitable retracement.

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 a strong downtrend, and recently the price has moved higher in the form of retracement. Technically, this is the ideal scenario for trend trading and going ”short” in the pair, but as there is a high impact news announcement in few minutes, the market could sharply move on any side. Therefore, it is wise to wait for the release and then trade based on the data and shift in volatility.

After the news announcement, the price suddenly surges and moves higher in the beginning, but the price sees some selling pressure from the top and closes with a large wick on the top. The sudden up move is because of the weak Crude Oil Production data, which made traders sell the U.S. dollar and cause a short-term reversal in the market. As the ”news candle” still closes as a bullish candle, one should not underestimate the buyer’s strength and go ”short” in this pair. We also cannot go ”long” in the currency pair due to the selling pressure seen later. Thus, we can only trade the pair after he/she gets a sense of clear direction.

NZD/USD | Before The Announcement

  

NZD/USD | After The Announcement

Lastly, we shall discuss the NZD/USD currency pair, where the first image shows the characteristics of the chart before the news announcement. As we can see, the pair is in a strong downtrend, and just before the release, it is at the lowest point. This indicates a great amount of strength in the U.S dollar, as it is on the right-hand side. If the Crude Oil Production is lower than before, the pair will continue to move lower, and we will not have a suitable trade entry.

On the other hand, if the data is better than last time, we can only go ”long” in the market, if we see some reversal patterns. After the data is released, the market moves sharply higher, almost similar to the above pair, and again leaves a wick on the top. The bad news in the form of lesser Crude Oil Production increased the volatility on the upside and shot the price up.

That’s about ‘Crude Oil Production’ and its impact on the Forex market. Let us know if you have any questions in the comments below. Cheers.

Categories
Forex Fundamental Analysis

What Should You Know About ‘Income Tax’ As A Fundamental Indicator?

What is the Income Tax?

What is the Income Tax?

What is the Income Tax?

An Income Tax is a percentage of our income that the government takes in the form of taxes. Income Tax is paid by individuals and entities depending on the level of earning and gains during a financial year. In most of the countries, a single income tax does not usually apply to the entire income, but rather various rates apply to different portions of the “taxable income.” The different tax rates and the income levels at which they apply vary widely.

Types of Income which attracts Tax 

Income Tax is a direct tax that is levied on the income and other types of earnings of an individual in a financial year. Below are some types of incomes and taxation rules.

Income from Salary: This includes basic salary, taxable allowances, and profit in lieu of salary, pension received by the person who himself has retired from the service. They all fall under the category of taxable income.

Income from business/profession: This includes presumptive incomes from business and professions that individuals do in their capacity and maybe their part-time work. This is also added to the taxable income after adjustment of the allowed deductions.

Income from properties: A taxable person may also own one or more house properties. These properties can be self-occupied or rented out or even vacant. The rules of Income Tax state that rent from house properties is to be treated for the purpose of calculation of taxable income. An income tax assessee can, however, claim certain deductions for house maintenance in certain areas.

Capital Gains: They are the gains that one makes from selling capital assets like Gold, house properties, stocks, mutual funds, securities, etc. Although capital gains are a part income tax, they are not added to taxable income, as they are taxed at different rates.

Economics and Income Tax

Tax plays a major role in maintaining a balance between people, businesses, and governments,  which broadly represents the economic activity of a country. Here are two ways in which changes to Income Tax affects the economic activity and well being of people.

Tax Incentives

By granting incentives, taxes can affect both supply and demand in an economy. Reducing marginal tax rates on wages can motivate workers to work more. Expanding the income tax credit can bring more low-skilled workers into the labor force. Reducing Tax rates can also encourage to employed persons to invest in stocks and bonds, which improves the capital flow of companies.

Budget Deficit

Large Tax cuts can slow economic growth by increasing budget deficits. When the economy is operating at its potential, a sudden reduction in tax rates may provoke the government to borrow capital from foreign investors and institutions. They will also divert some funds allocated to private investment, reducing productive capacity relative to what it could have been. Either way, deficits increase and thus reduce well-being.

The Economic Reports

The Income-tax rates are announced every year by the Finance Ministry during a press release, which puts out all the slabs and tax brackets based on the income level. This is usually the Central Government tax rate, but there is also a yearly announcement made by all the states, which impose income taxes in the same way the federal government does. In some countries, a single tax rate is applicable to everyone, regardless of the income level. This is called a “flat tax.”

Analyzing The Data

Investors, when analyzing a currency Fundamentally, give extreme importance to the Capital Gains tax of that country. Income Tax is not a major concern for investors when taking a position in the market. But a major deviation from the standard Income Tax rates catches the attention of investors. However, if the Federal government has been maintaining a fixed rate over the years without any major changes, there is no reason to worry, as they fell, the economy is stable. However, an increase in Capital Gains tax is not taken well by the institutional investors, which changes their stance on the economy and the currency, mostly to negative.      

Impact on the currency

A study conducted by economists examined the impact of taxes on the real exchange rates through their effects on economic activity. Their report says that an increase in the capital interest tax rate leads to depreciation in the currency, while an increase in the wage or consumption tax leads to a real domestic currency appreciation. This hypothesis is supported by the data estimations of annual data from 10 OECD countries over 17 years.

A marginal increase in Income Tax is considered to be good for the economy as it increases the revenue of government organizations, but a substantial increase in tax rate can have a reverse effect on the economy, and this will be unbearable for salaried persons.

Source of information on Income Tax rates

Income Tax rates are available on the official website of the finance department of the country, where one can also find the rates for previous years as well (of more than 30 years). Using this information, a trader can analyze the trend in the Income Tax rates over the years. Here is a list of major countries of the world with their Income Tax rates.

