Tag: Sales

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Forex Fundamental Analysis

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

Introduction

Introduction

Introduction

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

Understanding New Home Sales

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

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

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

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

How to use New Home Sales Data for Analysis

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

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

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

Source: St. Louis FRED

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

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

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

Impact on Currency

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

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

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

Sources of Data

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

How New Home Sales Data Release Affects Forex Price Charts

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

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

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

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

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

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

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

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

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

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

Categories
Forex Fundamental Analysis

The Impact Of ‘Total Vehicle Sales’ Data On The Forex Market

Introduction

Introduction

Introduction

Vehicle sales figures offer us much insight into the consumer demand and overall health of the economy. Changes in vehicle sales figures could also be used for predicting the near-future direction of economic growth. Understanding how vehicle sales figures can be used to infer upcoming trends in crucial economic indicators could always give us the advantage of being ahead of the market trend.

What is Total Vehicle Sales?

Total Vehicle Sales represent the overall number of domestically produced vehicles that have been sold. The reports could be monthly, quarterly, or even yearly, depending on the reporting vehicle manufacturing companies. In other words, Total Vehicle Sales is the annualized new vehicles sold count for a given month.

The automotive industry represents a vital component of the United States economy. It makes up about 3% of the total GDP and remains the largest industry in the manufacturing sector. It is responsible for employing lakhs of people in the United States and transacts in billions each year.

How can the Total Vehicle Sales numbers be used for analysis?

At first, the importance of the vehicle sales figure may not be apparent, but vehicle sales serve useful for economic analysis. A vehicle is a significant purchase for people. People buy vehicles when they are confident about their ability to make payments. It is possible only when they have considerable disposable income or procure loans at lower interest rates.

When people’s disposable income is considerable, it means the people are affluent financially and reflects the good health of the economy. On the other hand, when loans are available to more people at lower interest rates, it means there is sufficient monetary stimulus from Central Banks to promote economic growth and money is easy to come by. Such inflationary pressures stimulate economic growth and indicate that the economy is likely to grow steadily.

The increase in vehicle sales figures reinforces the positive affirmations forecasted by other economic indicators like consumer spending or interest rates. As consumer spending comprises more than two-thirds of the GDP, an increase in vehicle sales likely indicates a healthy two or three quarters that are going to continue in the economy.

Equity markets respond and perform exceptionally well around the Total Vehicle Sales figures, as the increasing figures in sales imply increasing profits for the related companies. The increase in profits due to sales is doubled down by the stock prices soaring higher, and vice-versa also holds. Hence, the vehicle sales figures are given much-deserved attention every month by the equity traders and the media. To some degree, currency markets feed off from the equity markets, but the effect is noticeable only when the changes are significant.

Vehicle purchases are considered to be discretionary spending, and when people are paying for such items, it indicates the economy is flourishing. The relation between vehicle sales and economic growth also becomes more apparent during recessions, where vehicle sales drop significantly. During the Great recession of 2007-2009, vehicle sales fell by 3 million.

With rapid development in the automobile industry, more durable vehicles that last longer, unlike older models, are coming into the market.  It means people need not buy new vehicles as frequently as before. Hence, recent trends should incorporate this factor also into the statistics.

Alongside this, there is a shift in the industry due to disruptive brands like Tesla introducing electric cars as a contrast to combustion engines. It affects the industry and the dependent oil and gasoline industries as well. Self-driving and Artificial Intelligence equipped automobiles are catching up with the people, and this could soon invalidate many traditional jobs that came as a result of the regular gasoline cars and trucks.

The current COVID-19 pandemic already cost the economies of most countries much than they could handle, and many industries suffered heavy losses. The silver lining for the automotive industry is coming from the fact that as people resume their regular life by going back to their work require a safe commute. Things are looking brighter for the automobile industry as more people are considering the safety assured through private commute over the risk involved in the public transportation system.

Impact on Currency

Vehicle Sales acts as a coincident indicator that reflects the health of the economy at the current state. The currency markets are focused more on the leading indicators before the trends pick up. Total vehicle sales prove to be more useful for the equity markets for trading on the automobile and other related industries, but currencies require more than just vehicle sales.

Hence, overall Total Vehicle Sales are a low-impact indicator for the FOREX market and are useful in double-checking or reaffirming our leading indicator predictions. Economists and business analysts will use total vehicle sales data to report current economic health, but currency traders can overlook this indicator for other macroeconomic leading indicators.

Economic Reports

The Bureau of Economic Analysis (BEA) provides monthly reports on total vehicle sales on its official website. Apart from this, the St. Louis FRED website also details the same figures historically in a more comprehensive and visually depictive way.

Sources of Total Vehicle Sales

We can obtain Total Vehicle Sales figures for the United States from BEA.

For analysis purposes, the St. Louis FRED website offers better resources and ease of access for Vehicle Sales figures.

We can obtain Global Total Vehicle Sales figures for the majority of the countries from Trading Economics.

