Tag: Macro Economics

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Forex Fundamental Analysis

‘Imports by Country’ – How Crucial Is It To Know About This Fundamental Forex Driver?

Introduction Currency values are critical for international trade and vice-versa. The exchange rates are directly influenced by changes in import and export composition, quantity, and prices. The volatility of a currency is directly associated with the country’s import and export relations with other countries. Understanding how international trade affects currencies in the forex market is […]

Introduction Currency values are critical for international trade and vice-versa. The exchange rates are directly influenced by changes in import and export composition, quantity, and prices. The volatility of a currency is directly associated with the country’s import and export relations with other countries. Understanding how international trade affects currencies in the forex market is […]

Introduction

Currency values are critical for international trade and vice-versa. The exchange rates are directly influenced by changes in import and export composition, quantity, and prices. The volatility of a currency is directly associated with the country’s import and export relations with other countries. Understanding how international trade affects currencies in the forex market is paramount for fundamental analysis.

What are Imports by Country?

A country’s trade balance (net exports and imports) is critical for currency valuation. The Balance of Trade refers to the required balance to exist between the total monetary value of a nation’s exports and imports. It is key to currency valuation. When a country exports, domestic currency comes into the country in exchange for the sale of products. When a country imports, the currency goes out in exchange for purchasing goods outside the country. Hence, a balance of exports and imports to maintain a healthy economy.

It is often necessary to understand a nation’s export and import composition to grasp its ties with other countries. Countries’ dependency on goods and services from other nations induces leverage and power for the exporting countries. For example, the United States imports 20% of all its goods from China. If China were to cut-off all its exports to the United States, that would dramatically impact the United States economy and its currency. Hence, the categorization of imports based on country and goods gives us an idea of the underlying relationships between currencies.

United States Imports by Country 

Source: Trading Economics
How can the Imports by Country numbers be used for analysis?

Today’s global world is one that is tightly interconnected and has complex links amongst countries. Understanding trade composition helps us in identifying where to look for volatility. For instance, the United States only imports about 2% of its products from India. If, for some reason, the import prices changed from India in either direction or completely stopped, it would not impact the trade balance significantly.

Hence, categorization based on countries helps us understand the dependencies a particular country has. Heavy dependence on a limited set of countries, especially for primary resources like energy and food, is not suitable for the economy. During times of a natural disaster in the exporting country will affect the dependent countries also.

A country that solely depends on its trade relations with fewer countries is likely to see more volatility in currency valuation. The more diverse the portfolio of a country in terms of its international trade partners, the more robust the currency is. Hence, currencies like the AUD, CAD are more volatile currencies because their exports are heavily dependent on fewer markets, unlike the EUR and USD.

Imports and Exports by country and category of products are equally essential to understand a nation’s currency volatility. For instance, Australia’s heavy dependency on coal and iron ore exports to china and japan induces volatility in AUD currency in correlation with coal and iron ore prices.

The Imports by country is not an economic indicator but is a prerequisite for understanding macroeconomic analysis of currency pairs. Currency valuations are primarily affected by trade relations a country has. It is not frequent for a country to change its import composition by country often, but it has a significant impact on the currency when it does.

Imports form only one half of the equation. Overall to understand the macroeconomic dynamics, both exports and imports have to be taken into account. Also, currency value change has a direct effect on imports and exports. When the Domestic currency appreciates imports are cheaper and profit margin increases for importing companies but hurts exporters as they receive fewer dollars than before. When the domestic currency depreciates, imports get hurt while exporters benefit. Some countries competitively peg their currency lower during export and higher during import. This phenomenon is sometimes referred to as “currency wars.”

Changes in import and export composition as a result of trade agreements or tariffs imposed has a more direct impact on companies that constitute the import and export goods and services. Hence, stock prices of companies are more sensitive to import and export data.

Impact on Currency

Imports categorized based on countries is for segregation and analysis purposes only. It is not an economic indicator in itself. Still, it is essential to understand the existing trade partners of a country to know which currencies are being exchanged for what goods. Imports and Exports both make up the balance of trade, which helps to analyze currency valuation.

Hence, Imports categorized by country are although useful, changes in the composition are necessary for a macroeconomic picture but does not induce volatility in itself. Any change in composition would have already been announced in news reports that would be priced into the market. It is useful at the starting point for establishing currency analysis, but it is neither an economic indicator nor induces any volatility in currencies.

Economic Reports

For the United States, The Census Bureau tracks and consolidates import and export composition on its official website. It releases monthly data ranking countries with which it had exports and imports. It details all the goods and services that are exported or imported from the partner countries.

Sources of Imports by Country

Census Bureau’s Trade highlights reports are available here. We can find a consolidated listing of “Imports by country” of most countries on Trading Economics.

Imports by Country News Release – Impact on Price Charts

Imports by Country is an important piece in analyzing the “Trade” and “Imports” fundamental indicators. It alone is not an economic indicator but is one of the components that make up a fundamental indicator. Precisely, the balance of trade is the economic driver that references the data obtained from Imports and Exports. Extending further, the data from Imports is acquired from factors like Imports by Country and Imports by Category.

Imports by Country alone does not pump up the volatility of the market. Also, the report is released during the release of the Imports data.

Imports Report – Untied States

United States Imports by Country

The USA is the second-largest importer in the world. The imports of the USA are China, the European Union, Euro Area, Canada, Mexico. For the May data, the overall imports dropped from $200.9 billion to $199.1 billion. Imports from China and Canada increased the previous month, but the rest saw a slight decline.

NZDUSD – Before the Announcement

In the below chart of NZDUSD, on the 4H time frame, we can see that the market is in an uptrend. It made a high to 0.65815. Since then, the price has been retracing.

NZDUSD – After the Announcement

On the day of the report announcement, the NZD showed strength, while USD showed weakness. However, the volatility and volume remained average. In the following days, the bullishness remained intact. In fact, after consolidating for a while at the resistance, the price made a new high. Thus, we can conclude that the Imports by Country indirectly did affect the USD price.

AUDUSD – Before the Announcement

From the price chart of AUDUSD, we can see that the price action is similar to that of NZDUSD. Before the announcement of the news, the market was in a strong uptrend.  After making a high to 0.69845, the prices have been pulling back down.

AUDUSD – After the Announcement

During the announcement of the news, the market volatility was unchanged. However, in the subsequent sessions, the market reacted negatively on USD, and the price touched the recent high and even made a higher high. The market perhaps did react as expected to the new, but in the later weeks.

USDCHF – Before the Announcement

Before the announcement of the news, the market was in a pullback phase of a downtrend.

USDCHF – After the Announcement

On the announcement day, the volatility of the market was feeble. The price pushed to the downside but with low volume that is typically seen during the announcement of major news events.

In the following trading days, the predominant downtrend continued where the price made a new low from 0.93828. This down move could be due to several factors; however, there could be a slight effect on the Imports by Country report. Cheers!

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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!

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Forex Fundamental Analysis

Everything About ‘Harmonized Consumer Prices’ Macro Economic Indicator

Introduction Harmonized Index of Consumer Prices (HICP) is the go-to indicator for monitoring inflation statistics in the European Union (EU). Inflation reports are vital for the currency markets, as inflation directly erodes currency value. Hence, domestically and internationally, inflation statistics play equally critical roles in currency valuations. Understanding HICP is mandatory for building fundamental analysis […]

Introduction Harmonized Index of Consumer Prices (HICP) is the go-to indicator for monitoring inflation statistics in the European Union (EU). Inflation reports are vital for the currency markets, as inflation directly erodes currency value. Hence, domestically and internationally, inflation statistics play equally critical roles in currency valuations. Understanding HICP is mandatory for building fundamental analysis […]

Introduction

Harmonized Index of Consumer Prices (HICP) is the go-to indicator for monitoring inflation statistics in the European Union (EU). Inflation reports are vital for the currency markets, as inflation directly erodes currency value. Hence, domestically and internationally, inflation statistics play equally critical roles in currency valuations. Understanding HICP is mandatory for building fundamental analysis related to the European Union countries.

What are Harmonized Consumer Prices?

Harmonized Index of Consumer Prices (HICP)

It is a list of the final price paid by European end-consumer for a basket of commonly used goods and services. Like the United States has the Consumer Price Index (CPI) as a means of regularly measuring inflation levels month over month, the European Union (EU) has HICP. The average change in the price of the selected goods and services gives us a clear idea about the inflation rates in the EU.

The HICP differs from United States CPI because it takes inflation data from each member nation of the European Central Bank (ECB). It is also a weighted index, meaning that goods are given a specific weightage based on demand, or how essential and frequently used by the consumers. The consumer goods basket is derived from data of both rural and urban areas of each member nation.

How can the Harmonized CP numbers be used for analysis?

The Harmonized Index of Consumer Prices (HICP) is measured and given by each of the European Union (EU) member states. European Union is a political and economic union of 27 states located primarily in Europe. It is given out to measure inflation and help the European Central Bank (ECB) to form monetary policies accordingly if required. Every member country’s HICP measures the shifts over time in the prices of the basket of selected goods and services purchased, used, or paid for by households of that nation.

The “commonly used goods and services” include coffee, meat, tobacco, fruits, household appliances, electricity, clothing, pharmaceuticals, cars, and other commonly used products. It is also worth mentioning that the index excludes owner-occupied housing costs.

The HICP is also used for the Monetary Union Index of Consumer Prices (MUICP), an aggregate measure of consumer inflation for all countries of the eurozone. The eurozone represents all countries of the European Union that have incorporated the Eurodollar as their national currency. The primary aim of HICP is to maintain price stability. It defines the stable inflation rate in the euro area as below two percent annually.

Amongst HICP and MUICP, the HICP is a broader measure of inflation, but for trading, traders would prefer MUICP as it tells about the inflation concerning the European Dollar (EUR). The MUICP is calculated by selecting HICP from the eurozone countries only. All the member nations use the same methodology to calculate their respective HICP, enabling them to compare with each other and easily calculate the MUICP directly.

The selected goods and services are updated annually to account for the changes in consumer spending patterns. Each country’s weightage represents its consumption expenditure share in the entire euro area.

Inflation is the fuel that drives the economy. It is a double-edged sword, too much inflation erodes currency value, and citizens become poorer, and too low causes deflation, which slows the economy making money “costly.” A low and steady inflation rate is the only solution to keep the economy growing for capitalist economies.

When inflation rates fall below the long-term averages, the central authorities may use fiscal (government actions, ex: tax cuts) or monetary levers (central bank actions, ex: lower interest rates) to counter deflation and induce inflation. When the inflation rate is above the long-term rate, it is called hyperinflation, and central authorities may intervene and tighten the belt to deflate the economy. They can raise interest rates, increase taxes to deflate the economy to normal levels.

Inflation statistics like the HICP are coincident indicators as they tell us about the current price inflation. They are affected by leading indicators and policymaker’s responses. The HICP is closely watched by economists, central authorities, consumers, and even traders. In the currency markets, relative inflation can help us predict which currency’s value is eroding relatively faster. Inflation also affects the GDP of the country, which is a primary macroeconomic indicator for currency trading.

Impact on Currency

Currency markets emphasize on leading indicators over coincident indicators to always stay a step ahead of market trends. Coincident indicators confirm the trends rather than predict. Due to this, the impact of the HICP indicator in the market is low. For currency traders, MUICP and currency-specific aggregates are more useful than aggregate metrics like HICP to check inflation. Hence, overall, HICP is a low impact coincident indicator that can be overlooked for more country-specific inflation statistics.

Economic Reports

HICP data is published by Eurostat every month. It is the statistical office of the European Union. A brief estimate for the euro is published at the end of the month, followed by the detailed version containing indices of all member states approximately two weeks later. On the Eurostat page, we can find monthly, annual data, a detailed listing of country weights, item weights, prices, etc.

Sources of Harmonized Consumer Prices

We can know more about HICP in detail from the European Central Bank’s official website and the official data on the Eurostat page. We can find the consolidated monthly reports of HICP on Trading Economics.

Harmonized Consumer Prices – Effect on Price Charts

The Harmonized Index of Consumer Prices (HICP) is a coincident indicator. In essence, this indicator does not predict the future price action of currency but is coincident with it. Typically, metrics such as MUICP and other price reports induce volatility in the market. But HICP alone does not increase the volatility of the market.

Impact

The data is exclusive to the European Union and is released by the Federal Statistical Office. The impact of HICP on the currency market is negligible.

Harmonized Consumer Prices Report June

Below is the report of HICP for the month of June released in July. As per the data, the HICP increased from 108.47 to 108.58.

EURUSD – Before the Announcement

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

EURUSD – After the Announcement

On the day of the announcement of the report, the prices retraced in the first half of the day and shot north aggressively and made a new higher high during the New York session. On the volumes side, there was feeble volatility in the Asian and European sessions, while it increased with the open of the US markets. That said, the increase in the volatility was not abnormal, which is typically seen during the release of major economic reports.

EURAUD – Before the Announcement

Before the report was released, the market was moving in an inclined channel showing EUR strength.

EURAUD – After the Announcement

After the report came out, the price break through the channeling market and began to trend. By the end of the day, the EURAUD price was up 0.65% from the previous day. This bullishness could perhaps be from the incident HICP report. However, the subsequent day, the market lost all its gains.

EURNZD – Before the Announcement

Prior to the announcement of the report, the market which was consolidating had begun to show mild bullishness.

EURNZD – After the Announcement

On the day the news was announced, the price continued to rise higher and higher for the entire day. In fact, EURNZD outperformed both EURUSD and EURAUD. There would be several factors that could’ve inflated the price, but a moderate effect could be through the positive HICP news. On the volatility side, there was no aggressive rise in volatility. However, the volume significantly increased during the North American session.

Thus, traders can analyze the technical factors of the market and open positions without any hesitation from the HICP report. That said, conservative traders may wait for the reports to be released, and then enter if the report is in favor of their speculated direction.

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Forex Fundamental Analysis

Minimum Wages – Understanding This Macro Economic Indicator

Introduction

Introduction

Introduction

Minimum Wages are essential for protecting citizens and ensuring that everyone gets a fair share of the fruits of the progress made. Minimum Wages act as the foundation for everyone at the entry-level to compete equally to the top. Minimum Wages are used by a majority of the countries across the world. Understanding Minimum Wages and its importance can help us better understand improvement in people’s living standards over time alongside the country’s economic growth.

What are Minimum Wages?

The International Labor Organization (ILO) defines Minimum Wages as “the minimum amount of remuneration that an employer is required to pay wage earners for the work performed during a given period, which cannot be reduced by collective agreement or an individual contract.” It is the least money paid out for work as a wage over a given period. It cannot be lowered by mutual understanding nor through a legal agreement. Hence, it is the lowest remuneration that an employer can give their employees.

The Minimum Wage can be set by a statute, wage board or council, competent authority decision, industrial or labor courts, tribunals, or law enforced collective arguments. Most countries had introduced the Minimum Wages by the end of the twentieth century.

Minimum Wages initially started off to stop exploiting workers in sweatshops (places with unacceptable working conditions, potentially illegal and dangerous). Owners at such places generally had dominion over that workplace and people working. But later on, it became a means to help uplift the lower-income families. Minimum Wages were first incorporated by New Zealand in 1894, followed by many other countries gradually.

How can the Minimum Wage numbers be used for analysis?

Minimum Wages acted as the price floor beneath which a worker may not sell their labor. The purpose of Minimum Wages is to set a barrier to exploiting the labor force through unduly low wages for their work. It will ensure a just and equitable way of distributing the returns on the progress made collectively. It will also ensure people receive the money required to sustain a living and act as legal protection for people who need it.

Minimum Wages are also used as part of a policy to eradicate poverty. It also helps curb inequality amongst employees based on age, sex, or race for the work of equal value done. Minimum Wages also acts as a floor for wage negotiations and collective agreements. Any negotiation always has a legal and reasonable base, only above which all negotiations can take place and shall not fall below it.

The effect of increasing the Minimum Wage had a negligible impact on the employment rate in general. Still, cost-cutting in other sectors and the profitability of the company become vulnerable. Minimum Wage level adjustments are deemed to be made from time to time, meaning whenever the board feels it is needed based on the cost-of-living indices. Most countries adjust their Minimum Wages yearly, some do on a six-month basis, and some do it on a two-year basis.

Inflation and Cost-of-Living fluctuations erode the purchasing and protection power of the Minimum Wage. At such times, unscheduled interventions become essential to keep protecting the labor force.

Fixing Minimum Wage too low defeats the very purpose for which they were set and too high creates a significant impact on employment, worsening the situation. Careful and objective decisions have to be made to set and adjust Minimum Wages periodically as per economic conditions.

Setting too low could constrain consumer spending, which is terrible for the economy as it fuels the GDP. Setting too high could trigger inflation on subsequent levels, hurting exports, decreasing profit margins, and reducing employment.

The ILO deems the following three economic factors to take into account to set Minimum Wages: economic development requirements, productivity levels, and desirability of achieving and maintaining high levels of employment. All the factors are correlated and have to be set to optimize all three economic factors.

The ratio of Minimum to Average Wage is also used to understand wage inequality among laborers within an organization. In developed economies, Minimum Wages generally range 35 to 60 percent of the Median Wage. In developing economies, the percentage is even higher, indicating higher-level workers are relatively underpaid. Minimum Wage at aggregated levels classified based on regions can also help central authorities to identify lagging states or regions, where the standard of living can be improved and economic backwardness eradicated.

Images Credit: International Labour Organization

Impact on Currency

Minimum Wages changes are often annual and do not have an impact on currency markets as it pertains to a particular section of working-class people. Minimum Wage is a low impact lagging indicator and does not deem any importance in the currency markets.

It is useful for central authorities and vulnerable workgroups to raise their living standards and maintain economic equality. When everyone is treated justly in terms of wages, economic growth is not crippled by exploitation and discrimination.

Economic Reports

In the United States, the Department of Labor enforces the Fair Labor Standards Act (FLSA) and sets the Minimum Wage and overtime pay standards. It is enforced by the Department’s Wage and Hour Division. Annual revisions to the same are made and announced, if any.

Sources of Minimum Wages

  • Minimum Wage details set by the Department of Labor is available here.
  • The OECD also maintains the same as Real Minimum Wages.
  • Consolidated reports of Minimum Wages of most countries can be found on Trading Economics.
  • We can find guidelines on setting the Minimum Wage and various nuances associated with it on ILO.

Minimum Wages Announcement – Impact due to news release

The Minimum Wage is an employees’ base rate of pay for ordinary hours worked. It is dependent on the industrial policies that apply to their employment. Employees cannot be paid less than their Minimum Wage, even if they agree to receive it.

Every year, the work commission reviews the minimum wages received by employees in the national workplace system and then submits it to the government’s labor ministry. Looking at the suggestions mentioned, the government increases the minimum wages for workers of the nation. Minimum wages have little impact on the value of a currency as it does not considerably affect the industrial output and the economy.

The below image shows that the weekly wages were increased for Australian employees in 2020. Although the difference is not huge, it still is a positive step taken for the daily wage workers. Looking at the data, we should not expect significant volatility in the currency pairs during the announcement.

AUD/EUR | Before the announcement

In the above image of the AUD/EUR 1-hour timeframe chart, we try to establish potential trading opportunities. The pair has been ranging for the past three days before June 19th, 2020.

AUD/EUR | After the announcement

The above image highlights the news announcement day. It may seem there was a small uptrend that was built was erased in the second half of the day. An increase in the minimum wages in favor of AUD did not break the trend established a few days earlier. The pair continues its range post the announcement day also.

AUD/USD | Before the announcement

The above image highlights the AUD/USD pair a few days before the news announcement day. No trend has been established as of now.

AUD/USD | After the announcement

The above image highlights the news announcement day, and we see a similar pattern to the AUD/EUR. We see it is in the typical volatility range of the AUD/USD. The news announcement did not help AUD break the previous and post ranging trend here also.

AUD/CHF | Before the announcement

The above image is AUD/CHF pair, and here also, no potential trading opportunities are building up until June 19th, 2020.

AUD/CHF | After the announcement

The above image highlights the news announcement, and we see that the news did not move the currency in favor of AUD. The AUD/CHF continued to stay in the same range as before the news release day.

Overall, in all the three scenarios, we see the minimum wage economic indicator despite coming in favor of AUD; the market impact was negligible. The market is aware that it is a low impact indicator and affects only a specific section of the labor force.

Hence, changes in minimum wages of a country do not translate to its currency volatility, as already confirmed through our fundamental analysis. Moreover, it is a yearly statistic, and the corresponding effects of increased minimum wages will be captured through monthly indicators better.

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Forex Fundamental Analysis

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

Introduction

Introduction

Introduction

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

What are Labor Costs?

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

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

Labor costs are broadly categorized into the following two categories:

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

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

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

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

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

How can the Labor Costs numbers be used for analysis?

Labor costs are affected by the following factors:

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

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

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

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

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

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

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

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

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

Impact on Currency

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

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

Economic Reports

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

Sources of Labor Costs

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

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

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

Labor Costs Announcement – Impact due to news release

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

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

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

NZD/USD | Before the announcement

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

NZD/USD | After the announcement

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

NZD/CAD | Before the announcement

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

NZD/CAD | After the announcement

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

NZD/EUR | Before the announcement

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

NZD/EUR | After the announcement

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

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

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Forex Fundamental Analysis

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

Introduction

Introduction

Introduction

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

What is Long Term Unemployment Rate?

Long-term unemployment

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

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

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

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

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

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

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

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

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

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

Chart Credit: OECD

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

Impact on Currency

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

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

Economic Reports

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

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

Sources of Long Term Unemployment Rate

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

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

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

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

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

AUD/USD | Before the announcement

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

AUD/USD | After the announcement

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

AUD/GBP | Before the announcement

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

AUD/GBP | After the announcement

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

AUD/EUR | Before the announcement

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

AUD/EUR | After the announcement

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

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

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Forex Fundamental Analysis

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

Introduction

Introduction

Introduction

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

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

What is the GDP per Capita?