Links to Income Tax information sources

GBP (Sterling) | USD | EUR | CHF | CAD | NZD | JPY

Income Taxes is a compulsory contribution to state revenue, levied by the government on workers’ income and business profits. This gives the ability to the government to provide basic safety and community systems for the public. This ensures freedom and basic living standards that citizens expect. Therefore, it is the duty of citizens to timely file Income Tax returns and be a responsible civilian.  

Impact of the Income Tax news release on the price chart 

After having a clear understanding of the Income Tax and its role in the economy, we will now extend our discussion and study the impact of the same on the value of a currency. Investors and traders mainly consider the Capital Gains tax rates, which is also a form of Income Tax. Any major changes to the Capital Gains tax cause extreme volatility in the currency pair and a change in the outlook for that currency. Thus, the income tax alone is not explicitly taken into account by traders.

In the upcoming sections, we will analyze the change in volatility in the currency pair due to the announcement of Income Tax rates. The above image shows the Federal Tax rates of Canada for 2020, where we can see the percentage of income that will be levied as Income Tax on individuals of the country. This is also known as ‘Tax Bracket.’ The maximum Income Tax rate stood at 33%, and this rate has been maintained from the past four years. This data is published by the Canada Revenue Agency, where one can find other tax rates as well.

GBP/CAD | Before The Announcement

We start our discussion with the GBP/CAD currency pair, where the above image shows the behavior of the chart before the news announcement. Price action suggests that the price seems to be retracing the big uptrend and is at a key ‘support’ level. If the Income Tax rate announcement comes out to be negative for the Canadian economy and not per expectations, one can take a ‘buy’ trade in the above pair. Whereas positive data might not result in a trend reversal as the overall trend is up.

GBP/CAD | After The Announcement

After the announcement, we see that the price moves higher, and it closes with a fair amount of bullishness. The increase in volatility to the upside is a sign of continuation of the trend, and this shows that the data was not very positive for the Canadian dollar. The bullish ‘news candle’ indicates a weakness in the currency where traders find the data to be negative for the economy. As the market moves higher, once can go ‘long’ in the market with a stop loss below the ‘news candle’ and ‘take profit’ at the recent ‘high.’

EUR/CAD | Before The Announcement

  

EUR/CAD | After The Announcement

The above images represent the EUR/CAD currency pair. In the first image, we see that the price is moving within a range, and just before the announcement of Income-tax rates, the price is at the bottom of the range. Since the price is at an optimal place for going ‘long’ in the market, aggressive traders can buy the currency pair with a strict stop loss of a few pips below the ‘support’ area.

We are essentially advantage of the increased volatility and movement in the pair. After the Income Tax rates are published, the market moves higher similar to the GBP/CAD pair, but later, the market gets sold into, and the candle closes with a large wick on the top. We can say that the news data was neutral to negative for the economy. Thus, there some confusion among traders can be seen. As the ‘news candle’ is not a bullish candle, it is wise to wait for the price to cross above the moving average and then a ‘buy’ trade.

CAD/JPY | Before The Announcement

CAD/JPY | After The Announcement

Lastly, we discuss the CAD/JPY currency pair, where the characteristics of the chart appear to be different from the above two pairs. Since the Canadian dollar is on the left-hand side, an uptrend in the first image signifies a great amount of strength in the currency. As the market is continuously moving higher before the announcement, we need a lot of confirmation from the market in order to go ‘short’ in the market. I

f the news data is positive for the economy, the move gets accelerated to on the upside and, in that case, once can join the trend after a retracement. After the news announcement, the market crashes, and volatility increases to the downside, thereby indicating a possible reversal. The bearish ‘news candle’ shows that the Income Tax rates were not very positive for the economy, and thus traders sold Canadian dollars. One should take ‘short’ trade only after the price goes below the moving average.

That’s about Income Tax and the impact of its new release on the Forex Market. Let us know if you have any questions in the comments below. Cheers.

Categories
Forex Fundamental Analysis

What Impact Do ‘Building Permits’ News Release Have On The Forex Market?

Introduction

Introduction

Introduction

The building permits monthly reports is one of the major indicators closely watched by economists and Fundamental analysts. It is also one of the most misunderstood numbers even by experienced traders. Understanding the difference between building permits report, housing starts report, and housing completion reports and what they imply is key here. It is important to understand the building permits report because it plays a key role in predicting GDP growth.

What is a Building Permits Report?

Building Permit Report

It is an official authorization by the local governing body to allow construction of a new building or the reconstruction of an old one. An individual owning land cannot simply build a house or a commercial store without any approval from the concerned legal authorities. The building which has obtained its permit implies that it has received the planning permission by the local state planning department.

The governing body dictates construction rules and regulations, which will be specific to that geographical location. For example, a state which is vulnerable to earthquakes is likely to have a mandate which dictates that building should be able to tolerate a certain level of seismic activity. A coastal region-building permit might require the builders to construct the building to tolerate high-velocity winds etc.

Housing Starts Report

It is a monthly report which tells the number of houses that have started their construction activity recently and are at the beginning stage of the construction process.

Housing Completion Report

It is also a monthly report which tells the number of houses that have reached their finishing stage with the majority of the construction work completed recently.

How is the Building Permits Report obtained?

In the United States, the United States Housing Sector monitors building permits. The Housing Sector releases the U.S. Housing Starts report from which the United States Census Bureau releases the monthly building permits report. The report is released every month in the second or third week for the previous month (eighteenth working day to be precise).

As per the Census Bureau, the organization conducts a voluntary mail survey, to which the officials give a response with their reports and figures from which they generate the final report. They cover almost the entire country through the individual permit offices, which in most cases, are the municipalities. Based on geographical locations, the reports can be categorized for area-specific analysis. 

Is the Building Permits Report important?

