Tag: Loan

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Forex Fundamental Analysis

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

Introduction

Introduction

Introduction

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

What are Loans to Private Sector?

Loan

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

Private Sector

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

Loans to Private Sector

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

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

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

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

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

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

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

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

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

Impact on Currency

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

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

Economic Reports

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

Sources of Loans to Private Sector

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

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

How Loans to Private SectorAffects The Price Charts?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bottom Line

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

Categories
Forex Fundamental Analysis

The Importance of ‘Loan Growth’ as a Forex Macro Economic Indicator

Introduction Loan Growth is a suitable parameter for us to check whether the monetary strategies implemented by the Central Authorities are coming into play yet or not. Loan Growth also helps us to gauge the health of the economy in terms of liquidity. Loan Growth percentage serves as a litmus test, especially in a capitalist […]

Introduction Loan Growth is a suitable parameter for us to check whether the monetary strategies implemented by the Central Authorities are coming into play yet or not. Loan Growth also helps us to gauge the health of the economy in terms of liquidity. Loan Growth percentage serves as a litmus test, especially in a capitalist […]

Introduction

Loan Growth is a suitable parameter for us to check whether the monetary strategies implemented by the Central Authorities are coming into play yet or not. Loan Growth also helps us to gauge the health of the economy in terms of liquidity. Loan Growth percentage serves as a litmus test, especially in a capitalist economy, where credit and inflation primarily drive the economy forward.

What is Loan Growth?

Loan: It is a debt incurred by an individual or entity. The lender is generally a bank, financial institution, or the Government. The lender credits the borrower a sum of money. The borrower agrees to specific terms and conditions that can include finance charges, interest payments, due dates, and other conditions.

Loans can be secured or unsecured. In secured loans, the loan is given out against collateral with a financial value like a property, mortgages, or securities, etc.

Loan Growth: Loan Growth refers to the percentage increase in the number of loans issued overall by banks in a particular region over a particular time frame. The time frame can be monthly, semi-annual, or annual.

Most modern economies today we see are capitalist economies, i.e., they grow through capitalism. A capitalist economy requires money to expand and grow. Hence, credit is an inevitable fuel required for economic growth.

How can the Loan Growth numbers be used for analysis?

A healthy increase in the percentage of Loans is suitable for a stable and healthy economy. But as with any case, there is no perfect economy, and there are two sides of analysis to Loan Growth.

First Scenario

A healthy economy means it is growing at a stable rate year over year with mild inflation each year. Credit fuels economic growth in this type of economy. In this type of economy, an increase in the number of loans taken can be considered a positive sign for the economy.

Businesses can grow beyond just cash in hand. Householders can purchase homes without saving the entire cost before purchase. Governments can meet their spending needs without relying solely on tax revenues. Be it a business, householder, or a Government can smoothen out their economic activities in terms of money. They will take credit when in deficit and payback when in surplus.

An increase in Loan Growth can imply that more people are creditworthy, and more businesses are taking credit to expand and grow. Both of these scenarios are good for the GDP and is a good sign for the economy.

Second Scenario

The first scenario takes into the assumption that the economy is strong and stable. In reality, currently, most of the developed nations are struggling to maintain their economic growth. For example, the United States debt to GDP ratio is above 100%, which indicates that even if the entire GDP were given out to repay the debt, it would still be in some debt. Most of the developed nations have taken substantial credits to keep the economy from ticking over.

Keeping economic growth and global competency in mind, most countries have invested heavily in overgrowing in the short-term. By taking on more and more debts, countries may have achieved the necessary growth and needs now but have pushed their problems to the future.

Economists argue that eventually, there would be a time when countries cannot afford any more debt and would be backed into a corner. The only way out then would be at a considerable cost of losing out more than what they had made. Studies also show that rapid loan growth than the long term average also has seen an increase in underperforming or bad loans.

It is also essential to know that increase in Loan Growth should be accompanied by the fact that no bad loans are given out. Giving loans to people and businesses who do not have the eligibility but just because money is lying around is also a problem.

In the United States itself, the Government has been injecting money into the economy since the financial crisis in the form of Money Supply and Quantitative Easing programs to inflate their way out of depression or recession. Until now, the Government has not been able to reduce debt and is only taking on more debt to sustain the current growth.

An increase in loans is good or bad for the economy remains debatable for many. Without credit, sector growth is almost unimaginable in present times. For our analysis, we can use the Loan Growth rate as a litmus test to see whether the injected money from the Central Authorities has started reaching the public and businesses.

When the Central Authorities want to inflate the economy, they reduce interest rates by injecting money into the interbank market. The injected money takes time to get into the economy, and loans are one form in which this money gets circulated.

Overall, for our analysis, once Loan Growth shows increasing numbers, we can assume that the injected money is reaching the intended sectors, and consequent effects could be predicted on businesses and consumers. Loan Growth is indicative of a growing economy in general and is more prominent in developing countries.

Impact on Currency

Loan Growth is a by-product of a reduction in interest rates from the Central Banks of the country and an increase in employment and business growth. An increase in Loans indicates that money is “cheaper” to borrow. It is inflationary for the economy and is given out to induce growth (which may or may not happen).

An increase in Loan Growth depreciates currency as more money is competing against the same set of goods and services. A decrease in Loan growth appreciates the currency as the reduced liquidity forces goods and services to come at reduced prices.

Overall, Loan Growth is a low-impact indicator, as the Central Bank’s interest rates are the leading indicators, and the desired effect from increased loans can be traced from other leading indicators like Consumer and Business surveys.

Economic Reports

Since Loan Growth is not a significant economic indicator, official publications for significant countries are not explicitly published but can be obtained through reports analysis. For our reference, the Trading Economics website consolidates the Credit Growth in different sectors for data available countries on its official website. Since it is a consolidation, frequency and time of publication vary from country to country.

Sources of Loan Growth

Loan Growth consolidated available data for different countries are available here.

“The impact of bank lending on Palestine economic growth: an econometric analysis of time series data” has been referenced for this article.

How Loan Growth Affects The Price Charts

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

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

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

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

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

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

EUR/USD: Before Loan Growth release on July 27, 2020, 
Just Before 8.00 AM GMT

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

EUR/USD: After Loan Growth release on July 27, 
2020, 8.00 AM GMT

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

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

EUR/JPY: Before Loan Growth release on July 27, 2020, 
Just Before 8.00 AM GMT

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

EUR/JPY: After Loan Growth release on July 27, 
2020, 8.00 AM GMT

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

EUR/CAD: Before Loan Growth release on July 27, 2020, 
Just Before 8.00 AM GMT

EUR/CAD: After Loan Growth release on July 27, 2020, 
8.00 AM GMT

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

The release of the loan growth data has an instant short-term effect on the EUR. The data is, however, not significant enough to cause any relevant shift in the prevailing market trend.