GDP 

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

GDP Per Capita

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

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

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

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

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

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

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

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

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

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

Impact on Currency

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

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

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

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

Economic Reports

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

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

Sources of GDP per Capita

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

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

GDP & GNP – FREGDP per Capita

Real GDP per Capita – FRED

GDP per Capita – World Bank

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

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

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

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

USD/JPY | Before the announcement:

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

USD/JPY | After the announcement:

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

NZD/JPY | Before the announcement:

NZD/JPY | After the announcement:

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

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

EUR/JPY | Before the announcement:

EUR/JPY | After the announcement:

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

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

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

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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

‘GDP From Manufacturing’ – Understanding The Macro Economic Indicator & Its Impact

Introduction

Introduction

Introduction

GDP from Manufacturing is significant for many developing economies. It is their primary driver for economic growth to improve the standard of living and generate wealth. Manufacturing Sector has supported a large share of jobs in the economy. 

Manufacturing Sector has helped many economies to come out of underdeveloped status to developing nation status. Hence, understanding GDP from Manufacturing has varying significance in different countries is suitable for macroeconomic view in the international markets.

What is the GDP from Manufacturing?

Gross Domestic Product

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

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

Manufacturing

It is producing goods for use or sale labor, processing equipment, or machinery. It is a process that could be physical, chemical, or mechanical. The manufacturing sector mainly uses raw materials to make finished goods for consumption by end customers or intermediate goods for other manufacturing industries. For example, a car Manufacturing company could import raw iron ore metal, and process it to produce metal car body parts.

In the lifecycle of a finished good, the Manufacturing comes in as the second stage in the supply chain right after the source of raw materials. The manufacturing sector includes plants, factories, mills, and generally use power-driven machinery in their process. The manufacturing sector can also include small businesses, or home startups like bakeries, candy stores, or custom tailors, etc.

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

Manufacturing is an essential component of GDP. In the United States, it contributed 11.6% of total GDP. Manufactured products make up half of the total United States exports. In the United States alone, the Manufacturing Sector has 12.85 million jobs, about 8.5% of the total workforce. The importance of the Manufacturing Sector is evident from the rapidly developing economies like China, Japan, and India. 

The industrialization has been the main propellent for economic growth in these countries that put them back on the map. With export-led growth, China has primarily used Manufacturing Sectors to achieve growth rates of 10% and above to catch up with the advanced economies like the United Kingdom, and the United States. Manufacturing Sector is a labor-intensive sector, and it requires skilled labor. Despite the advent of modern technologies, equipment, and automated machinery, it still requires skilled laborers to fill the gaps.

Developing economies do not have a competitive edge over the developed economies in the services sector. But they do have the advantage in the Manufacturing and Industrial Sectors due to the availability of cheap labor. The low costs associated with a low standard of living and maintenance attracts business to establish their production centers in such countries. For example, an autoworker in Detroit makes 58 dollars an hour compared to 8 dollars in Mexico.

With an improved standard of living in developed economies like the United States, the cost of labor is high in comparison. It is the primary reason for the decline in the Manufacturing Sector growth in the developed economies for over two decades, paired with rapid growth in developing economies during the same period. 

With many developed economies transitioning more into the services sector, the Manufacturing Sector has lost its fair share in developed economies while developing ones like China have significantly increased their Manufacturing Industry production levels. 

About Thirty percent of the GDP of China comes from the Manufacturing Sector alone. Hence, we can understand that the Manufacturing Sector is the primary source of growth for many developing countries. The above plot shows the increase in Manufacturing Production in China. It is steady and steep growth. The vertical axis is plotted in CNY HML (Chinese Yuan Hundred Millions).

As the countries develop, they start to get involved in the Service sector by investing the wealth generated from the Manufacturing Sector to come on par with developed economies and establish a total equilibrium. But there is a long way to go before all developing economies become developed.

Impact on Currency

The GDP from Manufacturing 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 Manufacturing does not paint the full picture of the economy. It can be an essential tool for the Central Authorities to keep track of Manufacturing Sector performance and its implications to the economy.

As established, the Manufacturing Sector is a significant contributor to economic growth for developing economies. Hence, changes in this sector widely affect the overall economic health, and all the dependent industries therein. It is a proportional and lagging indicator. Higher GDP from Manufacturing 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 Manufacturing figures. We can also go through GDP by Industry to get the Manufacturing Industry performance in the report. The World Bank actively maintains track of GDP by Sector figures of most countries on its official website.

Sources of GDP from Manufacturing

For the United States, the BEA reports are available below: 

World Bank also maintains the Manufacturing Sector’s contribution as a percentage of GDP on its official website, as given below for reference. ‘GDP From Manufacturing’ of various economies can be found here.

Impact of the ‘GDP from Manufacturing’ news release on the price charts

The manufacturing sector is crucial for the development of a country. The growth of machinery output and technological improvements are the main drivers of economic growth. The service sector, too, is dependent on most of the manufactured goods. Manufacturing also revives the economy by creating tens of millions of new jobs, eradicating recession.

Therefore, the manufacturing sector contributes a significant part of the GDP of a country. When we drill down to the fundamental analysis of the currency, investors do not look at the manufacturing sector’s contribution alone but consider the distinct GDP as the leading indicator of economic growth.

For example, we will be analyzing the influence of GDP on various currency pairs and see the impact it makes on the value of a currency. The below image displays the previous and latest GDP in the United Kingdom released in May, where we see a significant drop in the GDP compared to the previous month. Let us find out if the market reacts positively or negatively to the news release.  

GBP/USD | Before the announcement:

We shall start our analysis with the GBP/USD currency pair, where the above image shows the properties of the pair before the news announcement. We can see in the above image that the market is in a downtrend, and recently the price has been moving within a ‘range.’ Since the GDP announcement is a high impact event, we should wait for the news release to clarify the direction of the market.  

GBP/USD | After the announcement:

After the news announcement, we witness a slight amount of volatility in the currency pair where the price initially goes up, and later it closes with a wick on the top. We do not observe the kind of impact that was expected due to the news release may be because the market had already priced in a negative outlook. Since the impact was less, we should look to trade the currency pair based on technical indicators and chart patterns.     

GBP/CAD | Before the announcement:

GBP/CAD | After the announcement:

The above images represent the GBP/CAD currency pair, where we see in the first image that the market seems to be resuming the downtrend after a price retracement to the resistance. Given that the impact of GDP announcement is high, we will look to take a ‘short’ only after confirmation from the market. There is a probability that the market may turn to the upside from this point if the news comes out to be positive for the British Pound.

After the news announcement, we see that the price rises above the moving average, and it closes with some bullishness. Even though the GDP data was fragile, traders bought British Pound and strengthened the currency. One of the reasons could be that the market has factored in the negative expectations, which led to a positive reaction after the news release. One should analyze the pair technically before taking a position in the currency.  

EUR/GBP | Before the announcement:

EUR/GBP | After the announcement:

The above images are of the NZD/GBP currency pair, where we see that the market is in a steady uptrend before the news announcement, signifying the enormous amount of weakness in the British Pound. Ideally, we will be looking to buy the currency pair after a suitable price retracement to the ‘support’ or ‘demand’ area. By the way, we should also not forget that the news release can reverse the trend.

After the news announcement, we see that the market reacts negatively to the news release but positive for the British Pound since it is on the right-hand side of the currency. The volatility slightly increases to the downside, which is evident from bearish ‘news candle.’

That’s about ‘GDP from Manufacturing’ and its influence 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

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

Introduction 

Introduction 

Introduction 

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

What is Gross Fixed Capital Formation?

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

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

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

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

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

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

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

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

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

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

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

Impact on Currency

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

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

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

Economic Reports

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

Sources of Gross Fixed Capital Formation

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

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

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

GFCF – Trading Economics

GFCF – World Bank

GFCF – United Nations

GFCF – IMF

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

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

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

USD/JPY | Before the announcement:

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

USD/JPY | After the announcement:

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

GBP/JPY | Before the announcement:

GBP/JPY | After the announcement:

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

CAD/JPY | Before the announcement:

CAD/JPY | After the announcement:

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

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

Categories
Forex Fundamental Analysis

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!

Categories
Forex Fundamental Analysis

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

Introduction

Introduction

Introduction

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

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

What is GDP Constant Prices Indicator?

Gross Domestic Product (GDP) 

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

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

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

GDP Constant Prices

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

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

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

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

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

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

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

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

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

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

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

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

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

Impact on Currency

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

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

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

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

Economic Reports

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

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

Sources of GDP Constant Prices

For the United States, the BEA reports are available here 

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

GDP & GNP – FRED

Real GDP – FRED

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

GDP Constant Prices (2010 US$) – World Bank

OECD – GDP Constant Prices and other variants

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

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

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

USD/CAD | Before the announcement:

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

USD/CAD | After the announcement

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

GBP/CAD | Before the announcement:

GBP/CAD | After the announcement:

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

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

CAD/CHF | Before the announcement:

CAD/CHF | After the announcement:

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

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

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

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Forex Fundamental Analysis

Everything About ‘Changes in Inventories’ Macro Economic Indicator

Introduction

Introduction

Introduction

Changes in Inventories are one of the primary business leading economic indicators that can give us insight into economic prospects for the coming months. Understanding of Inventory Changes and Sales can help us forecast economic growth, which is our primary objective through Fundamental Analysis.

What are Changes in Inventories?

Inventory: It is the stock of goods that retailers, wholesalers, and manufacturers hold with them. Inventory is measured in their appropriate dollar values. Businesses often keep stock of their finished goods when they predict an increase in sales in the coming months so that they are ready to meet the increased demand and can lock in profits.

The Monthly Retail Trade Survey, the Manufacturer’s Shipments, Inventories, and Orders Survey, and the Monthly Wholesale Trade Survey are the primary sources from which Business Inventory is compiled.

At the level of Retail Merchandise, Inventories are measured at cost level at the retailers as per the FIFO (first-in, first-out) method of valuation. At the Wholesalers who distribute goods to retailers, the inventories’ values are added to the business inventories every month. At the manufacturer level, the inventories, whether in raw material, work-in-process or finished, are valued at cost, primarily by the FIFO method of valuation.

How can the Changes in Inventories numbers be used for analysis?

Business owners and retailers have a certain kind of acquaintance with market trends, and due to their years of experience running their business, they know the subtle trends of increase in sales, demand, etc. Hence, Businesses stocking up on inventories is not a joke, as it costs them real money for producing as well as holding the stocks. If they did not forecast an increase, they would not have increased inventories in the first place.

Seasonally Adjusted Inventory Changes can thus act as a leading indicator for the increase in consumer consumption, which is good for business, and the economy. On the other hand, increased inventory figures could also indicate that the sales have fallen, and thus creating an inventory stockpile, which indicates decreased consumer spending, which signals terrible times for the economy are ahead.

Hence, it is often essential to combine Inventory figures with Retail Sales figures to correctly gauge the economic trend. Retail Sales figures indicate actual consumption of goods by consumers and hence is the more accurate figure when compared to Changes in Inventories.

An increase in Manufacturing Production is followed by an increase in Inventory. It is then followed by an increase in Retail Sales. The first two stages, i.e., increase in Manufacturing Production and Inventory Changes, are still forecast, i.e., the rolled dice can turn either way. But Retail Sales is a guaranteed economic indicator, as money comes back into the pockets of retailers and manufacturers.

Hence, the more commonly watched statistic out of the business inventories figures is the Inventory-to Sales Ratio. It is the ratio of Inventory value to Retail Sales figures. It gives us an indication, by how many times the inventories outpace the Retail Sales. The lesser the number, the better.

For example, an Inventory-to-Sales Ratio of 2.5 indicates that there is enough inventory stock to supply 2.5 months of Retail Sales. When the ratio increases, it is an indication that the inventories are increasing in contrast to the sales, which indicates the economy is slowing down. The upcoming Production activity would be reduced until the current Inventory stock starts to deplete off. On the other hand, when the ratio is falling, it is indicative of manufacturers to increase production activity to the oncoming increase in demand.

Inventories are primarily concerned with the Manufacturing Sector, which accounts for 20% of GDP in the United States. It drives a significant portion nonetheless.  An increase in manufacturing activity as a consequence of decreasing ratio figures can add to employment, or even wage growth, which is good for the economy. Increased employment further stimulates Consumer Spending as more people have the cash to spend, which cyclically boosts the economy.

Impact on Currency

Changes in Inventory figures can be leading indicators. If correctly put, way too leading. It means that the changes in inventories are figures at the start of the manufacturing process-consumer purchase lifecycle. The indicator has two-way conclusions to be drawn, as discussed above. Hence, the traders who are not well versed with the industry should use this indicator with caution, as an increase in Inventory can mean slowdown or expected growth both.

Only investors or traders who have a historical perspective of the figures can use this indicator effectively to predict growth months ahead of the market. In general, the market follows Retail Sales and Ratio as reliable metrics, and hence there are significant moves in the market around these figures. Hence, although a leading indicator of economic growth, it is advised to combine it with Retail Sales figures to affirm your assessment of economic activity.

Economic Reports

In the United States, the Bureau of Economic Analysis releases quarterly reports of the GDP, wherein the section of “Key Sources and Assumptions” contains the details of “Changes in Private Inventories.” The BEA publishes quarterly reports on its official website after every quarter. The release dates are also posted on its official website.

The United States Census Bureau maintains the Manufacturing & Trade Inventories on its official website.

Sources of Changes in Inventories

BEA – Gross Domestic Product

The St. Louis FRED website makes the search and analysis of Inventories data from BEA a lot easier. The links are given below

Change in Private Real Inventories – FRED

Change in Private Inventories – FRED

Census Bureau – Inventory

Census Bureau – Shipment, Inventory, and Orders

Inventory data for various countries are available in statistical and list format here.

Impact of the ‘Change in Inventory’ news release on the Forex market

The Change in Inventory measures the value of change in producer-owned inventories between the beginning and the end of the calendar year. For businesses, the build-up of inventories can be a threat. The problem is that these inventories will probably be cut in the future, depressing demand for goods and leading to production cutbacks. In hard times, managers work hard to cut back on inventories. All companies need to be prepared for business cycles, which is driven by inventory swings. Companies must try to reduce their inventories by reevaluating their practices.

In today’s lesson, we will analyze the change in inventory levels of many agricultural commodities, particularly grains, that are produced in a given year and stored or held until they are marketed. The annual value of inventory change represents the gross value of agricultural production. The below image shows the net Change in Inventory from 2017 to 2018 in the agricultural sector of Canada. This value has been estimated for durum wheat, oats, rye, corn, soybean, potatoes, tobacco, and many other commodities. Let us find out how the market responds to this data.

USD/CAD | Before the announcement:

Let us start with the USD/CAD currency pair in order to observe the impact of the Change Inventory on the Canadian dollar. In the above image, we see that the market is in moving within a ‘range,’ and currently, the price is at the top of the ‘range.’ Since the impact of this news event is less on a currency, aggressive traders can take ‘short’ positions with a large stop loss.

USD/CAD | After the announcement:

After the news announcement, the market moves lower, and the price reaches to the moving average. The bearish ‘news candle’ indicates that the Change in Inventory data was positive for the Canadian economy, which resulted in the strengthening of the currency. The close of ‘news candle’ is a confirmation sign of a down move. Thus, one could take a risk-free ‘short’ position soon after the news release.

CAD/JPY | Before the announcement:

CAD/JPY | After the announcement:

The above images represent the CAD/JPY currency pair, where we see that before the news announcement, the market seems to be moving in a ‘channel’ with the price presently is at the bottom of the ‘channel.’ Since the Canadian dollar is on the left-hand side of the currency pair, an upward channel signifies strength in the currency. Therefore, traders who trade channel can buy the currency pair with a stop loss below an appropriate technical level.

After the news announcement, the price moves higher, and volatility expands on the upside. The ‘news candle’ closes with a fair amount of bullishness as a result of better than expected Change in Inventory data. At this point, once could confidently take a ‘long’ position with a target up to the higher end of the ‘channel.’

GBP/CAD | Before the announcement:

GBP/CAD | After the announcement:

The above images are that of GBP/CAD currency pair, where we can see in the first image that the market is in a strong uptrend, which signifies the great amount of weakness in the Canadian dollar. Technically, we should be looking to buy the currency pair after a price retracement to a ‘support’ or ‘demand’ area. Until then, we will be monitoring the impact of the news release.

After the news announcement, volatility slightly increases to the downside, and we witness a fall in the price. However, the Change in Inventory does not have a major on the currency pair where the Canadian dollar strengthens only momentarily. One needs to still wait for a pullback in order to join the uptrend.

That’s about the ‘Change in Inventory’ 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

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 Fundamental Analysis

Did You Know That ‘Internet Speed’ Of A Nation Is Also Considered A Forex Fundamental Driver?

What is Internet Speed?

What is Internet Speed?

What is Internet Speed?

Internet Speed refers to the speed at which data, voice, and video travel long distances. This is achieved with the help of broadband. Broadband refers to the transmission technologies used to transmit the internet. The term is used to describe high-speed and high-bandwidth communication infrastructure. Without broadband, it is not possible to attain high-speed internet at any cost. The common medium of transmission technologies includes coaxial cable, fiber optic cable, and radio waves.

(Source: Statista.com)

Business and Internet Speed  

Companies accessing the internet is nothing new. In the 80s, banks and Wall Street began changing the way they dealt with information. Back then, internet-related tasks were accomplished with the help of a simple modem and dial-up connection. In today’s demand scenario, much faster and reliable systems of internet connection are required. Business owners and IT professionals have a lot to choose from.

High-speed internet leads to greater advantages for companies that rely on cloud-based apps and data. According to the study conducted by an international group, a city with high-speed internet, over a gigabit connection, has an overall healthier economy. The research was carried out by comparing 14 metropolitan areas where more than half the population has access to high-speed internet with that of 40 neighboring cities without high-speed internet.

It was reported that cities that had gigabit connections, like the fiber optics, can support a 1.1% higher gross domestic product than other “slower internet” cities. A 1.1% contribution might soundless, but when this is seen in the context of developed countries that grow a minimum of 1-2% every year, one can estimate how significantly it can impact economic growth. It could mean up to $1.5 billion in the local economy.

Importance of High-Speed Internet

On a global level, increasing internet speeds have the power to transform whole economies. During the keynote speech at Broadband World Forum, Johan Wiberg (Head of Business Unit Network, Ericsson) described that when more and more people begin to have access to high-speed internet and mobile broadband, people will find new ways to conduct the businesses.

High internet speed has the power to spur economic growth by creating efficient systems for businesses and consumers. It opens up opportunities for more advanced online services, smarter utility services, and telecommunication. In healthcare, for instance, innovative mobile applications will be used by nearly 800 million people.

But when it comes to high-speed internet, it is not easy to launch into an area overnight. It takes effort from companies and governments to introduce data and wi-fi connectivity in rural areas. Hence, the positive effects of these new technologies are hard to see right away. As more and more businesses get access to high-speed internet, whole verticals of the economy will transform.

With these effects sounding exciting, one shouldn’t expect higher income levels with the introduction of high-speed internet in our communities. When governments and policymakers fully comprehend the importance of digital highways, it is then we can find drastic changes in the economy in no time.

Countries with Fastest Internet around the World

Taiwan has the fastest internet with an average speed of 85Mbps, followed by Singapore, Jersey, Sweden, and Denmark. While Yemen has the slowest internet in the world with an average speed of just 0.38Mbps. Thirty-seven of the fifty fastest internet countries are located in Europe, with 10 in Asia, 2 in North America, and just 1 in Africa. The global internet speed is getting faster.

The previous year, global average internet speed was 9.1Mbps while this year, the global average is 11.03Mbps, a rise of more than 20%. Generally speaking, countries which have the fastest internet speeds are the ones which are small and developed. The larger & less developed a nation is, the slower will be the internet.

By looking at the present statistics, we can say that there is little change in development, availability, and rollout of faster infrastructure in the bottom half of the ranking compared to the top half.

Below is the avg Internet Speed of different countries in the world (In terms of MBPS)

(Source – Fastmetrics)

Impact on Currency 

Temporary internet shutdown in a high connectivity country is estimated to have a GDP impact per 10 million people per day of $23.5 million on average. The average impact in a medium connectivity country would be an estimated $6.5 million and $0.6 million of GDP, respectively. Therefore, Internet Speed does impact the value of the currency as well. But it does not an immediate impact, rather the effect is felt on a longer-term.

Sources of information on Internet Speed

There are many speed testing websites that calculate internet speed and keep them updated every few minutes. However, this information cannot be found on most of the economic websites as it is a very important economic indicator for traders. The website of telecommunication ministry is also a source of information on the internet and broadband.

Links to Internet Speed information sources

GBP (Sterling) – https://tradingeconomics.com/united-states/internet-speed

AUD – https://tradingeconomics.com/australia/internet-speed

USD – https://tradingeconomics.com/united-states/internet-speed

CAD – https://tradingeconomics.com/canada/internet-speed

JPY – https://tradingeconomics.com/japan/internet-speed

CHF – https://tradingeconomics.com/switzerland/internet-speed

Final Words

Broadband has created new sectors and redefined the old ones. The music industry, for example, after years of declining sales, is growing rapidly after the adoption of digital distribution models. All this is possible only with the help of fast internet. As broadband becomes abundant and faster, everything from retail to government services finds new ways to reinvent themselves, especially in knowledge-based sectors where such speed and efficiency can enhance competitiveness.

Digital infrastructure opens up possibilities for more advanced online services, smarter utility services, e-health, telecommunication, and telepresence. All are dependent on high-speed broadband networks. Hence Internet Speed of a nation pays a key role in determining how advanced the country is in terms of technology as well.