The number of building permits applied is genuine, as it costs around 500 to 2000 dollars on the type of building, which can be a residential home or a commercial store. All the numbers are, in actuality, going to translate into real newly constructed buildings.

Construction of a building involves a lot of economic activities like the hiring of the labor force, preparing raw materials, purchasing construction items, hiring engineers, etc. Because of the scale and nature of the activity, more money gets circulated into the economy. A large increase in the number of building permits can indicate an increase in employment, increased consumption of goods and services, flourishing businesses, etc.

Construction permits also indicate that the population has enough funds or has the necessary means, which is usually bank loans. Most people construct a home through a mortgage, which implies that banks are ready to lend money; this again implies that money was injected into the economy to stimulate economic activity.

An increase in building permits can also mean that the population has more confidence in their economic prospects and trust the solvency of the plan. Since the construction of a home or a commercial store involves a significant amount of money, we can also give an insight into the nation’s liquidity and health of the economy. An increase in building permits also gives us an idea about the country’s lending environment, i.e., whether the health of the banking sector for the monetary base of the nation will expand or contract, which can be inflationary or deflationary respectively.

How can the Building Permits be Used for Analysis?

The data set goes back to the 1960s, which is a fairly decent range to rely on its correlation with economic activity with good confidence. The U.S. Census Bureau publishes building permits report, housing starts report, and housing completion report. Among these, the building permits report is the most closely watched reports as it indicates an upcoming economic activity. Whereas the housing starts report tells us about the current economic activity, while the housing completion report tells us of the past economic activity.

An increase in the building permit report tells that the construction sector people are confident about an increase in demand for house sales, which implies more money will be in circulation soon. Conversely, decreased building permits report tells us that the economy is slowing down or contracting due to which people are not ready to buy new houses or do not have sufficient funds to afford the cost.

The building permits report is an advanced indicator, whereas the housing starts report is a current indicator, and the housing completion report is a trailing indicator. The building permit indicates first of an upcoming economic surge or plunge while the housing starts report reflects the current economic condition, and the housing completion report shows the effect of a past economic surge or plunge.

It is noteworthy to mention that the housing completion follows the housing starts numbers, and the housing starts number follow the building permits numbers. An increase in the building permits will automatically result in a rise in the housing starts number in the subsequent months, and a few more months later, the same numbers will appear in the housing completion report. Hence, understanding which reports implies what economic activity is key here.

Sources of Building Permits Reports

We can browse through the historical building permits survey reports on the official website of the United States Census Bureau here. You can also find the construction-related statistics here.

Impact of Building Permits news release on the price chart 

In the first part of the article, we understood the importance of Building Permits in a country, which is a key indicator of demand in the housing market. The ‘Building Permits’ indicator, also known as ‘Building Approvals’, is one of the most impactful events in the forex market.

Traders and investors around the world pay a lot of attention to this data and keep close on its numbers. The ‘Building permits’ data is released on a monthly basis and is said to cause a fair amount of volatility in the currency pair. In the following section, we shall see how the data of ‘Building Permits’ affects the price charts and notice the change in volatility.

For illustrating the impact of the news, we will be analyzing the latest month-on-month ‘Building Permits’ data on Australia and measure the impact of the same. A higher than expected reading is considered to be positive for the economy, while a lower than expected reading is considered to be negative. In this case, the ‘Building Permits’ of Australia was reduced to -15.3% from +3.9%, which is a reduction of a whopping 19.2%. One would already imagine this to be very bad for the Australian economy but let us see what it meant for currency traders.

AUD/CAD | Before The Announcement

We shall begin with the AUD/CAD currency pair, where the above chart shows market action before the news announcement. We see a decrease in volatility as the announcement is nearing as the market players are eagerly waiting for the ‘Building Permits’ data. We already have an idea from what is forecasted by economists that the data is going to much worse than before due to a fundamental factor that has affected the Australian economy. Instead of predicting what the numbers are going to be, it is better to wait for the actual news release and trade based on the shift in momentum.

AUD/CAD | After The Announcement

In the above chart, after ‘Building Permits’ data is released, the market collapses, and the price goes below the moving average. The market reaction was as expected, where there was a sudden increase in volatility on the downside. The data shows that there was the least confidence in the housing market of Australia in the month of February. As the market falls and given that the ‘Building Permits’ data was very bad, we can ‘short’ the currency pair with certainty.

A few hours later, we see that the market shot up and reversed completely.  This move was influenced by the announcement of ‘Interest Rate’ by the Reserve Bank. We need to always be aware of such events, especially when we are already in a trade. This teaches us the importance of trade management, which crucial for every trade.

AUD/CHF | Before The Announcement

AUD/CHF | After The Announcement

The above images represent the AUD/CHF currency pair, where it seems like the market has factored in weak ‘Building Permits’ data before the news announcement. After a big downward move, the market has retraced from the ‘lows,’ which is the ideal use case for going ‘short.’

Also, at present, the price is below the moving average, which shows the weakness of the Australian dollar. After the data is released, the price goes lower but leaves a spike on the bottom, and we see increased volatility on both sides. But this shouldn’t scare us, and we need to stick to our plan of going ‘short’ in the currency pair as the data was really bad.

EUR/AUD | Before The Announcement

EUR/AUD | After The Announcement

In the EUR/AUD currency pair, the Australian dollar is on the right-hand side, which means a news release positive for the currency should take the price lower and vice versa. The characteristics of this pair are different from the above-discussed pairs since the price has retraced the major uptrend by a lot. This means the Australian dollar is very strong against the Euro.

Therefore, any news release that is negative for the Australian economy may not collapse the Australian dollar here. Therefore, it needs to be traded with caution. After the news announcement, the price does go up because of the weak ‘Building Permits’ data, but after a couple of candles, the price goes below the ‘news candle.’ We see that the news data does not have much impact on this currency pair and not suitable for trading based on news.