Having that said, the news release of Internet Speed figures for different countries doesn’t really affect the Forex price charts in any way. Hence, technical analysts can ignore this fundamental driver’s news announcements. Cheers!

Categories
Forex Daily Topic Forex Fundamental Analysis

How Important Is ‘Corporate Profits’ Economic Indicator In Determining A Nation’s Economy?

What is Corporate Profit?

What is Corporate Profit?

What is Corporate Profit?

Corporate profit is the money left after the company pays all its expenses and taxes. The money that is collected by the company after selling all products and services during the specified period is considered as line revenue. From this revenue, various deductions happen in the form of tax and salaries, to name a few. Money left over after all the expenses are paid considered to be the company’s profit. The profit earned by the company is an important parameter when it comes to the fundamental analysis of a company.

How is Corporate Profit measured?

The corporate profit economic indicator calculates the net income of a company that is measured by considering the following factors:

Profits from present production – This type of profit is gained from two components. First, the income that is gained after inventory replacement is included in this, and secondly, the income statement depreciation is considered. This type of profit is also known as operating or economic profit.

Profit on books – The profit earned from net income minus inventory and depreciation adjustment is known as book profits.

Profit after-tax – Book profit after the tax deduction is called profit after-tax. This type of profit is believed to be the most relevant number when calculating corporate profit.

Real Corporate Profit

Corporate profits are one of the most studied data of a company. It also plays a major role in other financial measures of the country. Profit is not a measure of the amount of cash a company earned in a given period. We need to understand the income statement that includes non-cash expenses as well. It is also important to understand the changes in accounting methods that have influenced the profit margins.

These are some hidden charges that are directly deducted from the net profit. Therefore, it is often more appropriate to consider profit as a percentage of sales when comparing one company to another. Remember, a comparison between companies should be made among companies within the same industry, and the net profit should be seen in this context.

Analyzing corporate profits

Corporate profit is nothing but a company’s income and the one that is directly reflected in the official statement. Hence, they are one of the most important things to consider when investing in the shares of a company. Increasing corporate profits means either increasing corporate spending, growth in retained earnings, or increasing dividend payments to shareholders. All of these are positive steps taken by a company indicating growth.

The corporate profits data is most useful for an investor rather than a trader. It involves buying the shares of a company and holding them for a minimum of 3 months. An investor may also use this number to do performance analysis. If an individual notices an increase in the profit of a particular company while the overall corporate profits are declining, it could signal company strength. Alternatively, if an investor notices that the company’s profits are declining while overall profits are increasing, i.e., of the sector, a structural problem may exist in the company.

Economic reports

Corporate profits are through statistical reports that are published by the Bureau of Economic Analysis (BEA). It is a comprehensive report comprising of the company’s net revenue, earnings before tax, earnings after tax, corporate profits, expenditure, etc. Finally, the report summarises the net income of corporations in the National Income and Product Accounts (NIPA). One thing we have to make a note of here is that the corporate profit numbers derived from the NIPA, which is dependent on the GDP growth, are different from the profit statements released by the companies. So, while analyzing the data, we need to be cautious by looking at both the numbers and rely on the ones where the difference is not huge.

Impact on Currency

There might not be a direct relationship between corporate profits and the value of a currency as the former is more company-specific and represents a very small portion of the economy. However, an overall corporate profit that is a collective data of all companies affects the stock market. If the data is good, it means the manufacturing is growing and that domestic companies are generating profits. This, in turn, has a positive impact on the currency and leads to an appreciation of the domestic currency. However, if the collective data is negative, it can lead to depreciation of the currency in the long term.

Sources of information on Corporate Profits

Corporate tax data is released by the Bureau of Economic Analysis (BEA) quarterly on the official website. Another reliable source of information on corporate profits is the press release by the respective companies. The press releases can be found on the website of the stock exchange. Links to Corporate Profits sources

GBP (Sterling) – https://tradingeconomics.com/united-kingdom/corporate-profits

AUD – https://tradingeconomics.com/australia/corporate-profits

USD – https://tradingeconomics.com/united-states/corporate-profits

CAD – https://tradingeconomics.com/canada/corporate-profits

EUR – https://tradingeconomics.com/germany/corporate-profits

JPY – https://tradingeconomics.com/japan/corporate-profits

Corporate profits are a closely watched economic indicator by institutional investors. Profitability provides a summary of the company’s financial health and serves as an essential indicator of economic performance. Profits are retained earnings, providing much of the capital for investing in productive capacity. The estimates of profits and related measures are used to evaluate the effects on corporations of changes in economic policy and the financial condition of the country.

Impact of the ‘Corporate Profits’ news release on the Forex market

Corporate profit, also called net income, is the amount remaining within the company after all costs such as interests, taxes, and other expenses are deducted from total sales. It is also referred to as net profit or net earnings. A high cumulative corporate profit generally indicates that a company is running efficiently, providing value to its shareholders, and contributing towards the growth of the manufacturing sector.

It is significant because it shows how well the company has managed its costs. The corporate profit data is not that important for traders as it does not have a direct impact on the value of a currency. Hence, we should not expect high volatility in the currency after the news announcement.

In the following section of the article, we will be analyzing the impact of Corporate Profit on various currency pairs and analyze the change in volatility due to the news release. The below image shows the latest quarter’s corporate profit in Canada that was released in June. We see a major drop in profits compared to the previous quarter, which means companies were unable to make huge profits in this quarter. Let us find out the reaction of the market to this data.

USD/CAD | Before the announcement

We will first examine the USD/CAD currency pair to observe the impact of corporate profit on the Canadian dollar. The above image shows the state of the chart before the news announcement. We see that the pair is in a strong uptrend, and recently the price seems to be retracing. Our approach should be to ‘buy’ the currency pair as the major trend is up, but the price needs to retrace to an important technical level before we can buy. Let us see that if ‘news’ gives us that opportunity.

USD/CAD | After the announcement

After the news announcement, the price goes lower, and volatility increases to the downside. Even though the Corporate Profit data was awful for the economy, traders went ‘long’ in the Canadian dollar by selling U.S. dollars. The bearish news candle shows that the news candle did not have any adverse effect on the currency. Few hours after the news announcement, volatility continues to increase on the downside, and we witness large selling pressure in the market.

GBP/CAD | Before the announcement

GBP/CAD | After the announcement

The above images represent the GBP/CAD currency pair, where we see that before the news, the market is moving in a ‘range,’ and recently, the price has moved higher after reacting from the support. Since the impact of corporate profits is least on the currency, traders shouldn’t be scared of the news release and can take a position in the market according to their strategy.

After the news announcement, the market slightly moves lower, or even one could argue that the news release had a major impact on the currency. The corporate profit data had a minor impact on the currency pair, which lasted for a few minutes. Traders should analyze the pair technically and not be worried about news data.

CAD/CHF | Before the announcement

CAD/CHF | After the announcement

The above images are that of CAD/CHF currency pair, where we see that the market in a strong downtrend with some minor price retracement at the moment. We should be looking to go ‘short’ in the currency pair after the occurrence of the price continuation pattern in the market. However, if the price continues to move higher, the sell trade is off the table. Conservative traders can wait for the news release and then take a position based on the impact of the news.

After the news announcement, the price moves higher, and volatility expands on the upside. The small up move gets completely retraced by the immediate next candle, and the market continues to move lower. Hence, it is evident that the news has a negligible impact on the currency pair, where the overall trend of the market dominates the move after the announcement.

We hope you understood this Fundamental Indicator and its relative impact on the Forex price charts. All the best!

Categories
Forex Fundamental Analysis

Why Understanding ‘Corruption Index’ Is Crucial In Determining Economy’s Health?

Introduction To Corruption Index

Introduction To Corruption Index

Introduction To Corruption Index

The corruption index is a score that is given to the government of a country, which indicates the degree of corruption in the country. The value is assigned from 0 to 100, with 0 indicating high levels of corruption and 100 indicating low levels. The score is given by Transparency International, an organization that tries to stop bribery and other forms of corruption activities in the country. Transparency international started ranking in 1995, and today it scores more than 176 countries and territories.

The Corruption Index focusses on the public sector and evaluates the degree of corruption among public officials and politicians. In highly corrupt countries, the judiciary’s quality and independence are usually low, and official statistics try to underestimate the level of corruption to hide the bitter truth. The international agencies are a valuable alternative source of information to report the extent of illegal practices being done by civil servants and politicians in a given country.

Impact of corruption on the economy  

Most economists view corruption as a key obstacle to economic growth. It is seen as one of the reasons for low income and plays a critical role in generating poverty traps. It prevents economic and legal systems from functioning properly. Other effects are a misallocation of talent or human development, reduction in the incentive to accumulate “capital.”

Corruption hampers development by allowing agents to interfere in the usual functioning of the government. Economists believe that corruption is like a competitive auction; those who want a service, use the power of money to get it, and the result is an inefficient allocation of resources. The resources get used by people who do not deserve or are not meant to use it.

Contrary to this idea, some people argue that corruption ‘greases’ the wheels of development and that foster growth. The main idea is that corruption facilitates beneficial trades that otherwise would not have taken place. In this way, it promotes productivity by allowing individuals in the private sector to correct or avoid government failures of various sorts.

Limitations of Corruption Index

The index has been criticized lately based on its methodology used for ranking countries. Political scientists find some flaws in the way the corruption index is calculated. These flaws include:

  • Corruption data is too complex to be captured by a single source. For example, the type of corruption in rural Michigan will be different from that in the city administration of Chicago, yet the index measures them in the same way.
  • It is seen that the corruption index is influenced by perception about it. It means it is not measured by considering its real value, where the index may be reinforcing existing stereotypes and clichés.
  • The index only measures public sector corruption and ignores the private sector. This means the well-publicized scandals such as the Libor scandal, or the VW emissions scandal were not included in the corrupt segment.

 Analyzing the data

Corruption index is an important economic indicator that most economists and money managers look at before making investments. In recent times, it is making a huge impact on the economic development of a country. Thus, we need to understand how the data is analyzed. By comparing the two countries’ rankings, one can determine which of the two economies is stronger and enjoying investor confidence.

While analyzing the data, it important to keep in mind that economies of the same stature should be compared. We cannot compare the ranking of a developed country with that of a developing country. This is because corruption has a much greater impact on the growth rates of developing countries.

Impact on currency

Public corruption in emerging countries, especially, contributes to currency crises and put a major dent in the development of the country. Corruption acts repel stable forms of foreign investment and leave countries dependent on foreign bank loans to finance growth. Foreign investors refuse to put their money in developing countries where, for example, local bureaucrats accept bribes, and the government has been known to fall prey to businesspersons and builders.

A corrupt government may be undesirable for foreign direct investment (FDI), but it may not be equally disadvantageous when it comes to obtaining loans from international creditors. This is because governments of most countries offer considerably more insurance and protections to lenders than to direct investors. The result is a country with high debts and no foreign investment. Such an imbalance leaves an economy much more vulnerable to currency crises.

Sources of information on Corruption Index

The Corruption Index is published annually by Transparency International since 1995, which ranks countries by their perceived levels of corruption in the public sector. Transparency International is the official agency that keeps track of the corruption activities and wrongdoing of the government, which is reflected in the rankings. However, other economic websites measure corruption based on their parameters and factors. They also provide a statistical comparison of different countries with a clear graphical representation.

GBP (Sterling) – https://tradingeconomics.com/united-kingdom/corruption-index

AUD – https://tradingeconomics.com/australia/corruption-index

USD – https://tradingeconomics.com/united-states/corruption-index

CAD – https://tradingeconomics.com/canada/corruption-index

NZD – https://tradingeconomics.com/new-zealand/corruption-index

JPY – https://tradingeconomics.com/japan/corruption-index

The corruption index is gaining a lot of attention and importance around the world. Corruption decreases the amount of wealth in a country and lowers the standard of living. The economic impact of corruption is measured in two ways, first, the direct impact on the GDP growth rate and, secondly, an indirect impact on human development and capital inflow. The new methodology used by Transparency International uses four basic steps, including the selection of data, rescaling source data, aggregating the rescaled data, and a statistical measure indicating the level of certainty. The data collection and calculations are done by two in-house researchers and academicians.

Impact of Corruption Index’s news release on the Forex market 

The Corruption Perception Index (CPI) scores countries on how corrupt a country’s public sector is perceived to be by experts and business executives. It is a composite index, which is a combination of 13 surveys and assessments. The data is collected and compiled by a variety of reputed institutions.

The CPI is the widely used indicator of corruption all over the world. The corruption index is closely watched by investors who take investment decisions based on the ranking. However, it has a long-term impact on the currency, and the effect may not be seen immediately after the official news release.

In this section of the article, we will observe the impact of the CPI announcement on different currency pairs and witness the change in volatility due to the news release. For that purpose, we have collected the CPI ranking of Japan, where the below image shows Japan’s corruption score and rank in 2019. A score above 50 indicates low corruption levels and that the country’s government is clean.

USD/JPY | Before the announcement

Let us start our analysis with the USD/JPY currency pair and analyze the reaction of the market. The above image shows the daily time frame chart of the forex pair before the news announcement, where we see that the market is moving in a ‘range’ with the price at the top of the range. We will look to take a ‘short’ trade once we get confirmation from the market.

USD/JPY | After the announcement

After the news announcement, volatility increases to the downside, and the price falls drastically. The market reacted positively to the news data, where we see that the Japanese Yen gains strength after the news release. As the corruption index score was positive, traders strengthened the currency, as indicated by the large bearish ‘news candle.

GBP/JPY | Before the announcement

GBP/JPY | After the announcement

The above images represent the GBP/JPY currency pair, where we see that before the announcement, the market is in a strong uptrend, and recently the market has shown signs of reversal. We should be looking to sell the currency pair if the market is not able to move higher. However, we should wait for the news release to get a clear idea of the direction of the market.

After the news announcement, the market reacts similarly as in the previous currency pair, where the price moves lower and volatility expands to the downside. As the CPI data came out to be positive, traders sold British Pound and bought Japanese Yen, thereby strengthening the currency. At this moment, one can take risk-free ‘short’ trade with a stop loss above the ‘news candle.’

AUD/JPY | Before the announcement

AUD/JPY | After the announcement

Lastly, we will find out the impact on the AUD/JPY currency pair. The first image shows the characteristic of the chart before the news announcement, where it appears that the price is moving in a channel. One needs to be cautious before taking a ‘short’ trade as the price is at the bottom of the channel.

After the news announcement, the market gets a little volatile where we see that the price moves in both directions and finally closes near the opening. The overall reaction was bullish for the currency due to the healthy CPI data. The ‘news candle’ is not enough to confirm that the market is going lower as it has lower wick on the bottom, indicating buying pressure.

We hope you understood what ‘Corruption Index’ is and the impact on the Forex market after its news announcement. Cheers!

Categories
Forex Fundamental Analysis

Ease of Doing Business – Comprehending This Macro-Economic Indicator

What is the ‘Ease of Doing Business Index?’

What is the ‘Ease of Doing Business Index?’

What is the ‘Ease of Doing Business Index?’

The ease of doing business index was created jointly by two leading economists, namely Simeon Djankov and Gerhard Pohl from the Central and Eastern sector of the World Bank Group. It is an aggregate number that includes different parameters that define the ease of doing business in a country. The ease of doing business (EODB) measures the country’s position in offering the best regulatory practices. Though the World Bank started publishing the reports in 2003, the ranking only started only in 2006.

The EODB study captures the experience of small and medium-sized companies in a country with their regulators and the relationship with their customers, by measuring time, costs, and red tape they deal with. The goal of the World Bank is to provide an objective basis for understanding and to improve the regulatory environment for businesses worldwide.

Methodology

The survey consists of a questionnaire made by a team of experts with the assistance of academic advisors. The questionnaire consists of feedback on business cases that cover topics such as business location, size, and nature of its operations. This survey’s motive is to collect information that is affecting their business and not to measure conditions such as the nation’s proximity to large markets, quality of infrastructure, interest rates, and inflation.

The next step of the data-gathering process involves over 12,500 expert contributors such as lawyers and accountants from 190 countries in the survey to interact with the Doing Business team in conference calls, written reviews, and visits by the global team. Respondents fill out the surveys and provide information relevant to laws, regulations, and different fees charged.

A nation’s ranking is decided after assessing the following factors:

  • Starting a business – idea, time, procedure, and capital required to open a new business
  • Construction permits – permissions, land, and cost to build a warehouse
  • Electricity access – procedure, time and cost needed to obtain an electricity connection from the electricity board
  • Property registration- procedure, time, and cost required to register the warehouse with the local government body
  • Getting credit and loan – the process involved in getting credit from banks, and depth of credit information index
  • Investor protection – the extent of disclosure, liability, and ease of shareholder suits
  • Payment of taxes – tax filing process, preparation of tax filing and number of taxes paid
  • Cross border trading – number of documents required, and cost for import and export
  • Enforcing contracts – procedure, time, and cost to impose debt contract
  • Insolvency process – time, cost and recovery rate under a bankruptcy proceeding

Based on the score obtained in the above sub-indices, a country is assigned a rank in the ease of doing business index. The ease of doing business report is a complete assessment of competitiveness or the business environment. Still, rather it should be considered as a proxy of the regulatory framework faced by the private sector before starting a new business.

The Economic Reports

The ease of doing business reports is an annual report published by a team led by Djankov in 2003. The report is then elaborated by the World Bank Group that basically measures the costs firm is incurring for business operations. The World Bank report is, in fact, an important knowledgeable product in the field of private sector development. It has also motivated the design of various regulatory reforms in developing countries. The study presents a detailed study of costs, time, and procedures that a private firm is subject to before opening the company. This then creates rankings for a country.

Impact on Currency

The Doing Business report is used by policymakers, politicians and development experts, journalists, and, most importantly, the fund managers to understand the easiness of starting a business in the country. More companies mean more jobs, and more jobs mean faster development. Growth in the economy is directly related to the companies’ performance and the opening of new businesses. Therefore, when regulations are eased for starting a business, it contributes to the GDP of the country longer and increases the value of the currency in the international market.

Sources of information on Ease of Doing Business 

The ease of doing business report is one of the most sought reports in the finance industry, so many financial institutions and economic websites give mention ranking of a country after collecting the data from official sources. However, the data published by the World Bank is the most reliable and factual.

Sources

GBP (Sterling) – https://tradingeconomics.com/united-kingdom/ease-of-doing-business

AUD – https://tradingeconomics.com/australia/ease-of-doing-business

USD – https://tradingeconomics.com/united-states/ease-of-doing-business

CAD – https://tradingeconomics.com/canada/ease-of-doing-business

CHF – https://tradingeconomics.com/switzerland/ease-of-doing-business

JPY – https://tradingeconomics.com/japan/ease-of-doing-business

NZD – https://tradingeconomics.com/new-zealand/ease-of-doing-business

Ease of Doing Business report is one of the most discussed issues around the world. The report that is issued by the World Bank gets a lot of attention from the government around the world. For country authorities, it sheds light on regulatory aspects of their business climate. For business representatives, it helps initiate debates and dialogue about reform.

The private sector creates pressure on the respective government to ensure required reforms to indirectly improve the country’s rank in the EODB index. Investors take the decision of investment in a country based on the ranking of that country in the ease of doing business report. From the World Bank’s point of view, it demonstrates an unconditional ability to provide knowledge and resource information. This exercise by the World Bank generates information that is useful and relevant.

Impact due to news release

In the previous section of the article, we understood the definition of ‘Ease of Doing Business’ and the methodology used for ranking a country. Now we will extend our discussion in identifying the impact of the news announcement on the value of a currency. Many case studies tell correlation exists between ease of doing business and FDI flows.

One study finds that judicial independence and labor market flexibility are significantly associated with FDI flows. The number of procedures required to start a business and strength of the arbitration regime both have a significant and robust effect on FDI. Due to these reasons, foreign investors always invest in an economy where business activities can be carried out without any obstructions.

In today’s lesson, we will analyze the impact of ‘Ease of Doing Business’ on different currencies and analyze the change in volatility due to its news release. The below image is a graphical representation of Switzerland’s rank in 2018 and 2019. We see that the country had shown improvement in it’s ranking by two places. Let us find out the reaction of the market to this announcement.

USD/CHF | Before the announcement

Let us start with the USD/CHF currency pair to analyze the impact of the ‘Ease of Doing Business’ announcement. The above image is the daily time frame chart of the currency pair, where we can see that the pair is moving within a ‘range.’ Presently, the price is at a resistance area, which means sellers can push the price lower anytime soon. Therefore, we should be cautious before taking a ‘buy’ trade in this pair.

USD/CHF | After the announcement

After the news announcement, a slight amount of volatility is witnessed, which takes the price higher that results in the formation of a bullish ‘news candle.’ Since the Swiss Franc is on the left-hand side of the pair, a bullish candle indicates bearishness for the currency, and that is becoming weak. We can say that the news announcement a slight negative on the currency.

CAD/CHF | Before the announcement

CAD/CHF | After the announcement

The above images represent the CAD/CHF currency pair, where it appears that the market is moving in a channel before the news announcement. We should be looking to sell the currency pair as the price is at the top of the channel. However, the news announcement shall give us a clear direction of the market. We will not be taking any position before the news release as the news release has a moderate to high impact on the currency pair.

After the news announcement, the price moves a little higher and closes with some amount of bullishness. As the ‘ease of doing business’ was not so encouraging for the economy, traders went ‘short’ in Swiss Franc right after the news release. However, the effect does not last long, and the market collapses a couple of days later.

CHF/JPY | Before the announcement

CHF/JPY | After the announcement

The above images are that of the CHF/JPY currency pair, where we see a strong move to the upside before the news announcement, and currently, the price is at the resistance turned support area. There is a high chance of buyers becoming active at this point; hence, sell trades should be avoided.

After the news announcement, we witness some volatility in the market that takes the price lower but not by a lot. The impact was not great on this currency pair as the country slipped below by two places in the ‘ease of doing business’ ranking. When the impact of news settles down, one should start analyzing the pair technically and take the position accordingly.