That’s about Building Permits and the impact of its new release on the price charts. Let us know if you have any questions in the comments below. Cheers.

Categories
Forex Fundamental Analysis

‘Producer Price Index’ & The Degree Of Its Impact On The Forex Charts

Introduction

Introduction

Introduction

Producer Price Index PPI, which sounds very similar to the Consumer Price Index CPI is also an equally important indicator. It is widely used as a leading indicator to predict the upcoming CPI and thereby draw economic conclusions accordingly ahead of time. Hence, understanding the Producer Price Index, its history, and the resultant effect it has on the market is significant for traders who trade on Fundamental Analysis.

What is the Producer Price Index?

As the name suggests, the calculation of this index is from the viewpoint of the Producer, i.e., a manufacturer or maker of goods and services. Producer Price Index, in the simplest sense, measures the average of the selling prices of the goods and services at the manufacturing end place. In other words, it is the average of the prices at which the manufacturer sells his products and services to the retailers, who then take it to the local markets and make it available to the general public.

Understanding the difference between what Producer Price Index and Consumer Price Index represent is the key here. Consumer Price Index CPI represents the cost at which goods and services are made available to the general public. Hence, CPI is the measure of average weighed in COST PRICE of finished goods while the Producer Price Index represents the weighted average of SELLING PRICE of the manufactured goods. CPI represents what the end consumer or customer pays, and PPI represents what the manufacturer receives for his commodities.

An item when manufactured and sold from the place where it got manufactured incurs certain costs before it reaches the end consumer. These costs include transportation fees, some specific goods & service taxes, storage costs, etc. Hence, Producer Price is a more rudimentary or cruder form of CPI, and there is an inherent correlation between both. For this reason, PPI is considered an advanced signaling tool to assess CPI and make informed economic decisions by various groups.

How is the Producer Price Index PPI calculated?

The Bureau of Labor Statistics (BLS) surveys almost all industries in the goods manufacturing section and a majority of service sectors. This organization continues to include more and more divisions as time progresses. Producer Price Index of BLS is calculated by first collecting data from all the listed industries by field economists. These people collect data through various means like an onsite visit, phone calls, or even emails, etc.

The producer Price Index uses an altered version of the Laspeyres index. For any given set of goods, it compares the base period revenue to the current period revenue.

Producer Price Index =  (∑QoPo(Pi/Po)) / (∑QoPo)  ×100
  • Qo: Commodity Quantity shipped in the base period
  • Po: Commodity Price in the base period
  • Pi: Commodity Price in the current period

The above equation tells clearly that based on size & importance, items are weighted. The base price corresponds to 100 for which the base year corresponds to 1982. The PPI is published as a percentage increase or decrease with regards to the previously released number, which may be monthly, quarterly, and annually.

Why is the Producer Price Index important?

CPI measures consumer inflation, and PPI measures business inflation. The significance of the Producer Price Index is many-fold. First are the range and history of the data. The index data set goes way back in time. For example, PPIFGS (Producer Price Index by Commodity for Finished Goods) goes as far back as 1947. With such huge data, the reliability of the data set is high, and it usually depicts the macroeconomic picture of country and industrial health with good confidence.

Also, The PPI program is the oldest continuous series of the Federal Government going back to 1902. Second is the frequency & direct ground-level nature of the statistic meaning this data is a real-time reflection of the current industrial health. Thirdly, PPI is very closely related to CPI in the sense that it is an index of the same goods at an earlier stage of the life cycle.

While CPI shows the stats for a product at the near-end of its transaction life cycle in terms of changing hands, PPI shows the stats at the first transaction life cycle, which is very helpful. In this Index, there are many subcategories, wherein certain goods and services get included or excluded from the basket to give a more accurate picture of the concerning market in absolute or relative terms. For example, PPILFE Producer Price Index Excluding Food & Energy (Core PPI) strips away food, gas, and oil prices from the equation whose prices are volatile and measures the absolute changes.

How can the Producer Price Index be Used for Analysis?

The range of PPI is such that there is something for everyone here. Narrowing down into the PPI, any industry can be analyzed. Broadly there are three most popular classifications:

Industry classification: Here, groupings of commodities are done based on the industry sector they represent. The PPI releases about 535 indexes with more than four thousand specific product lines and product category sub-indexes.

Commodity classification: Here, the grouping of items is done based on the similarity of goods and services in terms of their making.

Commodity-based Final Demand-Intermediate Demand (FD-ID): Here, Based on the consumer group, the commodities are classified and are one of the most used PPI stats.

Due to the diversity in the statistics, different sectors of economists can isolate and use the Producer Price Index for their purposes.

Producer Price Index is a widely used indicator for predicting Consumer Price Index. Manufacturers and Industrialists also use these PPI to adjust pricing on the goods and services they buy and sell to fellow manufacturers to avoid having fixed pricing or unfair price changes during the duration of their business contract, which usually tends to be very long periods.

Sources of Producer Price Index

The U.S. Bureau of Labor Statistics releases all the indexes as mentioned above here

You can also find out the same indexes along with many others with a comprehensive summary and statistics of various categories on the St. Louis Fed website.

Impact of PPI’s news release on the Forex market 

After understanding the definition and significance of the Producer Price Index (PPI) in an economy, we shall look at its importance on price charts. For analysis purposes, we have taken the PPI data of Japan, where the survey responses from large Japanese manufactures provide the data for the report. Even though the PPI is a key indicator of the manufacturing sector of the economy, currency traders do not consider it to be the most important indicator of the overall economy. The below image The Business Manufacturing Index (BSI), along with PPI, measures the business sentiment in manufacturing.

The PPI data is released by ‘Bank of Japan’ that measures the change in selling prices of goods purchased by Japanese Corporations. A higher than expected PPI is considered to be positive for the currency and vice versa. The PPI data is released on a monthly, quarterly, and yearly basis, but the highest importance is given to the year-on-year data. The below image shows the latest year-on-year PPI data of Japan that was released in the month of March. As we can see, there is so much variation in the data from ‘previous’ to ‘forecasted to the ‘actual.’ This means, there are many other factors that influence the manufacturing industry that it is difficult to measure for the economists.

EUR/JPY | Before The Announcement

The above chart is that of EUR/JPY, and since the Japanese Yen is on the right-hand side, a down-trending market indicates the strength of the Japanese Yen. The reason behind this downtrend before the news release is because of the bullish expectation of the PPI data from market players. Traders have already forecasted the PPI to be around 1%, which 0.5% lower than the previous reading. Since it is lower, we should expect weakness in the Japanese Yen, but 1% seems to be a good PPI figure for the Japanese economy, hence the downtrend. We need to remember that a higher PPI data is not compulsory to take the currency higher, but rather sometimes the data alone plays importance.

EUR/JPY | After The Announcement

After the PPI numbers are announced, the price barely goes above the moving average line, and there is not much change in the volatility. As the PPI is not an impactful event, the volatility is as expected. A reduction in PPI is bad for the currency, but even though the PPI was reduced, the Japanese yen did not get weak. Therefore, we should just not be paying attention to the news but also use technical analysis to take trades. In this example, we can go long in the market only if we get ‘reversal’ signs, but we don’t see any such patterns. Thus, we should be looking for trend continuation patterns and join the downtrend.

GBP/JPY | Before The Announcement

  

GBP/JPY | After The Announcement

The above image represents the GBP/JPY currency pair, which shows similar characteristics as that of EUR/JPY, where the downtrend is much stronger than the latter. Since the downtrend is prominent, only a much worse PPI than before can take the currency higher. Even if the PPI was very low, the uptrend would not last as it is not an important measurement of the economy. After the news announcement, there is hardly any effect on the currency pair, and the volatility is in the same range. The PPI data was almost the same as that was forecasted by traders, and we can say that it was as per the market expectations. This made the Japanese Yen to strengthen more and downtrend extended on the downside after a bit of consolidation. Once the market slips below the moving average, a ‘short’ trade can be taken with a stop loss above the ‘news candle.’

USD/JPY | Before The Announcement

  

USD/JPY | After The Announcement

This is the USD/JPY currency pair, where the chart characteristics are a little different than the above two charts. Here we don’t really witness a downtrend but rather a ranging nature of the market. Since we are near the resistance area, any positive news release should be taken as an opportunity to ‘short’ in this pair. This is the way we should combine fundamentals with technical analysis. After the news is released, we don’t see any change in the volatility, and the ‘news candle’ leaves a wick on the top. The PPI data was again positive for the Japanese Yen, where the price crashed right after the ‘news candle.’

That’s about PPI and how the Forex price charts get affected during the news release of this fundamental indicator. Let us know if you have any questions in the comments below. Cheers!

Categories
Forex Fundamental Analysis

The Momentous ‘Consumer Price Index’ & How It Impacts The Forex Market

Introduction

Introduction

Introduction

Consumer Price Index, in short, known as CPI, is one of the most closely watched Fundamental Indicators. It is the most direct measure of the current inflation in the economy that a citizen can look at and find out. Hence, Understanding the Consumer Price Index, its history, and the resultant effect it has on the market is very important to build an understanding of the macroeconomics of a nation.

What is the Consumer Price Index?

As the name suggests, the calculation of this index is from the viewpoint of the end consumer, i.e., a regular citizen who buys his/her daily needs from a local grocery store or market. Consumer Price Index, in the simplest sense, is the average of the most commonly purchased household goods and services like toothpaste, milk, grocery, petrol, etc. But instead of a simple average here, each good and service is assigned a certain weightage based on their importance or usage degree amongst the population.

For example, milk, which is a daily need for many consumers, will have a higher weightage in the mean price calculation than that of furniture, which we do not purchase daily or frequently. Also, when we say most commonly purchased goods and services, it covers a wide range of goods and services (over 80,000 items) and does not include rarely purchased items like stocks, bonds, foreign investments, or real estate.

How is the Consumer Price Index CPI calculated?

The Bureau of Labor Statistics (BLS) surveys the prices of 80,000 consumer items to create the index and publishes it monthly. The Consumer Price Index has two subcategories; one is CPI-W, which stands for Consumer Price Index for Urban Wage Earners and Clerical Workers. CPI-W statistics are published first, and later the CPI-U (Consumer Price Index for Urban Consumers) values are released. CPI-U is a broader statistic in terms of population and goods & services coverage.

CPI-U is the more accurate and complete statistic relatively as it takes the urban population, which represents about 93% of the United States population into account. While the CPI-W covers only about 29% of the population. Hence, It is the measure of an aggregate weighed in the price level of most commonly bought goods and services. The list includes items like food, clothing, shelter, fuel, transportation fares, service fees (water and sewer service), etc.

Consumer Price Index, whenever released, is given out as a percentage change, and here the change is concerning the previous number, which can be monthly, quarterly, or yearly.

Note: Here, the base year cost amounts to 100, and this base year is in the year 1982 to 1984, where the average amounted to 100. But the data released monthly is shown as a percentage increase or decrease concerning the previous period (usually the previous month).

Why is the Consumer Price Index important?