That’s about the ‘Ease of Doing Business’ as an economic indicator and its relative impact on the Foreign Exchange market. Cheers!

Categories
Forex Daily Topic Forex Fundamental Analysis

Understanding The Importance Of ‘Terms Of Trade’ As A Macro Economic Indicator

Introduction

Introduction

Introduction

Terms of Trade is a direct and useful measure of an economy’s International Trade health and gives us a good measure of how fast capital is moving in or out of the country. Terms of Trade make analyzing Balance Of Payments and, more specifically, Current Account Balance easier. Understanding of Terms of Trade can help us better analyze the current liquidity of the economy and its changes in a more crude way.

What are Terms Of Trade Indices?

Terms of Trade is the ratio of its Export Prices and Import Prices. It is the ratio of money received on exports to money spent on imports. If there is an individual’s analogy to be made, then it would be the ratio of an individual’s monthly income to his monthly expenses. Mathematically, it would be the number of export goods that can be purchased per unit of import.

Terms of Trade ratio expressed in percentages, and hence the ratio is multiplied by a hundred. A TOT figure above100 indicates that the country is receiving more on its exports than on its income and vice-versa.

When a country has a TOT figure of more than 100, it means that it is receiving more capital on exports compared to sending capital out on imports. Hence, on an overall basis, capital is flowing into the country. Higher the ratio, the faster the rate at which capital flows into the country. It ultimately translates to the pace at which a country is becoming wealthy and liquid.

When a country has a TOT figure less than 100, it means capital is flowing out of the economy, and its import expenses exceed that of its export revenue generated. Continued periods of TOT figures less than 100 will drive the economy to a vicious debt cycle from which recovery may be difficult. The ratio will tell us how fast the capital is depleting from the economy and is nearing a financial crisis. Countries prefer to have a ratio above 100.

The ratio tells us the rate at which the economy is accumulating capital. On the global market place and International Trade, the ratio will determine what portion of the world’s wealth goes to each country. In other words, based on the demand and supply on the international markets, the ratio will tell us how profits from international trade will be distributed amongst the participating countries.

How can the Terms Of Trade numbers be used for analysis?

Since TOT is a ratio change in TOT, figures can imply multiple things. An improvement in TOT figure could mean:

  1. Export prices have increased in contrast to Import prices being stagnant or dropped.
  2. Export prices would have dropped but not as sharply as import prices. Both dropped but not to the same degree.
  3. Export prices would have stayed the same while Import prices would have dropped.

All the above scenarios can lead to an improvement in the TOT figure. Hence, simple changes in TOT figures cannot be directly used to draw economic conclusions. It is crucial to understand the factors that have resulted in a change in TOT numbers. It is crucial to know whether the change is a consequence of a short-term shock or development or a consistent long-term trend that will persist throughout the coming periods.

TOT is susceptible to multiple economic factors, some of which are:

Exchange rate: A decrease in exchange rate adversely affects imports and benefits exports and vice versa. Imports become costly, and exports become cheap, adversely affecting TOT.

Inflation: The inflation rate across different economies and different sectors affect different economies having different export and import portfolios. For example, a sharp increase in Iron Ore prices can greatly benefit Australia, whose chief exports are Iron Ore, while it can affect importing countries like China and Japan adversely. So inflation across sectors have different impacts across economies and within the country amongst different sectors.

Demand and Supply: Increase in demand, coupled with the availability of those resources also affects TOT as exports and imports are a function of demand and supply. Scarcity increases prices and oversupply decreases the same.

Quality of Produce: Size and quality affect the pricing of products. A high-quality product is likely to cost more and benefit the exporter more. Hence, the portfolio of the country’s exports and imports determines the TOT fluctuations of different product grades.

Trade Tariffs: Protectionist strategies from Governments lead to putting trade barriers on imports. The political and trade ties between countries can also affect the long term trend of TOT figures for a given economy.

Portfolio of Exports and Imports: What types of Goods and Services a country exports and imports also matter. Countries that export goods and services that are more of primary importance (ex: food and energy) tend to always have high demand and TOT ratio more than 100 both within the economy and on the global economy.

Impact on Currency

When the TOT figure is above a hundred, it implies domestic currency is flowing into the country and creating a deficiency in the global market. Hence, higher TOT figures will increase its currency demand and thereby leading to currency appreciation. On the other hand, a continued TOT less than 100 indicates the world is being supplied with domestic currency and therefore leads to currency depreciation.

It is a coincident indicator and is more useful as a long-term trend indicator rather than short-term changes. The indicators affecting TOT would have been identified through Trade agreements or other media sources in general and hence, is a mild-impact indicator.

Economic Reports 

The Bureau of Economic Analysis publishes its TOT figures in the National Income and Product Accounts every quarter of the year on its official website. Below is a figure for an illustration of the same:

We can also find the aggregated TOT reports for the OECD countries on the official website. The World Bank also aggregates and maintains TOT data for most countries on its official website.

Sources of Terms Of Trade

For the US, we can find the Terms of Trade in their National Income and Product Accounts here:

BEA – National Income and Product Accounts

OECD – Terms Of Trade

World Bank – TOT

We can also find Terms of Trade Index for many countries categorized here.

Impact of the ‘Capacity Utilization’ news release on the price charts

In the previous section of the article, we learned the Terms of Trade economic indicator and understood its significance in an economy. The ToT Index measures the ratio of an export to the price of an import, per commodity. A country that heavily relies heavily on exports, this number gives an important hint of the nation’s growth. Even though the Terms of Trade is useful in determining the balance of trade in a country, it does not have a major influence on the GDP of the economy. Therefore, investors don’t give much importance to the data during the fundamental analysis of a currency.

Today, we will be analyzing the impact on Terms of Trade on different pairs and witness the change in volatility due to the news release. The below image shows the latest Terms of Trade data of New Zealand that indicates an increase in the value compared to the previous quarter. A higher than expected reading is considered to be positive for the currency while a lower than expected reading is considered as negative. Let’s see how the market reacted to this data.

NZD/USD | Before the announcement:

We shall start with the NZD/USD currency pair to examine the impact of Terms of Trade on the New Zealand dollar. In the above price chart, we see that the market is in a strong downtrend before the news announcement with increased volatility. Currently, the price is at a key technical area, which is known as the ‘demand’ area, and hence we can expect buyers to come in the market at any moment. Thus, once needs to be cautious before taking a ‘short’ trade.

NZD/USD | After the announcement:

After the news announcement, the market moves lower and volatility increases to the downside. The Terms of Trade data showed an increase in the total percentage, but this was not good enough for the market players who apparently took the price down and weakened the New Zealand dollar. Although the ‘News Candle’ closes in red at the time of release, it gets immediately taken over by a bullish candle, as this was a ‘demand’ area.

NZD/JPY | Before the announcement:

NZD/JPY | After the announcement:

The above images represent the NZD/JPY currency pair, where we see that the characteristics of the chart are similar to that of the above-discussed pair. Before the news announcement, here too, the market is in a strong downtrend, and the volatility appears to be high on the downside. One thing that is different in this pair is that the price is presently at its lowest point and seems to have made a ‘lower low.’ This means New Zealand is weaker in this pair.

After the news announcement, market crashes and the price drops sharply. The Terms of Trade has a similar impact on the pair, where we see a further increase in volatility to the downside. Again. the weakness does not sustain, and the price shows a large bullish candle after the ‘news candle.’

NZD/CAD  | Before the announcement:

 

NZD/CAD  | After the announcement:

Lastly, we shall discuss the impact on the NZD/CAD currency pair and observe the change in volatility. Here, we see that the market is continuously moving lower before the news announcement indicating a great amount of weakness in the New Zealand dollar. Just before the news release, the price seems to be approaching the ‘demand’ area, which can possibly change the trend for a while by initiating some bullishness in the pair.

The Terms of Trade news announcement gets lukewarm from the reaction where the price initially moves higher little and finally closes forming a ‘Doji’ candlestick pattern. The news release leads to further weakening of the currency where the volatility expands on the downside.

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

Categories
Forex Fundamental Analysis

Significance Of ‘Wage Growth’ As A Forex Fundamental Driver

Introduction

Introduction

Introduction

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

What is Wage Growth?

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

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

Measuring Wage growth

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

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

Factors affecting Wage Growth Rate

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

Demand and Supply

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

Government Regulation

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

Training and Development Cost

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

The Economic Reports

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

Analyzing the DATA

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

Impact on Currency

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

Sources of information Wage Growth

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

Links to Wage Growth Information Sources   

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

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

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

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

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

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

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

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

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

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

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

USD/RUB | Before the announcement:

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

USD/RUB | After the announcement:

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

EUR/RUB | Before the announcement:

EUR/RUB | After the announcement:

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

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

GBP/RUB | Before the announcement:

GBP/RUB | After the announcement:

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

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

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

Categories
Forex Daily Topic Forex Fundamental Analysis

Importance Of ‘Construction Output’ As An Economic Indicator

Introduction

Introduction

Introduction

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

What is Construction Output?

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

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

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

(Picture Credits – Ons.gov)

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

How can the Construction Output numbers be used for analysis?

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

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

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

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

New Orders in the Construction Industry

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

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

Impact on Currency

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

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

Economic Reports

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

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

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

Sources of Construction Output

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

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

Construction Output reports for various countries are available here.

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

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

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

GBP/USD | Before the announcement:

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

GBP/USD | After the announcement:

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

GBP/AUD | Before the announcement:

GBP/AUD | After the announcement:

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

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

EUR/GBP | Before the announcement:

EUR/GBP | After the announcement:

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

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

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

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Forex Fundamental Analysis

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

Introduction

Introduction

Introduction

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

What is Employment?

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

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

How is the Employed Persons’ Statistic calculated?

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

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

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

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

Why is the Employment Situation important?

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

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

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

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

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

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

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

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

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

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

Sources of Employment Reports

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

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

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

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

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

EUR/CHF | Before the announcement:

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

EUR/CHF | After the announcement:

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

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

USD/CHF | Before the announcement:

USD/CHF | After the announcement:

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

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

GBP/CHF | Before the announcement:

GBP/CHF | After the announcement:

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

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

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

Categories
Forex Daily Topic Forex Fundamental Analysis

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

Introduction

Introduction

Introduction

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

What is Exports?

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

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

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

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

How can the Exports numbers be used for analysis?

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

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

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

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

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

Impact on Currency

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

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

Economic Reports

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

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

Sources of Exports

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

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

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

AUD/USD | Before the announcement:

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

AUD/USD | After the announcement:

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

AUD/NZD | Before the announcement:

AUD/NZD | After the announcement:

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

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

EUR/AUD | Before the announcement:

EUR/AUD | After the announcement:

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

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

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

Categories
Forex Basic Strategies Forex Daily Topic

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

Introduction

Introduction

Introduction

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

What is External Debt?

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

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

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

How can the External Debt numbers be used for analysis?

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

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

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

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

Impact on Currency

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

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

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

Economic Reports

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

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

Sources of External Debt

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

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

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

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

USD/SEK | Before the announcement:

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

USD/SEK | After the announcement:

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

EUR/SEK | Before the announcement:

EUR/SEK | After the announcement:

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

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

AUD/SEK | Before the announcement:

AUD/SEK | After the announcement:

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

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

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

Categories
Forex Daily Topic Forex Fundamental Analysis

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

Introduction

Introduction

Introduction

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

What is Fiscal Expenditure?

Fiscal Policy

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

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

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

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

Fiscal Expenditure

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

How can the Fiscal Expenditure numbers be used for analysis?

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

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

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

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

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

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

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

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

Impact on Currency

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

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

Economic Reports

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

Sources of Fiscal Expenditure

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

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

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

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

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

NZD/USD | Before the announcement:

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

NZD/USD | After the announcement:

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

GBP/NZD | Before the announcement:

GBP/NZD | After the announcement:

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

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

NZD/JPY | Before the announcement:

NZD/JPY | After the announcement:

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

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

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

Categories
Forex Fundamental Analysis

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

Introduction

Introduction

Introduction

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

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

What is Cement Production?

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

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

How can the Cement Production numbers be used for analysis?

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

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

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

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

(Source)

(Source)

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

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

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

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

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

(Source)

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

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

Impact on Currency

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

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

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

Economic Reports

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

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

Sources of Cement Production

Cement Production – National Bureau of Statistical of China

Global Cement Production – globalcement.com

Cement Production statistics for various countries can be found here

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

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

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

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

USD/INR | Before the announcement:

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

USD/INR | After the announcement:

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

GBP/INR | Before the announcement:

GBP/INR | After the announcement:

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

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

EUR/INR | Before the announcement:

EUR/INR | Before the announcement:

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

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

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

Categories
Forex Fundamental Analysis

‘Disposable Personal Income’ – Understanding The Macro Economic Indicator

Introduction

Introduction

Introduction

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

What is Disposable Personal Income?

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

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

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

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

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

Economic Reports

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

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

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

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

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

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

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

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

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

Impact on Currency

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

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

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

Sources of Disposable Personal Income Reports

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

Personal Income and Outlays

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

Disposable Personal Income – Seasonally Adjusted Quarterly

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

Personal Income – FRED

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

DPI Trading Economics

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

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

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

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

EUR/USD | Before the announcement:

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

EUR/USD | After the announcement:

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

USD/JPY | Before the announcement:

USD/JPY | After the announcement:

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

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

USD/HKD | Before the announcement:

USD/HKD | After the announcement:

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

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

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

Categories
Forex Fundamental Analysis

Importance Of ‘Housing Index’ In Gauging The Strength Of An Economy

Introduction

Introduction

Introduction

Housing Index is a broad and long term metric for investors and traders to judge the Housing Market in a country or specific region. There is a good correlation between the Housing Market, Stock Market, and economic growth. Housing Markets generally reflect the health and strength of the economy. Hence, the Housing Index serves as a pulse check or double-check for traders to affirm their economic assessments.

What is the Housing Index?

It is a measure of changes in the price movement of single-family houses. It generally measures the changes in residential housing prices as a percentage change from an index period (base period). The Housing Price Index for the base period is 100, and subsequent reports measure the change relative to this period.

For example, an HPI of 110 indicates a 10% appreciation in the single-family housing prices in a region. Hence, it is a direct measuring tool for housing price trends and serves as an indirect measurement tool for housing affordability, mortgage default rates, and prepayments, etc.  It is often expressed as change with regards to the previous month in percentage also.

Although different agencies are measuring the Housing trends, the most prevalent is the Housing Price Index by the Federal Housing Finance Agency in the United States. The FHFA HPI is a weighted, repeat sales index. It means it takes Houses that have also been refinanced into account. This data is obtained from reviewing the repeat mortgage transactions on single-family properties that have been securitized by Fannie Mae or Freddie Mac.

The HPI covers the entire 50 states, and also publishes for the nine Census Bureau Divisions, for Metropolitan Statistical Areas (MSA) and Divisions for more specific and detailed analysis.

How can the Housing Index numbers be used for analysis?

Housing Index is a widely used economic indicator by traders and investors. It gives a head check to the economic health of a country or region.

Generally, people buy houses through mortgages. When the Housing Price rises, it indicates that the market or citizens can pay for much higher rates. It indicates that the liquidity of the economy is good.

Secondly, people buy homes using mortgages most of the time, and it indicates the ease of obtaining a loan from banks at cheaper interest rates. It indicates that the bank has enough reserves to dish out mortgage loans at such low rates. It ultimately means the economy has an actively circulating wealth in the system.

Rising Housing Prices are accompanied by wage growth, employment in the construction industry, especially. It also stimulates confidence for the owners of Houses to know that they have a high-value asset with them that generally translates to increased consumer spending. Overall the total demand increases, boosting the economy and resulting in a higher GDP print.

When the Housing Prices fall, it indicates that consumers are less willing to purchase Houses as they are less confident about their future financial security. It can also indicate that banks are also lending at higher interest rates that are not affordable by middle and lower-middle-class families. The Housing Sector slowing down is a reflection of the economy in this sense. Slowdown accompanied by Mortgage defaults can be warning signs for investors, and traders about an oncoming slowdown or recession.

The below graph confirms our analysis as the housing prices fall during recession periods. As it can be seen that the Housing Index is not market sensitive and does not fluctuate to temporary shocks and instead, it has a trend that builds up over a time frame of certain months or years. Hence, it is a better tool for long term trends than a short-term trend.

Impact on Currency

The Housing Price Index is a coincident and lagging indicator in the short run, as it is a consequence of what has already happened in the economy. When the citizens feel confident about their financial security sufficiently, then only would they take a step to purchase a house. Hence, the Housing Price Index is a confirmation of a trend that would have been predicted by the leading economic indicators.

But for investors and traders who are looking for long term trends, the Housing Price Index acts as an efficient tool to assess current market prices and use it to predict the trend.

Potential shifts in the Housing Price Index can move the stock markets. The currency market movement depends on the strength of the economy.

When compared with indicators like Building Permits and Housing Starts, it relates to as a coincident indicator. In the long run, it can be used as a leading indicator to spot the trend that has already begun.

It is a proportional indicator, meaning when the Housing Price Index rises, it has a ripple effect through jobs, wages, and other industries related, and hence increased economic activity translates to higher GDP prints and appreciating currency.

Economic Reports

The Housing Price Index (HPI) is released by the Federal Housing Finance Agency (FHFA). It gets data from Fannie Mae and Freddie Mac, which are Government Sponsored Enterprises (GSE).

It releases monthly and quarterly reports for HPI on its official website. The dates for the subsequent year are already announced and are typically released at 9:00 AM on the specified date.

Many other agencies provide Housing Indices, one such popular one is the S&P’s Case-Shiller Index, which uses a slightly different approach in measuring the Housing Prices.

Sources of Housing Index

The Housing Price Index from FHFA is available here

All the current and previous reports are available here

We can find the different Housing Indices on the St. Louis FRED website here

We can find Housing statistics for various countries in the statistical form here

Impact of the ‘Housing Index’ news release on the Forex Market 

In the previous section, we discussed the House Price Index (HPI) economic indicator, which essentially is a measure of the single-family house prices movement, with mortgages backed by government-sponsored enterprises. This report helps to analyze the strength of the country’s housing market and the economy as a whole. The house price index contributes only a small portion of the GDP of the country. Thus investors do not give much importance to the news release.

In today’s example, we will be exploring the impact of the announcement of the U.S. House Price Index on different currency pairs and witness the change in volatility. A higher than expected number is considered to be positive for the currency, while a lower than expected reading is taken negatively. This report is published by the Federal Housing Finance Agency. The above image shows an increase in the value of the House Price Index from the previous month, which should be positive for the currency. Let us see how the market reacts to this data.

USD/JPY | Before the announcement:

Let’s begin with the USD/JPY currency pair and try to analyze the impact on the pair. As we can see in the above chart, the price is an overall uptrend and recently has retraced to a ‘demand’ area. Looking at the price, we can say that the price might move higher and continue the uptrend, but we need to wait and see if the news announcement causes major changes to the dynamics of the chart.

USD/JPY | After the announcement:

After the news announcement, the price sharply moves higher, and we see a bullish ‘news candle,’ indicating that the House Price Index data was positive for the economy. The volatility, which was quite less before the news release, suddenly increases to the upside after the release. This was a result of the increase in the House Price Index by 0.2% for the current month, which made traders go ‘long’ in the U.S. dollar. This is a confirmation sign that the market will further move up.

USD/CHF | Before the announcement:

USD/CHF | After the announcement:

The above images represent the USD/CHF currency pair where we that before the news announcement, the market is in a downtrend, and currently the price is at the lowest point. This means the U.S. dollar is showing weakness in this pair, or Swiss Franc is strong. When the price is strongly moving lower, it is not recommended to have any ‘buy’ positions as it could be very risky. Thus, it is better to wait for the news release and gain some clarity about the data. Based on the data, we can take a position in the market. After the news announcement, there is a sharp rise in the price and a spike in volatility to the upside. This again came from the fact that the House Price Index news data was better than last time, which brought cheer in the market and made investors buy more U.S. dollars. The bullish ‘news candle’ is a sign of trend reversal that could be extended further.

GBP/USD | Before the announcement:

GBP/USD | After the announcement:

The above images are that of the GBP/USD currency pair, where we see that the overall trend of the market is down, and recently the price has pulled back from its ‘lows.’ Here, since the U.S. dollar is on the right-hand side of the pair, a down-trending implies strength in the U.S. dollar. We will be looking to trade this pair after we see some trend continuation patterns in the market, indicating that the downtrend will continue. After the news announcement, the price falls by a good amount, and the volatility increases to the downside. The bearish ‘news candle’ signifies that the House Price Index news was positive for the economy that took the price lower and increased the selling pressure.

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

Categories
Forex Fundamental Analysis

The Significance of ‘Imports’ Data In Determining A Nation’s Economy

Introduction

Introduction

Introduction

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

What is Imports?

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

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

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

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

How can the Imports numbers be used for analysis?

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

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

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

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

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

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

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

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

Impact on Currency

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

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

Economic Reports

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

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

Sources of Import Reports

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

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

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

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

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

USD/JPY | Before the announcement:

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

USD/JPY | After the announcement:

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

GBP/USD | Before the announcement:

GBP/USD | After the announcement:

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

AUD/USD | Before the announcement:

AUD/USD | After the announcement:

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

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

Categories
Forex Fundamental Analysis

Understanding ‘Manufacturing PMI’ & Its Impact On The Forex Market

Introduction

Introduction

Introduction

The Manufacturing Purchasing Manager’s Index is an excellent leading or advanced macroeconomic indicator, which is used widely to predict economic expansion or contractions. It has a variety of applications for investors, economists, traders alike. It is a significant indicator to predict GDP, employment, and inflation in the upcoming periods. Hence, understanding of Manufacturing PMI can be hugely beneficial for a trader’s fundamental analysis.

What is Manufacturing PMI?

The Manufacturing Purchasing Manager’s Index is a survey of about 400 largest manufacturers in the United States of America. The word Manufacturing here implies that the study is associated with the industries that produce physical goods. Non-physical goods come into the category of Services Purchasing Manager’s Index, which is different.

Purchasing Managers in a company are the employees associated with procuring the raw materials, goods, and services that are required for running the company. For example, A car manufacturing company’s Purchasing Manager would typically be in charge of procuring nuts and bolts at the lowest or best prices from the market. The Purchasing Manager’s in this sense have a good idea of what the company requires and during what periods these requirements are set to increase or decrease.

How is the Manufacturing PMI calculated?

The Manufacturing PMI hence is a compilation of the survey answers given by the Purchasing Managers of the largest 300 manufacturing giants in the USA. The questions typically involve asked in the survey are related to month-over-month changes in the New orders, Production, Employment, Deliveries, and Inventories with equal weightage, as shown in the table below:

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

The Manufacturing PMI rating lies within the range of 0-100, where a score of above 50 indicates an expansion in the economic activity in the manufacturing sector, below 50 indicates contraction and 50 indicates no change in comparison to the previous month.

Economic Reports

In the United States, the Institute for Supply Management widely known in short as ISM releases the Manufacturing Purchasing Manager’s Index every month.

The ISM, established in 1915, is a large non-profit organization in its field. The members of the ISM Business Survey Committee (BSC) receive the questionnaire each month, asking them to identify the monthly changes for each index.

The ISM releases its Manufacturing PMI on the first business day of every month. The data for the Manufacturing sector goes back to 1947.

There are other companies that also publish PMI numbers, and IHS Markit Group is one such company that puts out numbers for the companies outside of the United States. Still, within the United States, the Insitute for Supply Management’s PMI is the most popular.

How can the Manufacturing PMI be Used for Analysis?

The data of ISM Manufacturing Reports on Business or the PMI goes back to 1947 due to which the data is robust and has high levels of confidence in ascertaining economic figures like GDP, inflation and employment, etc.

The Manufacturing sector of the United States makes up 20% of the total GDP, and hence the Manufacturing PMI is a significant economic indicator in that regard. The Manufacturing sector primarily drives the economic activities within the nation as it involves physical goods; hence it affects other dependent industries like transportation, labor force, etc.

The historical correlation between the real GDP and the ISM Manufacturing Data is about 85%, which is pretty good. The main advantage of studying Manufacturing PMI is that it is a leading or advanced economic indicator. It predicts the real GDP with a 12-month time lag, meaning it predicts a year ahead of time the real GDP due to which this index is widely sought after by investors.

A score of 80 and above has been correlated with a 3% average real GDP growth historically. A score of 70-80 correlates with 0-2% GDP growth rate and 55-70 correlates with -3% to 0% real GDP rate. Hence, above 50 indicates the overall economy is growing, and below 50 indicates contraction and possible recession.

Based on the Manufacturing PMI of different sectors, Suppliers can adjust their prices with the market. For example, if a cereal producing company’s Manufacturing PMI indicates expansion, then the crop suppliers can change their prices to a higher level to match the increase in demand and vice versa.

Below is a snapshot of Manufacturing PMI plotted against the real GDP growth rate historically, and we can clearly see the healthy correlation that exists between both. This shows the importance of this leading indicator’s importance in fundamental analysis of traders.

Impact on Currency

Since the United States is the largest economy, the US GDP drives the global GDP. In this sense, monitoring Manufacturing PMI gives us a good clue of the direction of the US economy and the relative direction of other economies. From this perspective, we can ascertain the currency direction also.

The further the score is away from 50 and closer towards 100, the better it is for the economy and resultantly for the currency. Higher scores translate to oncoming currency appreciation periods, while low scores would signal an oncoming recession and currency depreciation period.

A score of 85 and above is a strong signal for improving economic conditions and inflation in the economy.

Sources of Manufacturing PMI Reports

We can monitor the reports on the official website of the ISM. We can also go through the PMI of other countries from the IHS Markit official website.

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

The Manufacturing Purchasing Manager’s Index (PMI) measures the activity of the purchasing managers in the manufacturing sector. The indicator is particularly important for the manufacturing industry, which measures the growth of that sector; this eventually contributes to the growth of the economy. Therefore, the index has a direct and indirect effect on the economy. When speaking about the impact on the currency, the indicator does not cause a drastic change in volatility, but we do witness some positions being build up in the currency during the announcement.

In this section, we will be analyzing the latest Japanese Manufacturing PMI which was released in the month of March. The below image shows the previous and actual PMI data, where we see an increase in PMI from before. A higher than before PMI reading is considered to be bullish for the currency, while a lower PMI than before is taken to be negative. Let us view the reaction of the market in this case.

AUD/JPY | Before the announcement:

We start our analysis with the AUD/JPY currency pair, and as we can see in the above chart, the market is in an uptrend pointing towards weakness in the Japanese Yen. One of the reasons is that the market is expecting a subdued PMI data this time which is making the pair go higher. The only way to trade this pair is if the PMI data of Japan comes out to be very positive, which could result in a reversal and strength in the Japanese Yen. However, if the data proves to be negative, we cannot join the trend until we get a retracement.

AUD/JPY | After the announcement:

After the PMI numbers are announced, we see a sudden surge in volatility on the upside as the data was negative for the Japanese economy. As the numbers were disappointing, traders sold the Japanese Yen and took the price higher. A strong bullish candle shows the impact of PMI data on the currency pair. From a trading point of view, one cannot enter the market for a ‘buy’ soon after the news release. By doing this, he would be chasing the market, which is against the principles of risk management.

NZD/JPY | Before the announcement:

NZD/JPY | After the announcement:

The above images represent the NZD/JPY currency pair, which again is in a strong uptrend, but the up move is not as aggressive as in the case of the AUD/JPY currency pair. Just before the news announcement, the price appears to be at the ‘resistance’ area, which means if the PMI data comes out to be negative for the economy, we can see a breakout on the upside or if the data is positive, it could result in a short-term reversal.

After the PMI data is released, volatility expands on the higher side, and later the candle closes with a wick. This wick is a result of selling witnessed at ‘resistance.’ Therefore, the Manufacturing PMI data has a similar effect on the currency pair. We can trade the above pair after the price retraces to the resistance turned support area and then going ‘long’ with a strict stop loss.

USD/JPY | Before the announcement:

USD/JPY | After the announcement:

In the USD/JPY currency pair, the characteristics of the chart seem to be different from the above-discussed pairs. Here, the Japanese Yen is showing signs of strength before the news announcement. Thus, a positive PMI data should take the currency lower while negative data might result in an up move. The volatility is seen on both sides of the market. Thus, it is advised to wait for the actual data before taking any action. It is also not advisable to trade in the ‘options’ segment as it is a less impactful event and volatility after the announcement will be ‘low.’

After the announcement is made, the market goes up just by a little, signifying the least amount of volatility. The Manufacturing PMI, even though it was negative for the Japanese economy, it failed to take the price higher as in other pairs, as the impact of it very less. Thus, the small rise in price could be used as an opportunity to join the downtrend.

That’s about ‘Manufacturing PMI’ 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 Important Is ‘Mining Production’ For a Nation’s Economy?

Introduction

Introduction

Introduction

Mining Production is a key economic indicator as the final output of Mining Production is the primary input for many industries. Therefore, it is the core part of many industries’ business activity.

Fluctuations in the Mining Production figures are bound to translate to all the dependent industries that use the Mined resources as input in their production process. The knock-on effect can be many-fold, and hence it is a vital economic indicator for investors, economists, and government authorities.

What is Mining Production?

Mining Production refers to the entire process of searching for, extraction, beneficiation (purification), and processing of naturally occurring minerals from the Earth. Mining is the process of extracting useful minerals by excavating into the Earth as these minerals cannot be produced on the surface. Minerals are essential for running society to a large extent.

Minerals typically drilled can be Coal, metals like Copper, Iron, Zinc, or industrial minerals like limestone, potash, and other crushed rocks. Coal remains one of the most significant sources of energy throughout the world. Metals like Iron, Copper have a wide range of usage in industries, from small chips in computers to construction of giant buildings. Limestone, Sand, and other rocks have used in cement industries, which all contribute to the construction and housing industries.

In the United States, the Mining Production figures are released as part of the “Industrial Production and Capacity Utilization – G. 17” report by the Federal Reserve. This report is also called the Industrial Production Index (IP Index) or Factory Output.

The Mining Production numbers are expressed in index and percentage change formats. The base year for the reference index period is 2012, for which the score is 100. Every month the Mining Production numbers are published according to this index. For example, an index figure of 130 indicates that Mining Production has increased in contrast to 2012 statistics. The percentage change compares the figures to the previous month. It is a seasonally adjusted statistic. The figure below illustrates the Mining figures dating back to 1920.

How can the Mining Production numbers be used for analysis?

Hence, it is apparent that Mining lies at the heart of all industrial activities. A decrease in Mining production can adversely affect all the dependent industries, and correspondingly the effects will pass onto unemployment, layoffs, wages, economic slowdown, etc.

Since the end products of the Mining Industry act as the starting input for many industries, it serves as a leading indicator for the economy. It lies at the very start of the economic activity chain, and the ripple effect through fluctuations in Mining Production figures will effect dependent industries with 1-6 months’ time lag depending upon the nature of dependent business.

Investors, government authorities, and economists extensively use the IP Index report for their purposes. Mining is the extraction of minerals that are essential for the economy; the government monitors and provides the necessary support to improve Mining Production. In 2006, the mining industry alone produced shipments worth 78.65 billion dollars, and that is excluding oil and gas. Coal accounts for 50% of electric power generated in the United States.

Mining Production is susceptible to some of the following:

Resource Availability – Since minerals are non-renewable resources, which means they are exhaustible. Once a region is depleted of the particular resource, search for new mining areas, relocation, and Mining again is expensive to process.

Weather – Bad weather conditions can interrupt Mining Production as it typically involves explosions and heavy drilling equipment. Heavy rains can close down mines and access roads. Lightning can put the massive equipment operations, explosion handling personnel at risk. Strong winds disrupt blasting. High temperatures can affect Mining workers.

Technology – The amount of latest and advanced mining technologies that are available at the disposal of the country determines the Mining Production cost and total output.

Terrain – The type of terrain that needs to be mined can also affect Mining costs and Production levels. Mining Industries are the leading employers at the place of their operation. Mining supports more than 500,000 jobs directly and an additional 1.8 million jobs indirectly through its dependent industries. Hence, wages, employment, economic activity, revenue generation, exports, energy consumption are all affected by Mining Production.

Impact on Currency 

The Mining Production figure is a proportional and leading economic indicator. An increase in Mining production figures translates to stimulated business activity in the dependent industries, higher employment, wages, and improvement in economic activity. It will also generate higher revenue for the nation through exports of Mining Produced goods like Coal, Iron, etc. All this has a positive effect on the currency, and the currency appreciates. The reverse also holds.

Economic Reports 

The Mining Production report is a part of the IP report that is published by the Fed every month. This report is published in the form of estimates with subsequently revised estimates. The first version/estimate is released on the 15th day of every month, and this shows the Mining data of the previous month. This is the major report as it factors in about 75% of the data. The next four estimates account for 85%, 94%, 95% & 96% respectively as the source data becomes available after each passing month.

Sources of Mining Production 

The monthly Mining Production statistics are available on the official website of the Federal Reserve for the United States. The St. Louis FRED provides a comprehensive list of Industry Production, and Capacity Utilization reports on its website with multiple graphical plots. You can find this information here and here. We can also find global Manufacturing Production figures for various countries in statistical formats here.

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

In the previous section of the article, we learned the Mining Production economic indicator and understood it’s significance in an economy. The mining industry is critical to a nation’s economic well-being. It influences the country on a regional and individual level, with significant dependence on the resources under development as well as government policies. The mining industry is today is opening up new opportunities for foreign investments and technical assistance. Mining also impacts employment opportunities and income generation.  Governments and mining companies are working together to achieve these goals.

In today’s example, we will analyze the impact of Mining Production South African Rand and witness the change in volatility because of the news announcement. The below image shows that the Mining Production in South Africa increased 7.5% year-on-year in January 2020, following a 0.1% gain in the previous month and beating market expectations by a huge percentage. Let us see find out how the market reacts to this data after the news release.

USD/ZAR | Before the announcement:

The first pair that will be discussed is the USD/ZAR currency pair. Here, we see that the market is in a strong uptrend before the news announcement, as shown in the above image. As the impact of Mining production is less on the value of a currency, we will wait for the price to retrace near a ‘support’ area and then take a ‘buy’ trade. Until then, we have to watch if the price crashes below or shows signs of reversal.

USD/ZAR | After the announcement:

After the news announcement, the market hardly reacts to the Mining Production data keeping the volatility at the bare minimum. Later we see that volatility increases to the downside, which causes the strengthening of South African Rand. The market shows positively to the news release after the close of the ‘news candle.’ As the Mining Production data was bullish, traders are seen going ‘short’ in the currency pair and strengthening the South African Rand, immediately after the ‘news candle.

ZAR/JPY | Before the announcement:

ZAR/JPY | After the announcement:

The above images represent the ZAR/JPY currency pair, where the first image shows the characteristics of the chart before the news announcement. We see that the market is a strong downtrend, and since the South African Rand is on the left-hand side of the pair, it signifies extreme weakness in the currency. Presently, the price seems to have formed a ‘range,’ and right now is at the bottom of the ‘range.’

Thus, we can expect buyers to get active at any moment. We cannot take any position in the market at this moment. After the news announcement, volatility remains at the same level as before, and the price does not respond to the news data as expected. The ‘news candle’ forms a ‘Doji’ candlestick pattern where the price closes almost at the opening price. Since the Mining Production data does not have a major impact on the currency, traders should analyze the currency pair from a technical perspective and take suitable positions.

EUR/ZAR | Before the announcement:

EUR/ZAR | After the announcement:

The above images are that of EUR/ZAR currency pair, where we see that the market is in an uptrend, and recently the price is within a ‘range.’ Here as well, the South African Rand is showing weakness with no signs of strength at all. Technically, we will be looking to buy the currency pair once the price ‘pullbacks’ to a key ‘support’ or ‘demand’ area.

After the news announcement, the price stays at the same level as before and closes, forming a ‘Doji’ pattern. A bullish reaction to the Mining Production data can be witnessed after the close of the ‘news candle,’ which showed an increase in volatility to the downside and thereby strengthening of the South African Rand.

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

Categories
Forex Fundamental Analysis

Comprehending ‘Credit Rating’ & Its Importance as a Macro Economic Indicator

Introduction

Introduction

Introduction

The credit rating of an institution, organization, the government is like a pseudo report card of its ability to pay back its debt. The credit rating process is thorough and detailed. The credit rating of a country or a government, in that case, can significantly impact the inflow of domestic and foreign Investments. It is one of the major indicators around which a lot of volatility occurs in the financial markets; therefore, understanding the credit rating system is important.

What is Credit Rating?

Credit Scoring

Among the general population, people who have a job are usually aware of a credit score that is attributed to them buy one or more agencies within that country. For example, in India, CIBIL, which stands for Credit Information Bureau (India) Limited, is the primary agency that assigns credit rating to individuals.

The credit rating of an individual largely determines the eligibility to apply for a loan from any financial institution. A high score would indicate that the individual is capable of repaying on time, and conversely, a low score would mean that there is a high risk of defaulting on repayment by the individual. The credit score of an individual takes into account the history of loans, repayment records and past defaulting records, and his current net income. Based on all these factors, the calculated score then tells their worthiness of credit.

For example, a CIBIL score greater than 750 in India is usually seen as a minimum requirement to be eligible for a loan by most banks. The individual usually seek out to maintain a high CIBIL score to be eligible to borrow a higher amount of loan and lower interest rates as a lower score would greatly diminish their loan eligibility, and even if they do get a loan, they will have to pay higher interest rate than people with a good CIBIL score.

Credit Rating 

Credit scoring applies to individuals within a country, whereas credit rating applies to institutions, organizations, and governments. Similar to credit scoring credit rating tells whether that organization is credit working or not.

Credit rating becomes important as here the borrowers are big institutions, government, large financial organizations, and the lenders are also big investors or foreign bodies. The loan amount is high, often ranging in millions and billions, and the duration of the loan is also long. Hence, investors actively seek credit ratings before deciding to purchase a particular Bond and lending their money.

How are the Credit Ratings calculated?

There are many globally popular credit rating agencies. In the United States, three companies, namely, Fitch Ratings, Standard and Poor’s Global (S&P Global), and Moody’s Corporation, are the most famous and sought after agencies.

The credit rating process is very thorough and accounts for the entity’s entire debt and its repayment history. The process requires credit rating from the agency to meet with the organization and going over their financial records to assess their current financial status and assess their eligibility. They also take into account that past loan repayments and spending patterns, their current financial assets, and future economic prospects.

After this, a group of credit raters will work out the credit rating for that organization. The process may take up to 4 weeks in general. When the credit rating is ready, it is given out to the company and for a press release. The credit rating agencies usually follow an alphabet combination rating system.

For example, according to Standard and Poor’s Ratings, an organization having AAA rating is said to be outstanding, which is the highest rating possible. Next below is AA+, which means excellent this goes down a rating of D, which is the lowest score. The formats of writing may vary slightly from company to company, but in general, they have an understandable notation of alphabet combinations.

Are Credit Ratings important?

The credit ratings became particularly important after the 1936 rule, which restricted Financial Institutions to lend money to speculative bonds, i.e., having low credit ratings in other words.

Many companies now actively seek to get their credit rating assessed to gain the confidence of investors. The financial markets also have seen enough market crashes, the system collapses, and payment defaults even by the most reputed organizations and nations also. The European debt crisis and the Greece default one of the most popular instances wherein national level collapse of financial institutions and debt default occurred in the recent times of 2010-2011.

In one sense, there is a link between capital inflow and credit rating, hence government and financial corporations, when requiring money, the credit rating becomes a significant number.

The credit rating is not a performance report for a particular set year; instead, it is a continuously updated statistic that tells the credibility of the entity at the current time. For example, a country with the best credit rating last year may not have the same rating this year. The credit rating cuts through all the false alarms and directly gauges the financial numbers, which always tell the truth.

Hence, once the agencies publish credit ratings for a particular sovereign body, there tends to be a lot of volatility as investors either become gain or lose confidence in that body. Conversely, a decreased credit rating than the previous number, also stirs down the market in a negative direction.

Credit ratings, particularly sovereign credit ratings, are major indicators for investors, and hence the government bodies take utmost attention to loan repayment to avoid defaulting and thereby spoiling their credit rating, which will cost them future monetary indentures. Government bodies are aware that decreased credit rating will result in foreign investors stepping back, and consequently, losing their funding, which can, in extreme cases, lead to a total collapse of the institution or an economy at a large scale.

How can the Credit Ratings be Used for Analysis?

An institution with a low credit rating is considered a high-risk investment as the prospects of that company being able to repay is low.

A decrease in the sovereign credit rating signals an economic slowdown from which the country may take a significant time to recover. Conversely, a high credit rating for sovereign bodies and conglomerates indicates that the economy is stable and growing, and there are ample financial resources to pay back the debt on time.

Credit ratings are released quarterly, usually, after the financial numbers of the organization are released. They can be used as current macroeconomic indicators and also be used to predict future expansion plans of the borrowing party, as an institution borrows money to expand or invest in its growth.

Sources of Credit Rating Reports

For reference, Fitch credit ratings are published frequently on their official website.

Since Credit Rating is a major indicator, media coverage is huge and is easily available across the internet. For reference, this is a rating table given in Wikipedia.

Impact of the ‘Credit Rating’ news release on the price charts 

After understanding the meaning and significance of Credit Rating in a country, we shall now see the impact it makes on the currency after the Ratings are declared. There are many agencies that give Ratings to different countries, but the two most reliable and followed are the Ratings given Fitch and Standard and Poor’s (S&P). In today’s article, we will be analyzing the Credit Rating of the United Kingdom announced in the month of December. Credit Rating is said to be a major event in both the forex and stock market, which has a long-lasting effect on the value of a currency. Therefore, the rating could largely determine the degree of volatility in the currency pair.

In forex trading, Credit Rating is used by sovereign wealth funds, pension funds, and other investors to gauge the creditworthiness of a county, thus having a big impact on the country’s borrowing costs. As we can see in the above image that Fitch’s Credit Rating for the United Kingdom was last reported at AA with a negative outlook. Since the rating was unhealthy for the economy, let us see how the market reacted to this.

GBP/CAD | Before The Announcement

As the Credit Rating announcement is one of the biggest data releases of a country, volatility caused by the news release can be witnessed more clearly on a daily time-frame chart. Likewise, we have considered the ‘daily’ chart of GBP/CAD that shows an uptrend market. As we do not have any forecasted data available for the same, we cannot take any position in the market based on predicted ratings. The only way we position ourselves in the market before the news announcement is through the ‘options’ segment, where we can essentially take advantage of the increase in volatility on either side.

GBP/CAD | After The Announcement

On the day of the Credit Rating announcement, we see that the market falls by more than 500 pips resulting in a complete reversal of the trend. This shows the extent of the impact of Credit Rating on a currency pair. The reason behind the collapse of the British Pound is negative Credit Rating given by the two most renowned agencies.

This rating is used by institutional investors and fund managers to decide if they want to park their cash in the economy. Therefore, when the rating is downgraded, investors withdraw their money from the market and sell British Pound. From a trading point of view, one can take a ‘short’ position in the market with a high much higher ‘take profit’ since the market has the potential to go much lower.

GBP/JPY | Before The Announcement

GBP/JPY | After The Announcement

The above images represent the GBP/JPY currency pair where the chart characteristics are almost the same as that of the GBP/CAD, but with a difference that, the uptrend is more extended in this pair. When the market is trending strongly in one direction, we need to cautious while making trades in the opposite direction of the market. Here too, since we are not sure of the Credit Rating data, we cannot position ourselves on any side of the market.