The importance of the Consumer Price Index is many-fold. First are the range and history of the data. With such a huge data set, the reliability is pretty high, and it usually depicts the macroeconomic picture of a country. For example, the history of CPIAUCSL (Consumer Price Index for All Urban Consumers: All Items in U.S. City Average) goes all the way back to 1947. Second is the frequency & direct ground-level nature of the statistic meaning this data brings out. CPI is a real-time reflection of the current economic situation faced by the end customer or citizens.

Thirdly, the change in CPI is useful to ascertain the retail-price changes associated with the country’s cost of living. Hence it is used widely to assess inflation in the United States. In this Index, there are many subcategories, wherein certain goods and services get included or excluded from the basket to give a more accurate picture of inflation in absolute or relative terms. For example, Core CPI strips away food, gas, and oil prices from the equation as the prices of these items are relatively volatile.

How can the Consumer Price Index be Used for Analysis?

Due to the diversity in the statistics, different sectors of economists can isolate and use the Consumer Price Index for their purpose. For example, the United States Bureau Of Labor Statistics provides indexes based on various geographic areas also. Moreover, they even release average price data for select utility, automotive fuel, and food items, which gives this Index the status of a key indicator in gauging multiple economic indicators.

Consumer Price Index is a widely used indicator for inflation measure. For other economic indicators like hourly wages and currency worth within the nation (dollar’s purchasing capacity to procure goods and services), CPI can be considered as a regulator. On average, for a developed nation like the United States, 0.2-0.5% of Consumer Price Index increase is common, and any number beyond these figures usually indicates volatility in the growth of the economy in either direction.

Sources of Consumer Price Index

The U.S. Bureau of Labor Statistics releases all the indexes that are mentioned above. This data can be found here – Consumer Price Index

You can also find the same indexes along with many others with a comprehensive summary and statistics on the St. Louis Fed website as given below.

CPIAUCSL (CPI for All Urban Consumers: All items in U.S. City Average)

This is a broadly used statistic for measuring the overall inflation. It includes Food and Energy prices, unlike CPIFESL. The information related to this index can be found here.

CPIFESL (CPI for All Urban Consumers: All items minus the Food and Energy in U.S. City)

It excludes volatile components like Food and Energy (Oil Prices) and gives more of a Core CPI change within the United States. The information related to this index can be found here.

Impact due to news release

In this section of the article, we will analyze the impact of the Consumer Price Index (CPI) on a currency right when the announcement is being made and see where the market finally gets to. The image below shows that the CPI data has a huge impact (Red box indicates high impact) on the currency, which means it might cause a drastic change in the volatility after the news announcement. Ideally, if the actual CPI numbers are greater than the forecasted numbers, it is good for the currency and vice versa.

We have taken the recent CPI data of Australia, which is quarter-on-quarter. The quarterly data is more important and impactful than the monthly numbers. The below image gives the 4th quarter data of CPI that was measured in January, and the next quarter data will be released in April. We see below that the CPI data for the 4th quarter was 0.7%, which is 0.2% greater than the previous reading. It is also 0.1% greater than the forecasted number. But, let us see how the market reacted to the data.


AUD/USD | Before The Announcement

The above image represents the chart of AUD/USD, where we see that the market is in an uptrend showing the strength of the Australian dollar. One of the reasons behind the uptrend is that traders and investors forecast the CPI data where they are expecting a 0.1% increase in the same. If the CPI numbers are increased more than expected by the ‘Australian Bureau of Statistics,’ it could be the best-case scenario for going ‘long’ in the market. However, if the numbers are below expectations, volatility could increase on the downside.        

AUD/USD | After The Announcement

Here, we see a sudden surge in volatility on the upside that after the news announcement is made. The reason for this is that the CPI got increased by 0.2%, where the market was expecting a 0.1% rise. The large green candle shows how impactful the CPI data is on the currency. From a trading point of view, one should not be chasing the market but instead, wait for a pullback at the nearest support and resistance area and then take suitable positions. The CPI data was so positive for the Australian dollar that the price does not even come below the moving average. Take Profit‘ for the trade can be at the new ‘high’ with a stop-loss below the opening of the news candle.

AUD/CAD | Before The Announcement

AUD/CAD | After The Announcement

The AUD/CAD currency pair appears to be in a ‘range’ just before the news announcement and is at the bottom of the range. An interesting way of positioning ourselves in the pair is by having small ‘buy’ positions before the news announcement. Because the forecasted CPI data is greater than the previous reading, and we are at a technically important level that is supporting our ‘buy’ positions. The news outcome makes the ‘support’ area work beautifully as the market shoots up to the resistance area. Here too, the data proved to be very positive for the Australian dollar as a higher CPI data drives the currency higher. We can hold on to our trades even if the price is at ‘resistance’ since the news data is very good for the currency, and it has the potential to break the ‘resistance’ and move further.

EUR/AUD | Before The Announcement

EUR/AUD | After The Announcement

In this currency pair, the Australian dollar is on the right-hand side, which means a positive CPI data should take the currency lower. We can see that the Australian dollar already strong as the market is in a downtrend, and the market participants are optimistic about the CPI data of Australia. After the CPI announcement, the volatility increases on the downside, taking the price to a new ‘low.’ Again, when we witness better than expected data of any economic indicator, we should not be chasing the market but wait for a retracement to key levels. In this case, since we don’t see a retracement after the red ‘news candle,’ only aggressive traders can take ‘short’ positions with the confidence that the CPI numbers were exceedingly better than before and that it will take the currency lower.

That’s about CPI and its impact on the Forex market. We hope you find this information useful and if you have any questions, shoot them in the comments below. Cheers.