After the news announcement, the British Pound falls but as much as in the above case. There is an increase in volatility on the downside but not sufficient enough to take a ‘short’ trade. Another reason behind a lesser fall in price could be the weakness of the Japanese Yen. Also, the price, even after bad news, is still above the moving average.

GBP/NZD | Before The Announcement

GBP/NZD | After The Announcement

In GBP/NZD currency pair, before the Credit Ratings are declared, we can see that the market is showing signs of weakness. Since the overall trend is up, we need to wait for the news release and get a confirmation from the market. We can still trade in the ‘options’ segment of the market and profit from the increased volatility on either side after the news announcement.

After the Credit Rating data is announced by different agencies, the market falls, and volatility increases on the downside. This is a result of the negative Credit Rating given to the United Kingdom, which disappointed the market participants. Since the market was already showing weakness, this could prove to be the best pair to go ‘short’ with a much higher risk-to-reward ratio.

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

Categories
Forex Fundamental Analysis

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

How The ‘Terrorism Index’ News Release Impacts The Forex Market?

Introduction

Introduction

Introduction

Terrorism Index is a macroeconomic indicator that can influence long term investing and foreign investments flowing into an economy. The smoothness in business activities and productivity of the economy is influenced by acts of Terrorism, thereby affecting the overall Gross Domestic Product (GDP). Hence, understanding the changes in Terrorism Index and its impact can help economists and policymakers make critical decisions towards the country’s growth.

What is Terrorism Index?

Terrorism Index, also known as the Global Terrorism Index (GTI), is a report that gives us a comprehensive summary of the key global trends and patterns in the acts of Terrorism. It is one of the measures of Terrorist Activity in different economic regions.

Terrorism: According to GTI, Terrorism is defined as the threatened or actual use of illegal force & violence by a non-state actor to achieve an economic, political, religious, or social goal through fear, coercion, or intimidation.

It also details incidents of Terrorism throughout the globe for the past 50 years, covering the period of the beginning of 1970 and the change in recent periods. It also identifies and categorizes terrorists into designated groups. GTI also ranks the countries that it covers as per the degree of Terrorist Activity being experienced by those economies. It covers 163 countries that attribute to about 99.7 percent of the world population.

Below is the top ten countries list losing their GDP due to acts of Terrorism.

How can the Terrorism Index numbers be used for analysis?

Acts of Terrorism harm the economy. The impact of Terrorism is calculated through IEP’s cost of violence methodology. The methodology includes direct costs like loss of lifetime earnings, medical bills for treatment, and property loss from terrorism incidents. It also accounts for indirect effects like a loss in productivity, job or earning losses, psychological traumas that impact the victims and their associated family and friends.

Prolonged periods of terrorist activities can result in an unstable economy, where people may panic and fear for their life that impacts social order, political tensions, security threats, and leads to economic contractions. The more the terrorist activities, the lesser the chance for governing bodies to spend on public and growth, and the overall majority of revenue goes into combating Terrorism and bringing back the economy to its normal state.

Overall the economic impact is divided into four categories: deaths, injuries or fatalities, destruction of property, and GDP losses from Terrorism. Terrorism has many implications for the larger economies. It depends on the duration, level, and severity of the terrorist activities. Typically, when countries suffer more than 1000 deaths from Terrorism, IEP’s model includes national output losses that are equivalent to two percent of the total GDP.

The deaths from Terrorism has a significant impact overall, followed by GDP losses. The global economic impact of Terrorism was 33 billion U.S. dollars in 2018, 38 percent lower than in 2017. Terrorism also has wide-ranging economic consequences that have the potential to spread quickly through the global economy with significant social ramifications.

The violence caused by Terrorism, and the fear of Terrorism creates critical disruptions in the economy. It changes the economy’s behavioral patterns, like changes in investment and consumption patterns, diverting public and private away from productive and economic activities towards protective measures. Developed economies are able to absorb the economic shocks of Terrorism better than growing economies. Terrorist activities directed towards specific organizations specifically hurt that company’s stocks in the short-term.

Trades become costlier as it has to account for increased security and higher wage premiums for workers working during such uncertain times. Countries whose main revenue streams include tourism take a severe hit as terrorist attacks significantly reduce tourist arrivals and, accordingly, the revenue from it.

Impact on Currency

GTI is an inverse indicator, meaning; low GTI levels are suitable for the economy and the currency. High levels of GTI results in allocating a lot of government resources in combating and containing Terrorism. In extreme cases, the regions experiencing high levels of terrorist activities can enter curfews for weeks or even months on end that is bad for the economy.

High GTI discourages foreign capital flow into the economy as investors are not sure of a smooth growth of business and industries within that economy when frequent disturbances are expected.

Terrorism Index is an annual metric and has a low impact on the volatility of the market as it is a lagging indicator and shows the long term trends and studies of Terrorism. The more direct consequences are obvious through other macroeconomic indicators, but GTI is useful for investors and impacts long term growth plans of the economy. High GTI can also lead to shying away from foreign companies to invest and expand in the country.

A decrease in the percentage of GTI is indicative of recovering economy and hence, can be used as a positive signal for growth overall.

Economic Reports

The Global Terrorism Index (GTI) report is released by the Institute for Economics and Peace (IEP) and was developed by Steve Killelea, the founder of IEP. It obtains its data from mainly from the Global Terrorism Database (GTD) and some other sources.

GTD data is collected at the University of Maryland by the National Consortium for the Study of Terrorism and Responses to Terrorism (START). It is an annual report that is released at the year-end, usually around November and December, on the official website of Vision of Humanity organization.

Sources of Terrorism Index

The GTI and Peace reports are available on the official website of the Institute for Economics and Peace – Institute for Economics and Peace – Reports

We can refer the 2019 GTI report here: GTI – 2019

We can find the GTI for different countries listed out in various categories here.

Impact of the ‘Terrorism Index’ news release on the price charts 

The report of the Global Terrorism Index is gaining a lot of importance today as it measures the amount of loss incurred by a country due to the destruction caused by the terrorism activities. The report consists of patterns and trends of terrorism activities in 163 countries. It also measures the economic impact of Terrorism.

Terrorism, for instance, impaired the GDP growth of 18 Western European countries from 1971 to 2004, where the GDP per capita fell by 0.4 percentage points. A large terrorist attack can affect financial markets negatively in the short-term. However, in the long term, they continue to function efficiently, absorbing the shock. Therefore, more and more countries try to quantify the effects of Terrorism on the granule level so that the currency is not adversely impacted.

In today’s article, we will be analyzing the impact of the Global Terrorism Index news announcement on various currency pairs and interpret the change in the volatility. For illustration, we have considered the Terrorism Index of the U.S., where the below image shows the Rank, Score, and the Change in Rank from the previous year. It represents the year-on-year Terrorism Index Score of the U.S., which was released in November.

EUR/USD | Before The Announcement

The above image is that of the EUR/USD currency pair before the news announcement, where we see that the overall trend is down, and currently, the price has retraced up to a key level of support equals resistance. From the knowledge of technical analysis, this is the perfect trade setup for going ‘short’ in the market, but since there is a news announcement on the next day, it is wise to wait and then trade based on the numbers. However, aggressive traders take a ‘short’ trade with a larger stop loss above the recent ‘high.’

EUR/USD | After The Announcement

After the Global Terrorism Index numbers are announced, the price goes lower, and there is an increase in volatility to the downside. But the candle leaves a wick on the bottom and closes near the opening price. Initially, traders bought U.S. dollars because of the positive economic indicator data where the Terrorism Score was better than last time, and the rank reduced by two positions. Even though it was positive, there were some traders who felt it was that robust, which is why the selling did not sustain. One can still go ‘short’ in the pair but with a shorter ‘take-profit.’

USD/JPY | Before The Announcement

  

USD/JPY | After The Announcement

The above images represent the ‘daily’ timeframe chart of USD/JPY currency pair, where in the first image, it is clear that the market is moving within a channel, and now it is at the bottom of the channel. Technically, it is the right place for going ‘long’ in the market as one can expect some buying force from here. A ‘buy’ trade is only for the aggressive traders, and others still need to wait for the clarity in news data. But since a news announcement.

After the numbers are published, volatility increases on both sides, and the candle managed to close in green. The market reaction was again neutral in this case as the Terrorism Index data was mildly positive to mixed, which is why the ‘news candle’ forms a ‘Doji’ candlestick pattern. Thus, one can now go ahead and take a ‘long’ position once the price goes the moving average with a ‘take-profit’ near the upper trendline.

NZD/USD | Before The Announcement

NZD/USD | After The Announcement

These are the images of NZD/USD currency pair, and since the U.S. dollar is on the right-hand side of the pair, a down-trending market means that the U.S. dollar is showing strength. Though recently, the price is moving in a range and right before the announcement, it is at the top of the range, also known as ‘resistance.’ Another important point of consideration is that the volatility has increased on the upside, and this could be a sign of reversal. Therefore, ‘short’ trades from here have to be taken with caution.

After the Terrorism Index data is released, we see that the market moves lower and a moderate increase in volatility to the downside. The news outcome did not create the kind of impact that was expected and seen in other pairs. Thus, we need more indication from the market in order to go ‘short’ in the currency pair.

This ends our discussion on the ‘Terrorism Index’ and its relative news release impact on the Forex price charts. If you have any questions, please let us know in the comments below. Good luck!

Categories
Forex Fundamental Analysis

‘Initial Jobless Claims’ – What Should You Know About This Fundamental Indicator?

Introduction

Introduction

Introduction

The Initial Jobless Claims is a weekly statistics released by the United States department of labor. Unlike most other indicators that are released monthly, this report has an additional advantage. Because the Initial Jobless Claims report predicts the unemployment two to three weeks ahead compared to the employment report that is released monthly.

What is the Initial Jobless Claims report?

Jobless claims report comes directly from the United States department of labor, AKA. DOL. The department of labor is an executive branch of the United States Federal government and is mainly responsible for monitoring and promoting employment, employee welfare, improving employee wages, and helping them to claim their employment benefits. To do so, it enforces the main Federal laws and regulations.

The United state has a provision for providing insurance for those who are unemployed. In the year 1935, this policy came into implementation. Although it does not mean that every unemployed person is eligible, it has certain criteria. Insurance is provided to the people who have worked for a certain period and have recently lost their job due to factors that do not directly involve them.

For example, seasonal layoffs or business closure, the unemployment compensation insurance is applicable. The payment of compensations is for about 20-26 weeks, which may vary from state to state. The amount is usually a percentage of their most recent average wage for the year.

The initial jobless claim is different from them continued jobless claims. This report only shows the number of people who have applied for the unemployment benefit for the first time during the last week. In this regard, it becomes slightly more important than the continued jobless claim as it indicates the increase or decrease in the unemployment rate within the country.

How is the Initial Jobless Claims calculated?

The Initial Jobless Claims is prepared by the department of labor, which receives this data from state unemployment offices, which intern receive them from the local unemployment offices. The department of labor releases this report at 8:30 a.m. Eastern Standard Time.

Although many citizens apply for the benefit, it necessarily does not represent all the eligible people. Because, it is just a claiming, which will be either considered valid or invalid by the respective departments later.

Is the Initial Jobless Claims important?

When trying to assess the importance of the Initial Jobless Claims report as an economic indicator, there are many things we need to keep in mind.

The report does not cover the entire population. Not all people who are eligible for benefits apply for the same. Many people who are not eligible for the benefits will also apply. Also, the report is very volatile from week to week and is also a function of seasonality.  Hence, A four week moving average of the Initial Jobless Claims report irons out this volatility.

Below is a snapshot of the initial jobless claim report for the period of January- 2018 to February-2020. As we discussed, the numbers are very volatile, which makes it one of the ‘not-so-easy to decode’ economic indicators.

An increase in the Initial Jobless Claims report numbers relative to the previous numbers tells that more people have lost a job in the recent time. This has been historically associated with times of GDP contraction and economic stagnation. In other words, it indicates the beginning of an upcoming recession. A conversely significant decrease in the report occurs when the economy is coming out of recession and progressing towards economic growth (GDP expansion).

How can the Initial Jobless Claims Report be Used for Analysis?

The Initial Jobless Claims can act as abridge towards assessing the unemployment rate or the employment situation report (which are released monthly). The frequency of the report is the main advantage in comparison to other indicators. Because it allows interested people to get the most current economic situation. As mentioned, it can give us an idea about economic health two to three weeks before the employment reports that are released monthly.

Some Forex traders who are looking to buy or sell the US dollar can use this report for the most recent data in this regard. Higher the number, lesser is the confidence in the economy’s strength and vice versa. But in general, this is a minor indicator in comparison to the monthly reports, which are complete, thorough, and consistently reliable as they cover a greater section of the nation’s population.

Overall the Initial Jobless Claims report is a cruder and rudimentary indicator and is not robust or consistent at all times. But to some extent, it can reflect the direction in which the economy is heading. It may not be easy for us to know the minor movements in the economy accurately, but major movements get definitely reflected. In such cases, the Initial Jobless Claims report can also act as one of the main leading indicators to predict any oncoming recession or expansion of the economy.

Sources of Initial Jobless Claims Reports

The United States Department of Labor releases the Initial Jobless Claims report weekly on their official website in the ‘news releases’ section. Reference link – Initial Unemployment Insurance Claims

You can also find the same indexes diversified and other related categories like Continued claims etc. on the St. Louis website.

Impact of the ‘Initial Jobless Claims’ news release on the price charts 

After understanding the definition and significance of Initial Jobless Claims as an economic indicator, we are ready to find out the impact of the same on the currency. As we know that Initial Jobless Claims measures the number of individuals who filed for unemployment insurance for the first time during the week, and the impact is said to vary from week to week. A higher than expected reading is considered to be negative for the currency while a lower than expected data is taken as positive. The data has a moderate to high impact on a currency that causes a fair amount of volatility in the pair.

The below image shows the previous, forecasted and actual number of people who filed for unemployment insurance for the third week of March. We can see that the Jobless Claims were much higher than before with a rise in 70K people. From prerequisite knowledge, this should be extremely negative for the economy and hence the currency, but let us examine the reaction of the market.

USD/JPY | Before The Announcement

We start our analysis with the USD/JPY currency pair, where we notice a strong uptrend, which a result of excessive buying interest of US dollars. The strength in the US dollar could be due to another fundamental factor that is driving the currency higher. Technical analysis tells that when the market is trending strongly in one direction, we need to wait for a retracement to join the trend or wait for market reversal patterns. Hence, before the news announcement, we do not find any suitable way to position ourselves in the market.

USD/JPY | After The Announcement

After the Initial Jobless Claims are announced, volatility increases on both sides but finally closes in the form of ‘Doji’ candlestick pattern. Even though the data was very bad, it was bad enough to cause a reversal in the market. After looking at the market reaction, we can say that the data created confusion among traders as the market consolidates after the news release. Since the Unemployment data did not cause the price to break key levels of support and resistance, the uptrend is still intact. Therefore, one can enter for a ‘buy’ after an indication from an important technical indicator.

GBP/USD | Before The Announcement

GBP/USD | After The Announcement

The above images represent the GBP/USD currency pair, where we witness a strong downward move on the previous day before the news release. After the big move, market moves in a range, and just before the announcement, the price is at the ‘support’ area. This means traders who are optimistic about the Unemployment data can position themselves on the ‘long’ side with a strict stop-loss below the support.

After the news announcement, we hardly notice a change in volatility, and the candle again forms an indecisive pattern. Since the Jobless Claims data did not cause any drastic change in volatility, traders can enter for new ‘long’ positions or hold on their existing ones and should compulsorily exit at the nearest resistance.

GBP/USD | Before The Announcement

GBP/USD | After The Announcement

The GBP/USD currency pair shows similar characteristics as that of the USD/JPY pair, where before the news announcement, the market is in a strong uptrend. In such market scenarios, we essentially cannot position ourselves on any side of the market as we don’t have any technical factors supporting our trade. Therefore, it is wise to wait for the news release and then act based on the data.

After the Initial Jobless Claims numbers were announced, we see an increase in volatility but with no bias. It results in the formation of an ideal ‘Doji’ candlestick pattern with wicks on both sides and small body. Since the market did not collapse, we can conclude that the data was not damaging to the US dollar. From the trading point of view, we cannot enter for ‘buy’ even after the news release as technically, we need a retracement before we join the trend.

That’s about ‘Initial Jobless Claims’ and its relative news release impact on the Forex price charts. If you have any questions, please let us know in the comments below. All the best.

Categories
Forex Fundamental Analysis

Why ‘Personal Spending’ is Considered a Crucial Fundamental Indicator?

Introduction

Introduction

Introduction

Personal Spending makes up one half of Consumer Spending. As consumer spending drives total GDP, tracking Personal Spending patterns and changes can help us better understand the direction of the economy’s health.

What is Personal Spending?

In the broader sense, Personal Spending generally refers to Consumer Spending, which is a significant economic indicator as it drives about 70% of the total GDP. Consumer Spending is made up of two main components: Personal Saving and Personal Spending. Consumer Spending refers to the amount spent to meet daily needs and personal expenses to conduct one’s lifestyle.

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 savings, the internet bills, phones, etc. all these are part of our lives that the Consumer Spending measures. Personal Spending in this regard is the more specific component of Consumer Spending.

Consumer Spending = Personal Spending + Personal Savings

Economic Reports

The United States Commerce: Bureau of Economic Analysis measures personal Spending in the form of Personal Consumption Expenditure (PCE) or Consumer Spending Report. PCE report measures the goods and services purchased by individuals and NonProfit Institutions Serving Households (NPISHs)—who are resident in the United States.

PCE also includes purchases by military personnel stationed abroad, regardless of the duration of their assignments, U.S. government civilian, and by U.S. residents who are traveling or working abroad for one year or less.

BEA releases the PCE report in the last week of the month for the previous month. Quarterly and Annual reports, Seasonally adjusted versions of the same, along with Personal Saving Reports, are all available under the release titled “Personal Income and Outlays.”

Why Personal Spending?

Personal Spending is one-half of the Disposable Personal Income (the net amount left after all tax payments from the gross income), and it includes the necessities and personal expenditures. Hence, some may refer to Personal Spending to the expenses incurred by money spent on personal enjoyment like going to Restaurants, Trips, buying jewelry, clothing, movies, gaming, concerts, etc.

In this sense, Personal Spending takes a hit during job loss, tight monetary conditions, or recessionary periods as people cut back on personal comforts and tend to save more for the future. Decreased Personal Spending is not a  good sign for the economy as it withdraws money from the system and stays in people’s bank accounts or pockets only.

The correlation between Personal Spending and the GDP of a nation is strong. As we can see below, during recessions, the GDP and PCE (Personal Expenditures Report)  flat out from their usual and trend sideways or downwards (during more extended recessionary periods), otherwise steadily increase at the same pace.

Real Gross Domestic Product (In Billions)

Personal Consumption Expenditures (In Billions)

How can Personal Spending numbers be used for analysis?

Savings are for future consumption, and Personal Spending is for current use. Personal Savings are suitable for the long-term growth and health of the economy, while Personal Spending is more beneficial for short-term growth. Personal Spending becomes essential when an economy is going in or coming out of recession. It is during these periods of economic contraction-edges where changes in the spending numbers can be used to predict the trend of the economic recovery.

Investors can also monitor the Personal Spending sections of the PCE report and determine the spending patterns of people and predict sectorial growth or slowdowns. For example, a few decades ago, the service sector was not as dominant as it is today. Today about 64% of the expenses go towards services. This change in trend is easily observable through PCE. Through PCE, we can predict which markets are likely to see a boom or slowdown.

For illustration, see the below graphical representation extracted from the BEA official website, of the primary services that people are spending their money on. HealthCare and Housing Utilities make up a majority of the services that are chosen by people when compared to other services like Transportation, or Recreation. Such analysis is very useful for investors and stock traders to assess the industrial performance of different goods and service sectors.

(Image Source – BEA official website)

Impact on Currency

Personal Spending is a proportional indicator. Higher numbers in the Personal Spending section signals a growing economy and hence is good for the currency. Dip in the figures results in currency depreciation. As drop signifies, people are spending less, which results in business slowdowns in the economy, which ultimately results in lower GDP print, which is depreciating for the currency.

Personal Spending is a mild impact indicator as the retail sales figures precede the PCE monthly reports where similar tradable conclusions can be drawn as that of PCE reports. A healthy and growing economy would be reflected in the Personal Spending numbers as the people make up the economy. It is important to remember that Personal Spending is a reflection of the present financial situations of the population and hence only shows what the current economic status of the nation is.

It is a coincident indicator in this sense and is dependent on macroeconomic factors like the government’s policies, Quantitative Easing, inflation, etc. which direct the money flow. Hence, it is the effect in the cause-and-effect equation. It reflects the results of an action rather than the act itself. 

Sources of Personal Spending

The monthly PCE numbers releases can be found on the official website of the Bureau of Economic Analysis – Personal Income and Outlays-PCE

As opposed to Personal Spending, you can find the Personal Saving Rate in these sources – Personal Saving Rate & Personal Income and Savings

Personal Spending data and statistics of various countries can be found here – Trading Economics – Personal Spending

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

Now that we have a clear understanding of the Personal Spending economic indicator, we will now watch the impact of the indicator on the value of a currency. As Personal Spending measures the change in the inflation-adjusted value of all Spending by consumers, it accounts for a majority of overall economic activity. This report tends to have a mild to severe impact on the currency.

The below image shows the previous, forecasted, and latest Personal Spending data of the U.S., which is announced on a monthly basis. It is published by the Bureau of Economic Analysis and is the authoritative agency that conducts surveys across the country. A higher than expected reading is considered to be positive for the economy, while a lower than expected reading is considered to be negative. Let us examine the reaction of the market for the latest release.

USD/JPY | Before The Announcement

We will start analyzing the impact of Personal Spending data on the USD/JPY currency pair, where the above image shows the state of the chart before the news announcement. It very clear that the pair is in a strong downtrend, which means the U.S. dollar is extremely weak. One of the reasons behind weakness in the U.S. dollar is that the market participants are expecting lower Personal Spending figures for the month of February. At this point, aggressive traders can take ‘short’ positions in the market, owing to pessimism in the market, with a stop loss above the recent ‘high.’   

USD/JPY | After The Announcement

After the Personal Spending data is released, the market as expected goes lower, and volatility increases on the downside. The actual data came out to be lower than the forecasted data, and this made traders to further sell the currency pair. We can say that the poor Personal Spending data accelerated the downfall and took the currency much lower. This is the ideal and risk-free situation when it comes to taking a ‘short’ trade. Thus traders can sell the currency pair soon after the news release and have a much higher ‘take-profit‘ as the indicator has a severe impact.

USD/CHF | Before The Announcement

  

USD/CHF | After The Announcement

The above images represent the USD/CHF currency pair, where the behavior of the chart appears to be a little different from the previously discussed pair. A similarity in both the pairs is that the major trend is down. But here, the price has shown some signs of reversal before the news announcement. This could even possibly turn into an uptrend. As the volatility is high on both sides, it is advised not to carry positions in the market before the news release. One could even face issues such as high spreads and higher mark-to-market loss.

The news announcement resulted in a sudden price drop, and the market reacts negatively to the Personal Spending data. Thus the market here too gets bearish due to poor news data. As one does not see any trend continuation candlestick patterns after the news release, he/she shouldn’t be going ‘short’ in the market right after the announcement. Only after one sees such patterns, he/she can enter the market.

AUD/USD | Before The Announcement

AUD/USD | After The Announcement

These are the images of the AUD/USD currency pair, where the characteristics of the chart are totally opposite from the above two pairs. Since the U.S. dollar is on the right-hand side, a down-trending market would mean strength in the U.S dollar. Therefore in this pair, the U.S. dollar is extremely strong contrary to the above pairs where it was extremely weak. When the volatility is so high on the downside, it is less certain that an even a negative news outcome can result in a reversal of the trend.

After the news announcement, the market moves a little higher, almost negligible, owing to bad Personal Spendings data of the U.S., but this gets immediately sold, and the ‘news candle’ closes with a  wick on the top. Therefore, we can say that the Personal Spendings data did not have a significant impact on this pair, and volatility increased on the downside.

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

Categories
Forex Fundamental Analysis

Comprehending The ‘Tourism Revenues’ Statistics & Its Impact On The Forex Market

Introduction

Introduction

Introduction

The global connectivity through the internet, powerful smartphones and gaming technology, we may be led to believe that more and more people prefer to spend time in their home using their entertainment gadgets, but it is not so.

The internet has brought the world closer than ever before, making remote tourist places more accessible and affordable than ever. Tourism Revenues contributes to 2-10% of the total GDP of most countries. Tourist hot spots like Dubai, Mexico, France, Thailand, etc. have Tourism as one of their primary source of revenue generation.

Tourism Revenues, factors affecting it, and measures to improve it all have significant changes in Tourism employment labor, economic growth, and overall development of the economy.  Hence, our fundamental analysis needs to understand the Tourism patterns and its resultant changes in the marketplace.

What is Tourism Revenues?

Tourism is the act of people traveling to and staying in locations outside their usual residing place for leisure, recreation, business, or other purposes for a specified period.  For the general public, a tour typically implies leaving behind their work and home to travel and explore tourist spots with family, friends, or by themselves for refreshment.

Tourists are people coming from outside the current locality into consideration (be it a city, state, or even country) to temporarily visit the place. Business people having to travel on work purposes are also categorized under tourists. Below we have mentioned the three types of Tourism.

Inbound Tourism

Tourists coming into the country to visit are called inbound tourists. This adds to the revenue of the nation as people pay and spend money in domestic currency.

Outbound Tourism

When our citizens go out of our country to foreign destinations for tours, it is called Outbound Tourism. This takes away revenue from our country and adds to the foreign countries, as the domestic currency is exchanged for foreign currency for expenditure purposes.

Domestic Tourism

People of one state visit another state within the country; it is called Domestic Tourism. This is helpful for the visiting state as it brings revenue to the state.

Tourism Revenues

As per the United States Travel Association, in 2019, domestic and international travelers spent 1.1 trillion U.S. dollars. This spending has directly supported 9 million jobs and has generated 277 billion U.S. dollars to the payroll income an 180 billion dollars in tax revenues for federal and local governments.

Travel Industry accounts for 7% of the total private sector employment. The power of job growth through travel is higher than in many other industries. For example, every 1 million dollar sale of travel-related items directly adds to eight jobs compared to only five jobs in the non-farm sectors.

How can the Tourism Revenues numbers be used for analysis?

The following factors affect Tourism Revenues:

✰ Climate: The environmental conditions at the tourist destination adversely affect tourism. For example, In summer, hill-stations and colder regions see a rise in tourist numbers. If the ecology of the tourist place is balanced (avoiding over-exploitation of nature and over urbanization), unexpected adverse weather conditions can be avoided.

✰ Economic Situations: A healthy economy can support tourism. Financially weak people neither travel nor the Government of a weak economy create and promote an excellent tourist destination. Disposable Income of the people determines whether they can afford to spend on discretionary things like tours and travel. Political unrest and terrorist activities adversely affect tourism. Safeguarding and protection are essential from the Government’s side to assist tourism.

✰ Cultural importance: It is the historical and cultural significance of the places, monuments that attract tourists. Preserving and maintaining heritage sites over urbanization (building roads, houses, malls, or buildings for commercial use) can help foster tourism. 

✰ Research value: Researchers actively seek places undisturbed by human exploitation. The preservation of natural forests, seas, oceans can attract tourists who are Archeologists, Geologists, Biologists, Oceanographers, etc.

✰ Religious places: Tourists usually take tours to escape from their daily challenges and find peace. In this sense, religious destinations are always flooded during specific periods in a year. India is one such example where there are a lot of pilgrimage sites that bring in good revenue for the nation. Preservation and regulation of such religious places support tourism.

✰ Internet: Ease of accessibility to new people via the internet encourages people to explore these places. Enthusiasts only visit unknown and remote sites. The more people have reviewed an area, the more people would be comfortable visiting it.

✰ Amenities: Availability of transport, hotels, guiding services enhance the tourist’s travel experience. Lack of all these necessary facilities would contribute to a mediocre travel experience that would slowly decline the tourist numbers. Ratings of the place affect the tourist numbers in the long run.

✰ Economic Impact of Travel: Travelers create a “multiplier” effect on the economy. Apart from the direct purchase of goods and services by travelers, the indirect acquisition of raw materials needed to manufacture them adds to the indirect travel output.

Due to spending in the local areas, additional sales are generated that are categorized as induced output by tourism. For instance, the total jobs supported by Tourism is 15.8 million. As per the U.S. Travel Association, one in ten non-farm jobs indirectly relies on the travel industry. The travel industry has generated 2.6 trillion U.S. dollars for the economy, contributing about 2.6 % of GDP.

Impact on Currency

Tourism revenue supports jobs and the Income of the economy. Tourism is a proportional indicator. An increase in tourism revenues positively correlates to the currency value. As more tourists arrive, the more the domestic currency is in demand and hence appreciating the currency value and vice-versa.

Changes in Tourism Revenues from year-to-year have a low impact on the currency as it makes up less than 5% of GDP for many countries. For this reason, tourism is seen as a low impact indicator.

Economic Reports

The World Travel and Tourism Council provides a comprehensive summary of Tourism Revenues and its contribution to GDP for most countries on their official website. They publish monthly updates in cooperation with Oxford Economics to provide a brief overview of short term trends in the Travel and Tourism Sector.

The Travel Price Index (TPI) published monthly by the U.S. Travel Association measures the travel inflation and is comparable to CPI (Consumer Price Index).

Sources of Tourism Revenues

The information regarding tourism and related statistics can be found in the sources mentioned below.

Monthly Updates- WTTC | World Travel and Tourism Council | Monthly Statistics – USTA for (TPI, Travel Trends, etc.)

Impact of the ‘Tourism Revenues’ news release on the price chart 

Tourism Revenues are slowly becoming a significant source of income for various countries, especially for emerging economies. These revenues contribute a lot to the GDP of a country. Recently, this sector has been gaining a lot of attraction, and as a result,  governments of almost all countries are promoting the tourism industry. Today, we even have an official media release of the revenue generated by tourism alone released by the monetary agency of that country. Therefore, some traders around the world create and remove positions in the market based on the Tourism Revenues data.              

The below image shows the previous and latest Tourism Revenues data of Turkey. This is essentially the amount spent in billions of U.S. Dollars by Foreign tourists. This data is particularly important for developing countries. It is released on a monthly, quarterly, and yearly basis, depending on when the country chooses to publish. A higher than expected reading is considered to be positive for the economy, while a lower than expected reading is considered to be negative.

USD/TRY | Before The Announcement

We shall start with the USD/TRY currency pair and find out the impact of the news release on the pair. As we can see in the above image, the market is moving in a range, and just before the news announcement, it is at the bottom of the range. Technically, this is an area from where the price bounces and moves higher, but since there is a news announcement in some time, it is possible that this level could be broken. Therefore, we need to wait and then trade based on the news outcome and shift in volatility.

USD/TRY | After The Announcement

After the Tourism Revenues data is announced, volatility suddenly increases on the upside, and the candle closes as a bullish candle. The reason behind the sudden weakness in Turkish Lira is from the fact that the Tourism Revenues were almost halved in the fourth quarter compared to the third quarter. This made traders sell Turkish Lira and buy U.S. dollars. The buying strength coming exactly from the ‘support’ is a confirmation sign that the market will move higher, and one can go ‘long’ in the pair with stop loss below the ‘news candle.’

NZD/USD | Before The Announcement

NZD/USD | After The Announcement

The above images represent the TRY/JPY currency pair, where we see that, here too, the market is moving in a range before the news announcement. Since the Turkish Lira is on the left-hand side, price is at the ‘resistance’ area just before the announcement. As volatility is high, traders should wait for the Tourism Revenues announcement to get a clarity of the data. Once we know the actual result, we can trade based on the news.

After the data is released, the market expectedly reacts negatively, and price falls to the downside. This fall is due to extremely weak Tourism Revenues data, which made traders sell the currency. As the volatility increases on the downside and the price goes below the moving average, one can take a ‘short’ trade with a stop loss above the ‘resistance’ of the ‘range.’

NZD/USD | Before The Announcement

NZD/USD | After The Announcement

Lastly, we analyze the impact on the EUR/TRY currency pair, where also the market is moving in a range but with a downward bias. As we witness some selling pressure before the announcement, a positive Tourism Revenue data can be an ideal case for going ‘short’ in the pair expecting further downside. However, if the data was to be positive for the Turkish economy, one should wait for additional confirmation before entering for ‘buy.’

After the Tourism Revenues data released, the moves in both the direction and the candle managed to close in green. We do not see a strong up move in spite of weak Tourism Revenues data because selling pressure is high on the downside. As the candle closes, forming an indecision pattern, it is advised to go ‘long’ in the market only after volatility expands on the upside.

That’s about the macroeconomic indicator – ‘Tourism Revenues’ and the impact of its news announcements on the Forex market. If you have any questions, please let us know in the comments below. Cheers.

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

Everything About ‘Gold Reserves’ & It’s Impact On The Forex Market

Introduction

Introduction

Introduction

Gold is one of the most precious metals on the planet. In the field of monetary assets and currencies, Gold is like a nuclear warhead among all weapons. Throughout history, this yellow metal has always held its place as a secure financial investment. For a certain period in the international markets, it backed the major currencies like the United States Dollar.

Even though today’s currencies are no longer backed by any metal and are free-floating fiat currencies, countries still own and purchase gold year after year in tons. This shows that it is still one of the important financial assets of many countries. Change in Gold Reserves will have an impact on the nation’s currencies. Hence the study of the same is important for fundamental analysis for traders and investors.

What are Gold Reserves?

Most of the major nations which participate in international trades through export or import maintain a certain proportion of foreign currencies to hedge their currency at times of hyperinflation or deflation to manage their exchange rate at a fixed level, thereby not incurring losses on exports or imports.

Similarly, Many countries’ Central Banks maintain specific metric tons of Gold as reserves in their nation’s vaults along with other assets. Gold deposits saved in the nation’s vaults or other nation’s vaults as their holdings are called Gold Reserves.

Why Gold Reserves?

Up until a few decades ago, the Gold was used to back up the legal tenders of many countries. Today’s world is run by Fiat currencies, which can be printed as much as required by a government as the United States did before the Vietnam war, which led to the crashing of Bretton wood’s agreement. If, in a hypothetical case, let us say the United States dollar is no longer accepted as a legal tender in the global market, then the United States cannot buy or sell goods and services using their currency. Still, they can sell their Gold in exchange for the same.

The exposure of a currency to the market trends volatility, economic crisis makes it an unsafe form of wealth, which can depreciate over time. In this regard, Gold has always proven that it can hold its ground even during a major economic crisis and continue to appreciate to match with the inflationary trends. At times of economic crisis, extreme inflation, or deflation, which results in currency depreciation of a nation, investors, and people, in general, tend to run towards Gold as a safe financial bet.

Economic Reports

The International Monetary Fund (IMF) tracks and keeps the statistics of all assets of a nation as reported by various countries, which are then used by the World Gold Council (WGC), who are responsible for keeping up the demand and supply for Gold in the global market.

The data is obtained from the Central Bank’s Balance Sheets and compiled by WGC and releases monthly. They also provide historical data about the same for various countries to compare and analyze side by side.

How can the Gold Reserves numbers used for analysis?

Gold is not an abundant metal on the planet, and its rarity, along with unique lustrous yellow radiant color and other physical properties, has always kept it in demand in the market of jewelry, trades, and particular instrument designing sectors.

Gold is seen as one of the standard forms of wealth to be passed on from one generation to another, meaning its value keeps rising with global economic growth. As economies become wealthier, the Gold price also tends to be costlier. The worth of Gold in that sense has always remained constant, i.e., a precious and expensive metal.

The Gold demand increases during times of high inflation, and because of the limited supply, the price of Gold increases against the currencies. In this sense, the countries which are a net exporter of Gold see their domestic currency worth appreciating. Countries that are importers of Gold see their currency worth falling against Gold. In this aspect, Gold is indeed still a form of currency, or we can say it is an alternate form of currency.

Nations purchase Gold from the Bullions market and store up just like an ordinary employee saves up money for future needs or as an emergency fund for a rainy day.  Major Nations increase their Gold Reserves in hundreds of tons per year as it preserves wealth better than most currencies, and also for their concern on long term economic health and growth of their nation.

Below is Gold Reserves numbers for prominent countries having high holdings.

Above image is taken from the World Gold Council Official Website

Impact on Currency

A country with no Gold Reserves is exposed to all the risks associated with Fiat Currencies. Throughout history, there have been many currency crises where the dips have been so low that markets crashed, and governments collapsed, for instance, the Black Wednesday, which pushed the Sterling pound out of European Exchange Rate Mechanism.

Countries having substantial Gold Reserves numbers can face economic crises without market crashes, and the system collapses. As at any time, they can sell their Gold Reserves to increase their Currency worth, and let it float back again in the market against other fiat currencies.

Investors who have invested in foreign companies in that nation’s domestic currency can eliminate the fear of his returns depreciating over time or during economic crises there if the nation has sufficient Gold Reserves. Traders who Carry Trade can also be sure of their deposits not being subjected to major shocks that lead to unexpected volatility in the short run as the country will be able to recover from this through their reserves.

Gold Reserves inherently indicate a nation’s capacity to bounce back from a crisis or to never go into one in the first place. This is the reason why the United States Dollar and Euros are one of the major pairs as their Gold Reserves are in the top five amongst the world due to which the volatility in the currency is so low, making it a safe bet to trade on.

Low Gold Reserves can lose the confidence of investors, which would further depreciate the value of an already weakening currency, thereby pushing the economy further down the drain of a crisis. In Conclusion, the higher the Gold Reserves, the lesser the volatility and vice versa.

Sources of Gold Reserves Index

We can monitor the Gold Reserves changes of various nations across the globe from the WGC monthly reports, and they can be found here. Global Reserves data of different countries can also be found here. You can also go through Gold Reserves of the Federal Reserve Banks of the United States history here. We can derive the same numbers from the Central Bank’s balance sheets or the National Bureau of Economic Research.

Impact of the ‘Gold Reserves’ news release on the price chart 

Gold reserves play a major role in maintaining the economic stability of a country, and thus the government tries to own a lot of Gold. Some of the main uses of Gold include hedging against inflation and determining the value of import and export. The Gold Reserve of the country is released on a quarterly and monthly basis that shows the transactions carried out by different nations. Since the Gold Reserves held by a country is an important economic indicator, it said to have a moderate to high impact on the value of a currency.

The above image shows the previous and latest Gold Reserve data of India, which is published on the 1st of every month. A higher reading than before is considered to be bullish for the currency while a lower reading is taken to be bearish. India’s Gold Reserves was reported at 28.997 USD bn in Jan 2020. This shows an increase from the previous number of 27.831 USD bn for Dec 2019. The Reserve Bank of India is the official organization that provides Gold Reserves in USD.

EUR/INR | Before The Announcement

The first pair with which we will start our discussion is EUR/INR, where the above image shows a ‘daily’ time frame chart of the same. We see that the market is in a range from more than three months and currently seems like it has broken out of the range. Since we don’t have any clue of the Gold Reserves data, we cannot take a position on any side of the market. Technically, we have broken above the range, and we need a suitable retracement to join the trend.

EUR/INR | After The Announcement

As the data is released and the market gets to know that the Gold Reserves were increased than before, we see a sudden drop in prices as a result of strength in Indian Rupee. But later, the price reverses sharply, making the candle to close in green. One of the reasons could be that since the market was in a strong uptrend, it tried to make its last move up and finally collapsed later.

The volatility is seen to increase on both sides. From a ‘trade’ perspective, here’s where the technical analysis should be combined with fundamental analysis. We cannot take a short trade until the price crosses below the moving average, which is a sign of reversal.

GBP/INR | Before The Announcement

  

GBP/INR | After The Announcement

The above images represent the GBP/INR currency pair where we witness an extremely weak Indian Rupee, and just before the announcement, price is at the recent ‘higher high,’ which means this is the point from where the market fell. Without guessing what the Gold Reserve data might be, it is wise to wait for the news announcement and then take suitable action. However, one can still trade in ‘options’ to take advantage of high volatility when the announcement is being made.

After the news release, we see that the market drops, and the candle closes in red, which means there are high chances that traders may see the data as positive for the Indian economy and hence buy INR. Thus, as soon as the price falls below the moving average, we can go ‘short’ in the pair with a conservative target. Also, the price is in an area that could be a possible resistance.

USD/INR | Before The Announcement

USD/INR | After The Announcement

In the USD/INR currency pair, before the news announcement, the market moves up after reacting from the ‘support’ area and currently is in the middle of the range. Again, we don’t find any way to trade this pair as a news announcement can cause sudden volatility on any side. The overall volatility also appears to be low in this currency pair.

After the announcement is made, we see that the price drops below as a result of an increase in Gold Reserves from the previous month. The sudden increase in volatility on the downside, making the price go below the moving average, may attract one to go ‘short’ in the pair. We can sell the currency pair, but the stop loss needs to be placed above the resistance. The risk to reward ratio of this type of trade would be around 1:1.

That’s everything about Gold Reserves and the impact of its new release on the Forex price charts. If you have any queries, please let us know in the comments below. Cheers.

Categories
Forex Fundamental Analysis

Impact Of ‘Consumer Credit’ Economic Indicator On The Forex Market

Introduction

Introduction

Introduction

Consumer Credit is one of the economic indicators used by economists to analyze the health of the economy. It can be useful to infer the direction of other economic indicators like Spending, inflation, and standard of living. Although it is a low impact indicator in the trading world, a good understanding of Consumer Credit can be beneficial for strengthening our overall fundamental analysis.

What is Consumer Credit?

Consumer Credit refers to the debt incurred by individuals to serve their immediate needs. Consumer Credit here, in general, applies to the short-term loans given out to spend on their daily requirements like groceries, paying electricity bills. Consumer Credit is different in this context from long-term loans like House Mortgages, which are secured by real-estate. Consumer Credit is usually unsecured with no collateral.

Consumer Credit in these days comes in the form of Credit Cards mostly although there are other variants. The limit of Credit available on a given Credit Card depends on the net-salary of the individual. In general, the Credit limit is 8-12 times the monthly salary. Credit Cards are issued to people usually who can show a consistent flow of income in their bank statements, which generally translates to job-holders and business people as their default rate is lower than that of unemployed people.

Consumer Credit is made available through banks, retailers (like shopping malls, retail chains) and other small agencies to enable customers to be able to fulfill their immediate needs and pay-off at a later date with interest. The credit limit, interest rate, and the time after which the interest comes into effect vary from one lender to another. There are two different types of credits, and let’s discuss them in detail below.

Installment Credit

Installment Credit is given out for a specific purchase, and is issued for a definite amount for a fixed period and fixed monthly installments. The monthly payments are usually equal, and the time frame ranges from 3-month to 5-years generally. Installment Credit is also called EMI (Easy Monthly Installments) nowadays.

It is popular among the general population as it is widely used to make goods and services which are more on the expensive side, like a car, TV, or furniture, etc.  For example, a 3500$ bike could be purchased with an EMI, where the individual may make the initial downpayment of 500$ and choose to pay the remainder 3000$ as 500$ monthly installments in the form of a 6-month tenure EMI plus a little extra service charge for issuing this Credit.