Categories
Forex Fundamental Analysis

Understanding ‘Foreign Exchange Reserves’ & Its Impact On The Forex Market

Introduction To Foreign Exchange Reserves

Introduction To Foreign Exchange Reserves

Introduction To Foreign Exchange Reserves

Foreign Exchange Reserves are foreign assets held by a country’s central bank. Most of the foreign reserves are held in the form of currencies, while the other reserves include deposits, bonds, treasury bills, other government securities. There are plenty of reasons why central banks hold reserves. And the most important reason is to control their currencies’ values. The reserves act as a backup for their liability. From an economic point of view, it essentially influences the monetary policy.

When a country’s currency falls considerably, the foreign exchange reserve acts as a backup of their economy. Typically, countries hold the US dollar as their forex reserves because it is the most traded currency in the world. Apart from that, the Great Britain Pound, Chinese Yuan, Euro region’s Euro, and Japanese Yen are the currencies that are held as FX reserves.

Understanding Foreign Exchange Reserves

Let us understand with an example, how exactly are the forex reserves accumulated.

Consider two countries, the United States and Great Britain Pound. In the present situation, let’s say the value of USD and the GBP is the same with stable economies. Now let’s say the investors start believing that the USD is going to perform exceptionally well in the coming years. So, they begin flowing in cash into the US’s real estate and the stock market. This brings up a massive demand in the US dollar, while supply in Pound.

In such a situation, people must pay more Pounds to purchase one US Dollar. Or in USD’s perspective, people must pay lesser US dollars to buy one Pound. Moving further, let’s say the US does not want its currency to get very strong. This is because it has led to high volatility in the price and dramatic moves in the market.

With this concern, the central banks start printing more of their currency (US Dollar). And this money is deployed into buying the GBP. In doing so, the supply and demand of both the currencies stabilize again. Now the Pounds that the US central banks own are the foreign reserves. This hence appears on the balance sheet of the US.

What is the Purpose of Foreign Exchange Reserves?

There are several ways central banks use FX reserves for different purposes.

The countries use their foreign reserves to keep their currency’s value at a fixed rate. An example of the same is given above. Countries with a floating exchange rate system use FX reserves to keep the value of their currency less than the US dollar. For example, Japan follows a floating system. The central bank of Japan buys US treasury so that the Yen stays below the Dollar.

Another critical function of the reserves is to maintain liquidity in case of economic crises. For instance, a natural calamity might bring a halt to local exporter’s ability to produce goods. This cuts off their supply of foreign currency to pay for imports. In such scenarios, central banks can get their local currencies in exchange for the foreign currency they have. Hence, this allows them to pay for and receive imports.

The foreign currencies are supplied by the market to keep markets steady. It also buys the local currency to prevent inflation and support its value. Central banks provide confidence to investors through reserves. They assure their foreign investors that they’re ready to take action to protect investors’ investments. This will prevent the loss of capital for the country.

Some countries use their foreign reserves to fund sectors. For example, China has used its reserves for rebuilding some of its state-owned banks.

How Forex Reserves impact the currency?

Foreign exchange reserves are important to investors as it controls the supply and demand of the currency in the forex market. Knowing that central banks try keeping the currency values stabilized, we take advantage of this and try predicting the value of a currency pair.

Let’s say the US is buying large quantities of Australian goods, bonds, etc. This would create a demand in the Australian Dollar against the US dollar. That is, the value of AUD/USD would rise in doing so. Now, if the value rises to a significant amount, the central banks will buy back the US dollars from them, which creates a demand in the USD. And this hence will bring down the value of AUD/USD to keep it stable again. Therefore, traders can look to go short on AUD/USD knowing that USD would buy back their currency to keep both the currencies stable.

Reliable Source of information on Foreign Exchange Reserves

Traders and investors need the data of foreign exchange reserves to make their investments. And this data is publicly available for free. Below are the portals to access the reports on the Forex reserves of different countries. Apart from the current data, one can access the historical data with graphical charts as well.

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

Impact Of Foreign Exchange Reserves’ News Release On Forex

From the above topics, it is evident that Foreign exchange reserves affect the currency of an economy. Now, we shall see how the price charts are affected when the reports are released. Typically, the impact of the news after its release is low. The Forex reserves of a country are released on a monthly basis and usually at the beginning of a moth. However, the source of the announcement is different for different countries.

For analysis, we will be considering the data released by Japan. The reports on the FX reserve is announced by the Ministry of Finance of Japan. Specifically, we will be considering the reserves that are held as USD. Consider the below report of Foreign exchange reserves (USD) held by Japan’s central bank. The news was announced on 5th March 2020. We can that the newly released data was higher than the previous month by 16.7B.

Source: Investing.com

USD/JPY | Before the Announcement | 5th March 2020

Below is the chart of USD/JPY on the 15min timeframe before the release of the news. Currently, the market is showing some strength from the buyers.

USD/JPY | After the Announcement | 5th March 2020

Below is the same chart, but after the release of the news. We can see that a green candle popped at first but was eaten up by a red candle. Basically, the up move was nullified by the sellers. Also, we cannot really say that the up and down move was due to the news because the volume didn’t show any sudden spike up. Typically, for impactful news, the volume increases drastically, which did not happen for this news. However, the volatility rose a little above the average but dropped below in a few minutes. One of the reasons we could account for the low volatility and volume is that the report was almost the same as the previous month’s report.

EUR/JPY | Before the Announcement | 5th March 2020

EUR/JPY | After the Announcement | 5th March 2020

Consider the chart of EUR/JPY on the 15min timeframe given below. The news candle is marked by a rectangle around it. We can see that the price action of this pair is very similar to that of USD/JPY. Initially, the market showed a bullish move but dropped the next candle. Speaking of volatility, it was a pip or two above the average volatility. The Volume, too, did not increase during the announcement of the news, which usually happens for other impacting news. Hence, in this pair too, the FX reserves did not have an immediate impact on the currency pair.