Revolving Credit

Revolving Credits are used for any type of purchase, unlike Installment Credit. Revolving Credit is mostly available in the form of Credit Cards, where the line of Credit is open to the maximum limit set by the lender.

For example, a 50,000 dollar limit Credit Card can be simultaneously used to purchase a 20,000 dollars item and also again for anything else that is worth up to 30,000 dollars. The Credit line stays open as long as the individual pays the minimum amount to settle the interest on the Credit issued. It may even never be paid in full as long as we pay the minimum interest while the overall credit piles up.

This is unsecured Credit, and hence the interest rates on this type of Credit are high, which is risky as once you default, the interests can pile up very quickly, making it very difficult to recover. For example, a 10,000 dollar revolving credit, when you miss payments, let us say for six months, then the total settlement of the Credit can go up to 20,000 dollars also. This can also affect the credit rating of the individual debarring him from future Credit approvals from the agencies.

How can the Consumer Credit numbers be used for analysis?

As Consumer Credit refers to the short-term loans which are usually paid back with a little interest, generally, Consumers take Credit for personal enjoyment or servicing immediate needs. Hence, it tells us the Consumer’s confidence towards repayment of the incurred Credit.

People facing tight monetary situations during job loss generally cut back on Spending and stay away from such Credits. Hence, an increase in Consumer Credit can be seen as a sign of a healthy and growing economy.

Increased Credit numbers also tell us that banks and other retail agencies are willing to lend out money, as they are confident about the repayment and their prospects. High Credit also signifies that the liquidity of the economy is too high, meaning there is enough cash flowing in the system to give Credit lenders confidence to supply Credits to more and more individuals.

Impact on Currency

Consumer Credit number is a proportional indicator. Higher Consumer Credit numbers are good for the economy and thereby for the currency. Lower Consumer Credit signifies tight monetary conditions resulting in deflationary situations in the marketplace, which is depreciating for the economy. When Credit goes down, so does Spending, and thereby, business slowdowns are apparent once the demand is reduced, which is terrible for the economy anyway. 

Economic Reports

In the United States, the Board of Governors of the Federal Reserve System releases the Consumer Credit report around the fifth business day of every month on their official website under the section called G.19. The reports are released in Billions of Dollars in both Seasonally Adjusted and Not Seasonally Adjusted formats. The data report set goes back until 1945. The report details of the type of credits also, like Car loans, personal loans, with which institutions being the lenders of the Credit and the related maturity periods.

Sources of Consumer Credit

Monthly Consumer Credit Reports can be found here.

Fred Consumer Credit & Consumer Credit Owned and Securitized information can be found here & here, respectively.

If you are interested in comparing the Consumer Credit numbers of different nations, you can do that here.

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

In the previous section of the article, we understood and comprehended the Consumer Credit economic indicator, which essentially measures the change in the total value of outstanding consumer credit that requires installment payments. It is also strongly related to consumer spending and credit. Repeated revisions to the methodology result in volatile figures during a specific period of time. Consumer Credit does not majorly affect the value of a currency, and the volatility witnessed during the news release is on the lower side.

The image below shows the latest month-on-month Consumer Credit data of the U.S. that is published by the Federal Reserve. Traders usually have a short term view on the market based on the data, as it is not an enormous event, and it does not have a long-term impact on the currency. A higher than expected reading should be positive for the currency while a lower than expected is considered to be negative. Let us analyze the market reaction.

GBP/USD | Before The Announcement

First, we look into the GBP/USD currency pair, where we see that the market is pretty much range-bound, and just before the announcement, price is near the ‘support’ area. The volatility appears to be high both sides, and sudden movement can be expected on any side of the market after the news release. Since the economists have forecasted a lower Consumer Credit this time, as the price is at ‘support’ aggressive traders can enter for a ‘buy’ due to pessimistic expectations. Conservative traders will only be able to take a trade after we get a clear indication from the market.

GBP/USD | After The Announcement

After the Consumer Credit numbers are announced, the market quickly goes higher and shows up a strong bullish candle. The market rightly reacted to the bad Consumer Credit data as the data was much lower than expectations. This made traders and investors sell U.S. dollars, and thus volatility increased on the upside. Now that we have got a clear indication from the market, we can confidently enter for a ‘buy’ as the data was terrible for the U.S. economy. In this case, the market is expected to make new ‘highs,’ and thus, we can hold on our trades as long as we see signs of reversal.

NZD/USD | Before The Announcement

NZD/USD | After The Announcement

The next currency pair which we will discuss is the NZD/USD pair, and from the first image (before the announcement), we can clearly say that the characteristics of the chart are similar to the previously discussed pair. The reason is that here too, the U.S. dollar is on the right-hand side. One major difference is that, just before the news announcement, price is at the ‘resistance’ area. So, based on the forecasted Consumer Credit numbers, we cannot enter for a ‘buy’ as technically this is where traders sell a currency pair.

After the news release, the price tries to go down, but it gets immediately pushed up, and the candle closes in green. This happens as a consequence of poor Consumer Credit data. In this pair, volatility is seen on both sides after the announcement. However, from a trading point of view, since some selling pressure is seen, it is advised to wait for a breakout above the ‘resistance’ and then go ‘long’ in the market.

USD/SGD | Before The Announcement

USD/SGD | After The Announcement

The above images represent the USD/SGD currency pair, and since the U.S dollar is on the left-hand side, we see a down-trending nature of the market and recently is moving in a range. The volatility seems to have slowed a bit before the news announcement, and there are no signs of reversal. Right before the announcement, price is at the bottom of the range, also known as ‘support,’ and hence one cannot go ‘short’ in the pair based on the predicted Consumer Credit data.

We should always use technical analysis along with fundamental analysis to enter a trade. After the news announcement, price falls owing to bad data, but it fails to break the ‘support.’ This illustrates the importance of the amount of impact of an economic indicator on a currency pair. Until the impact is visible, we cannot decide as to which side of the market we should be trading.

That’s about Consumer Credit and the impact of its new release on the Forex market. Please let us know if you have any queries in the comments below. All the best.

Categories
Forex Fundamental Analysis

Comprehending ‘Capital Flows’ As A Macro Economic Indicator

Introduction Capital Flow is a useful indicator to assess the relative strength of economies and sectors within an economy. Capital always tends to flow towards growing, improving, and strengthening regions, be it industries, economies, or even currencies. Tracking the flow of Capital can help us understand the expanding areas within a nation and also throughout […]

Introduction Capital Flow is a useful indicator to assess the relative strength of economies and sectors within an economy. Capital always tends to flow towards growing, improving, and strengthening regions, be it industries, economies, or even currencies. Tracking the flow of Capital can help us understand the expanding areas within a nation and also throughout […]

Introduction

Capital Flow is a useful indicator to assess the relative strength of economies and sectors within an economy. Capital always tends to flow towards growing, improving, and strengthening regions, be it industries, economies, or even currencies. Tracking the flow of Capital can help us understand the expanding areas within a nation and also throughout the world. It also gives us an insight over which sectors are contracting or experiencing a slowdown. Hence, understanding Capital Flow is crucial for investors and traders to make critical investment decisions.

What is Capital Flows?

Capital Flow refers to the money movement within an economy amongst different classes or economies in the broader sense. Capital movement from one sector to another can be for various purposes like an investment, trade, or business operations. On a small scale, individual investors can direct their savings and investment capital into securities such as mutual funds, bonds, or stocks, etc.

On the medium scale, It can include money flow within corporations in the form of investment funds, capital spending on business operations, and R&D. For example, Big tech Giants like Apple or Microsoft can direct their funds on expanding their production sites in other countries. In this case, Capital flows out of the country, or they may choose to invest in Research and Development Sector to develop new products and services, where Capital flows into that division, which is usually headquartered in the native country, in this case, the United States.

On the larger scale, Capital Flows are directed by Government from their federal tax receipts to many outlets like public spending programs, regulatory operations, foreign trades, currencies, and foreign investments, etc. On what aspects the Government decides to direct the flow of Capital can imply many things like development, employment, inflation, foreign goods, imports, etc.

As the entire world runs on money, directing the flow of money is essential. An excess of influx or deficit of money flow can be detrimental for any sector. Hence, the Government segregates Capital Flows into different types for studying, regulating, and policy-making purposes. The following are the Capital Flow types:

Asset-class movements: It refers to the changes of Capital between liquid currency, stocks, bonds and other financial instruments like real estate, metals (ex. Gold, Iron, etc.)

Venture Capital: It refers to the shift in trends of capital movements directing towards startup businesses. Which sector new startup businesses are seeing capital inflow and which are not is tracked through Venture Capital statistics.

Mutual Funds Flow: It tracks the overall addition or withdrawal from the underlying classes of its funds, which can be bonds, stocks, banks, or other mutual funds. Inflow and outflow from one segment to others can imply many things for investors. In general, the influx of Capital Flow into a sector is positive, while outflow is depreciating for that segment class.

Capital Spending Budgets: It refers to the Capital movements for the corporate institutions and is used to monitor growth and expansionary plans of the corporate based on their budget allocation patterns.

Federal Budgets: This is the critical component amongst Capital Flows as it has a long-term impact on the economy and can either attract or drive-off foreign investors. It refers to the budget plans allocated for public spending, running economic operations and regulations, etc.

How can the Capital Flows numbers be used for analysis?

Money accompanies the growth period. Money always follows where there is growth or improvement. In the financial markets, this is called “hot money,” which refers to the funds from investors throughout the world. Whenever a stock market performs good, or an industrial sector improves or comes up with an innovation, it is followed by an increase in the inflow of Capital.

The capital flow can assess the relative strength of capital markets into and out of the markets or the liquidity of that stock market. As the United States is the world’s largest economy and accordingly, it is having the top two stock exchanges, i.e., the New York Stock Exchange (NYSE) and Nasdaq (NASDAQ) beating all the global stock exchanges.

At the corporate level, the flow of Capital helps investors assess the current financial stature of the company and their probable future plans. For example, Investments into expansionary plans are likely to generate more revenue in the future.

The Government’s Federal Budget can be used to analyze how much growth can be expected based on the current public spending and what portion goes into servicing debts. For instance, Higher budget allocation for public spending is indicative of an effort to stimulate the economy in a positive direction. Similarly, interest rates, bond yields can all determine Capital flow in and out of the economy.

Impact on Currency

When Capital flows into the country, the currency appreciates and vice-versa. For example, when the USA regularly imports foreign goods resulting in dollars going out of the country, this results in excess of U.S. dollars in the global economy due to which the value depreciates. On the other hand, if the USA continuously exports its goods, for this other countries send dollars into the USA, creating a deficit in the rest of the world. Accordingly, the demand for dollar increases and currency appreciates.

Generally, High yield rates (ex: Treasury Bonds), bank interest rates deposits relative to other economies attract Capital into the economy. When markets experience a slowdown or heading for a crash, it is amplified by the outflow of cash as it propels the de-liquefication and further drives down the confidence of people. Hence, healthy Capital inflow is essential to maintain the economy and for the currency to hold its value against other currencies. The same is illustrated in the below plot:

(Chart Credits – Market Business News)

Economic Reports

Capital Flow is a broad metric with several components, as discussed. The corporate balance sheets and press releases can be used to understand the Capital Flow within corporate sectors, which they usually release quarterly, or annually on their own official websites. The Federal Reserve System releases of the United States releases its Federal Budget and its recent revisions on its official website. There are many online platforms to track the status of the global stock exchanges themselves to observe the Capital Flow.

Sources of Capital Flows

Fed Balance Sheet Data & Information can be accessed here.

Information on major indices can be found here.

Capital Flow metrics with illustrative graphs for analysis can be found here.

Impact of the ‘Capital Flows’ news release on the price chart 

Now that we have understood the importance and significance of Capital Flows in a country, we shall study the impact of the same on the value of a currency. Capital Flows does not only mean the movement of funds across countries, but it is also measured in terms of investment in asset-classes, venture capital, federal budget, mutual funds, and government spending.

Capital Flows have quite an impact on the economy, if not a major effect. The revenue of the local Exchange Market, money supply and liquidity are some of the parameters which fall prey to any disturbances in the Capital Flows. Traders and Investors keep a watch on the Capital Flows data and monitor the trend of Flows. They will be interested in investing in the country only if they feel that there is growth potential looking at the monthly data.

In this section, we will be looking at the Capital Flows data of the U.S. collected in the Month of February and analyzed the impact on various currency pairs. This data is collected and published by the Department of Commerce’s Bureau of Economic Analysis. A higher than expected reading should be taken to be positive for the currency while lower than expected data is considered to be negative.

USD/CAD | Before The Announcement

Let us first analyze the USD/CAD currency pair. The above image shows the characteristics of the chart before the announcement was made, and we see that the pair in a strong uptrend moving aggressively higher. The uptrend could be due to another fundamental reason which we are not sure about. Thus, we should not be taking ‘short’ trades based on the forecasted data as we don’t see any signs of reversal on the chart.

USD/CAD | After The Announcement

After the Capital flows data is published, we witness a large amount of volatility in the market, and finally, the price closed as a bullish candle. Due to the increased volatility, the price initially went lower, but later, when traders apprehended the numbers, they bought U.S. dollars aggressively, and the ‘news candle’ closed with great strength. This reaction was because the Capital Flows data was largely above expectations and much higher than last time. However, one should not chase the market and enter for ‘buy’ but instead wait for a retracement to join the trend.

AUD/USD | Before The Announcement

AUD/USD | After The Announcement

These are the images of the AUD/USD currency pair, where the first image shows the state of the chart before the announcement is made. In the first image, we see that the price is mostly moving in a ‘range,’ and there is a fair amount of volatility on both sides. Just before the news release, the price is a little above the ‘support’ area, and one can expect some green candles from this point.

This means one should be cautious before taking any ‘sell’ trade from here. After the news announcement, the price sharply drops lower, and we see a rise in the volatility to the downside. Traders again bought U.S. dollars in this pair, and the price closed as a strong bearish candle exactly at the ‘support.’ One could use the supply point of the ‘news candle’ and then take a ‘short’ trade with a  stop loss above the recent high.

NZD/USD | Before The Announcement

NZD/USD | After The Announcement

Next, we discuss the NZD/USD currency pair where before the announcement is made, the market is range-bound, and currently, the price is in the middle of the range. Aggressive traders who wish to ‘buy’ the currency pair based on the forecasted data can do so, but they do should be willing to close their positions after the release if there is a huge difference in the actual data.

But as the volatility is high to the downside, it is advised to wait for the news outcome and then trade based on the market reaction. After the news release, traders sell the currency pair owing to wonderful Capital Flows data for the U.S. economy, and here too, the price closes as a bearish candle. Now we are sure that the weakness could be increasing in the pair, and one can take a risk-free ‘short’ trade with a stop-loss above the ‘resistance’ of the range.

That’s about Capital Flows and the impact of its new release on the Foreign Exchange price charts. Let us know if you have any questions 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

Understanding ‘Core Inflation’ & It’s Impact On The Forex Price Charts

Introduction

Introduction

Introduction

Core inflation is the change in the price of the goods and services that do take food and energy into account. It is referred to as ‘core’ because it represents the most accurate illustration of the underlying inflation trends. The reason for the exclusion of food and energy is due to its high volatility. They change so often that they may depict an inaccurate reading of the inflation rate. And the commodity market is the sole cause behind the volatility, as it extensively traded all day.

Why Exactly Food and Energy are Excluded

As already mentioned, Food and Energy are exempted from the calculation of core inflation because the volatility in these markets is too high. This reduces the accuracy of the core inflation rates. Food and energy are considered as the most necessary staples; that is, their demand does not change even if there is a price hike. For instance, let’s say the gas prices rise due to the rise in oil prices. But this rise will hardly affect you as you’ll still need to fill up your tank in order to drive your vehicle. Similarly, you will not become hesitant to go to the grocery store because the prices have risen.

Oil and gas are commodities that are traded on the exchange market where people can buy and sell them. The commodity traded bid on the oil prices when they suspect a fall in supply or a rise in demand. Also, the thick that war will bring down the supply of oil. With this assumption and analysis, they buy at the present price and anticipate a higher price in the future. And this is enough to pump up the oil prices in the market. And if things don’t go as per the plan, the prices fall when they sell. Hence, this creates high volatility in the market.

The food prices are dependent on the prices of gas. The food prices tend to rise along with the gas prices because transportation of the food is dependent on trucking. When the oil prices rise, the effect can be seen in the gas price a week later. And if the gas prices maintain its uptrend, the effect of it can be observed on the food prices a few weeks later.

Measuring Core Inflation

The core inflation is measured by both the Consumer Price Index (CPI) and the core Personal Consumption Expenditure Index (PCE). The PCE is the depiction of the prices of goods and services purchased by consumers in the United States. Also, since inflation determines the trend in trend in the rising prices, the PCE is a vital metric in assessing inflation. However, both PCE and CPI are considered to be very similar as both help in determining the inflation in the economy.

CPI and PCE – Which is the Preferred Measure?

It is observed that PCE tends to provide inflation rates that are less affected by the short-term price changes, which is why the Federal Reserve prefers the PCE index over the CPI. The Bureau of Economic Analysis (BEA), a division of the Department of Commerce, measures the rates by using the existing gross domestic product (GDP) data, which helps in determining the overall trend in the prices. The GDP gives the measure of the total production of goods and services. In addition, BEA takes in the monthly Retail Survey data and compares it with the consumer prices generated by the CPI. In doing so, the data irregularities are removed, which helps in providing long-term trends.

Why is Core Inflation Important?

It is important to asses core inflation because it determines the relationship between the price of the goods and services and the level of the consumer income. If there is an increase in the price of the goods and services and no proportional increase in consumer income, consumer buying power will decrease. So, we can conclude that inflation causes the value of money to depreciate compared to the prices of goods and services.

However, if the consumer income increases, but the price of the goods and services remains unchanged, consumers will theoretically have money buying power. Moreover, there will be an increase in the investment portfolio, which leads to asset inflation. And this can generate additional money for consumers to spend.

Core Inflation and its Impact on the Economy and Currency

Core inflation has both a subtle and destructive effect on economic growth. It is said to be subtle because an increase of one or two percent takes quite a while. However, this can have a positive effect at this rate as well. People purchase goods and services beforehand, knowing that price will rise in the near future. Hence, this increase in demand stimulates economic growth. And since currency depends directly on the economy, the price of the currency rises as well.

Inflation can have a negative effect on the economy, as well. That’s because people will have to spend how much ever high price on food and gas, as they are the essentials. This brings down other consumer sectors in the market because people tend to spend less here. Their businesses are less profitable now. This imbalance in the market lowers the economic output.

Reliable sources of data for Core Inflation

The core inflation rate is released by the countries’ statistics board. For most countries, it is released on a monthly basis. And the reports are in terms of percentages. Below is a list of sources of core inflation data for different countries.

EUR | USD | AUD | GBP  For other world countries, you may access those reports here.

How does Core Inflation Affect the Price Charts?

Until now, we understood the definition of Core inflation and its impact on the economy and the currency. Here we shall see the immediate effect of the currency pair when the reports are released. For our example, we will be taking the U.S. dollar for our reference. The core inflation rate in the U.S. is released by the U.S. Bureau of labor statistics. The frequency of the announcement of data is monthly.

Below is the core inflation data released by the U.S. Bureau of labor statistics for the month of February. But, the data for it is announced in the first week of March. We can see that the core inflation has turned to be 2.4 percent, which is 0.1 percent higher than the previous month and the forecasted value. Now, let’s see how this value has affected the U.S. Dollar.

EUR/USD | Before the Announcement – (March 11, 2020 | Before 12:30 GMT)

Below is the chart of the EUR/USD on the 15min timeframe just before the release of the news.

EUR/USD | After the Announcement – (March 11, 2020 | After 12:30 GMT)

Below is the same chart of EUR/USD on the 15min timeframe after the release of the news. The news candle has been represented in the chart as well. It is evident from the chart that the news did not have any effect on the currency pair. Though the reports showed an increase in the core inflation, there was hardly any drastic pip movement in the pair. Also, the volatility was below the average, and the volume was low. With this, we can come to the conclusion that the core inflation rate did not impact the EUR/USD.

GBP/USD | Before the Announcement – (March 11, 2020 | Before 12:30 GMT)

GBP/USD | After the Announcement – (March 11, 2020 | After 12:30 GMT)

Consider the below chart of GBP/USD on the 15min timeframe. We can see that the news candle was a bearish candle. That is, the news was positive for the U.S. Dollar. However, if we were to check on the volatility of the market, the volatility when the news came out was at the average value. Seeing the volume bar corresponding to the candle, it wasn’t high as such. Hence, the core inflation did not impact the GBP/USD.

Traders who wish to trade this pair can freely go ahead with their analysis as the news has a very light impact on the USD.

USD/CAD | Before the Announcement – (March 11, 2020 | Before 12:30 GMT)

USD/CAD | After the Announcement – (March 11, 2020 | After 12:30 GMT)

Below is the USD/CAD candlestick chart on the 15min timeframe after the release of the news. The news showed an increase in the core inflation rate by 0.1 percent. In the chart, we can see that the report turned out to be positive for the USD. In fact, the news candle actually broke the supply level and went above it. Compared to EUR/USD and GBP/USD, the core inflation had a decent impact on USD/CAD. However, the volatility was at the average mark, and the volume didn’t really spike up.

Conclusion

Core inflation is an economic indicator that measures the inflation of an economy without considering food and energy. This is because of the high volatility in the food and energy market. The core inflation rates are usually taken from the CPI or the PCE. This is an important indicator as it determines the relationship between the price of goods and services and consumer income.

It also gives an idea of the current economy of a nation. However, when it comes to its effect on the currency, there is not much impact on it. So, conservative traders can trade the markets without fearing the release of the news, as there is no drastic rise in the volatility of the markets.