GBP/JPY | Before the Announcement | 5th March 2020

GBP/JPY | After the Announcement | 5th March 2020

Below is the chart of GBP/JPY on the 15min timeframe. Similar to the above two pairs, in this pair too, the price action is almost the same. In 30 mins after the release of the news, the market showed a little bullish but ended on a bearish note. The volatility at this time was at the average line, and the volume was feeble. In fact, it was lesser than the time when the London or New York market opens. Hence, with this, we can come to the conclusion that the impact of Foreign exchange reserves on GBP/JPY was insignificant.

Conclusion

Foreign exchange reserves are the assets of other countries held by the central bank of a country. The reasons for doing so are plenty. The Foreign Exchange Reserves has its influence in determining the monetary policy. FX reserves can control the rate of a currency and can use to stabilize the same.

However, if we were to see its immediate impact on the price charts, it is low. The impact on the currency pair is usually when it is significantly overvalued or undervalued. FX reserves are also helpful to central banks in bringing up the economy to an extent. This indicator may not predict the future economy but can help economists in several other ways.

That’s about Foreign Exchange Reserves and their impact on the price charts. If you have any questions, let us know in the comments below. Cheers!

Categories
Forex Fundamental Analysis

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

Introduction

Introduction

Introduction

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

What is Productivity?

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

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

Measuring Productivity

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

Output

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

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

Input

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

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

Determinants of Productivity

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

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

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

The Economic Reports

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

Analyzing The Data

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

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

Impact on the currency

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

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

Sources of information on Productivity

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

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

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

Impact Of Productivity News Release On The Price Charts 

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

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

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

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

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

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

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

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

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

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

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

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

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

Categories
Forex Fundamental Analysis

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

Introduction

Introduction

Introduction

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

Understanding Balance Of Trade

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

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

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

How is the Balance Of Trade calculated?

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

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

How Can This Economic Indicator Be Used For Analysis?

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

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

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

Impact of Balance Of Trade on Currency

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

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

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

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

Balance of Trade & Balance of Payments

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

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

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

Economic Reports

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

Sources of Balance Of Trade

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

Impact Of ‘BOT’ News Release On The Price Charts

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Categories
Forex Fundamental Analysis

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

‘8765Introduction

‘8765Introduction

‘8765Introduction

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

What is the Government debt-to-GDP ratio?

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

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

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

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

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

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

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

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

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

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

Impact on Currency

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

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

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

Economic Reports

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

Sources of Government Debt to GDP

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Categories
Forex Fundamental Analysis

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

Introduction

Introduction

Introduction

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

What is Inflation?

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

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

What is Inflation Rate?

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

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

Why is Inflation Rate important?

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

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

How does Inflation Occur?

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

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

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

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

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

How is Inflation measured?

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

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

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

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

PPI vs. CPI

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

Sources of Inflation Indexes

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

Consumer Price Index | Producer Price Index 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Categories
Forex Fundamental Analysis

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

Introduction

Introduction

Introduction

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

What is Interest Rate?

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

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

Types of Interest Rates

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

Nominal Interest Rate

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

Real Interest Rate

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

Real Interest Rate = Nominal Interest Rate – Inflation Rate

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

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

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

Economic reports & Frequency of the release 

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

Impact on Currency

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

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

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

Sources of information on Interest Rate

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

Authentic Sources To Find The Info On Interest Rates 

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

Bottom Line

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

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

Categories
Forex Videos

Forex Fundamental & Economic Indicators Part 1 – How To Understand The Strength Of A Currency

https://youtu.be/i_AO21esRws

https://youtu.be/i_AO21esRws

Fundamental Analysis – Economic Indicators – Part 1

Trading any asset in the financial markets is complicated, and there are simply no shortcuts to becoming a successful trader, it all comes down to education. One of the biggest mistakes that new traders make is to learn about technical analysis without also learning about fundamental analysis, which is just as critical, if not more so. Fundamental analysis is the study of the macroeconomics pertaining to a particular country. It measures its wealth, and in the Forex market, a country’s wealth will determine what its currency exchange rate value is against other countries’ exchange rates.


Fundamental analysis is expressed in the markets by way of economic indicators, which are released by why governments, and non-profit organizations, which monitor economic activity within a country on a regular basis. Economic indicators are in levels of importance attached to each data point where risk rises from low, medium, to high. They can be leading indicators, which tend to precede trends, lagging, which might confirm trends, or coincident, which means the current state of an economy.
Leading indicators include consumer durables and share prices. Coincident indicators include GDP, employment levels, and retail sales. And lagging indicators include the gross national product (GNP), CPI, unemployment rates and interest rates, Once collated, and calculated, the economic information is released and is usually subject to a time embargo, and this typically happens once a month at a set time and day of the week. These are then updated each month, quarter, and each year. Economic indicators are segregated into groups. The higher the rise, the more the likelihood of increased market volatility post-release. More importantly, the release of such data allows traders and investors to understand the current and future economic position of a country and to plan in advance and adjust their portfolios or positions as appropriate.


Once economic indicators are updated, financial policymakers within a country can use the data on how to change policy. Therefore information which may suggest that an economy is overheating, or has as inflation which is below or above government targets, can be critical to policymakers may be forced to make adjustments and therefore perfect a currency exchange rate. Traders will be looking out for such data in order to try and predict if major policy decisions such as interest rate changes could be about to happen in order to adjust their portfolios accordingly. Traders are strongly advised to have access to a reliable economic calendar and refer to it on a regular basis in order to not to get caught out by events such as these. Decent calendars are freely available, and offer a breakdown of economic releases times and will also include things such as expected speeches from political and economic leaders. See example A.
In part 2, we will be looking at how professional traders plan ahead for forthcoming economic data releases.