How Total Vehicle Sales Data Release Affects The Price Charts

In the US economy, total vehicle sales data is an important leading indicator of consumer spending and consumer confidence. It measures the annualized number of new vehicles sold domestically in the reported month. The most recent data related to this was released on August 3, 2020, at 7.00 PM ET. The total vehicle sales is a combination of all car sales and all truck sales data and can be accessed from Investing.com here. The historical data of total vehicle sales can be accessed from Trading Economics here.

The screengrab below is of the monthly total vehicle sales from Investing.com.

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

The screengrab below shows the most recent changes in the monthly total vehicle sales data in the US. In July 2020, the monthly total vehicle sales were 14.5 million compared to 13.1 million in June 2020. This increase is expected to be positive for the USD.

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

EUR/USD: Before Monthly Total Vehicle Sales Release on August 
2020, Just Before 7.30 PM ET

From the above 15-min EUR/USD chart, the pair can be seen to be trading on a neutral trend before the release of the total vehicle sales data. This trend represents a period of relative market inactivity with candles forming near a flattening 20-period Moving Average.

EUR/USD: After the Monthly Total Vehicle Sales Release on 
August 2020, 7.30 PM ET

After the data release, this Forex pair formed a 15-minute bearish candle, indicating that the USD became stronger as expected due to the increase in total vehicle sales. The data release was, however, not significant enough to cause any market volatility as the pair continued to trade in a neutral trend with the 20-period Moving Average flattening.

GBP/USD: Before Monthly Total Vehicle Sales Release on August 
2020, Just Before 7.30 PM ET

Similar to the trend that we have observed with the EUR/USD pair, the GBP/USD was trading in a neutral pattern before the data release with candles forming around a flattening 20-period MA.

GBP/USD: After the Monthly Total Vehicle Sales Release on 
August 2020, 7.30 PM ET

After the news announcement, this pair formed a 15-min bearish candle but continued trading in the neutral trend observed before the data release.

AUD/USD: Before Monthly Total Vehicle Sales Release on August
2020, Just Before 7.30 PM ET

AUD/USD: After the Monthly Total Vehicle Sales Release on 
August 2020, 7.30 PM ET

As observed with the EUR/USD and the GBP/USD pairs, the AUD/USD traded within a subdued neutral trend before the data release. The pair formed a 15-minute bearish candle after the news release, but unlike the other pairs, it continued trading in a weak uptrend.

Although it plays a vital role as an indicator within the economy, it is evident that the total vehicle sales indicator does not cause any significant impact on the price action in the forex markets.

Categories
Forex Fundamental Analysis

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

Introduction

Introduction

Introduction

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

Understanding Retail Sales YoY

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

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

How Retail Sales YoY is Measured

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

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

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

How Retail Sales YoY can be used in Analysis

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

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

Source: St. Louis FRED

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

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

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

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

Impact on Currency

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

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

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

Sources of Retail Sales YoY Data

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

How Retail Sales YoY Data Release Affects The Forex Price Charts

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bottom Line

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

Categories
Forex Daily Topic Forex Fundamental Analysis

Understanding The Impact of ‘Sales Tax Rate’ News Release On The Forex Market

Introduction

Introduction

Introduction

The sales tax rate usually comes as an afterthought to many. But for forex traders, understanding how the rarely-talked about sales tax rate could prove useful in the long-run. This article defines what sales tax rate is and further shows how they impact a country’s economic development and, by extension, its currency.

Understanding the Sales Tax Rate

A sales tax rate is the percentage of the total cost of the goods or services being sold. Sales tax is a consumption tax that is imposed by governments or local authorities on the sale of goods and services. The sales tax rate is calculated as a percentage then added on the cost. These taxes are usually collected at the retail point of sale on behalf of the imposing authority.

As structured, any business that is offering goods or services is liable for the payment of the sales tax in a given jurisdiction. Depending on the laws, this occurs is they have a physical location within the jurisdiction, an official employee, or an affiliate.

How Sales Tax Work?

The sales tax is collected at the end of the supply chain, only after resale to the consumer has occurred. Since consumers are the ones paying the tax, businesses receive a resale certificate to show that the sales tax is not yet due. The purpose of this certificate to the resellers is to ensure that no sales tax is paid on purchases of items to be resold.

The administration for the sales tax is triggered by whether or not a particular business has a presence within the tax jurisdiction. To be eligible to collect sales tax from its customers, the business has to apply for a sales tax permit from the relevant authorities.

Depending on the jurisdiction, the goods and services that are eligible for a sales tax vary. Groceries and medications are exempt from sales tax, as are goods and services purchased by nonprofit organizations.

Sales Tax Rate as an Economic Indicator

The sales tax rate can serve as a leading indicator for the shifts in demand and supply within the economy. Higher sales tax rates reduce the purchasing power and, with it, the aggregate demand and aggregate supply. The lowered demand and supply within the economy result in reduced economic activities, which could have an unintended ripple effect throughout the economy. With lowered demand and supply, unemployment as a result of job cuts in the affected sectors is another unintended consequence of a higher sales tax rate.

On the other hand, lowering sales tax increases the purchasing power of consumers, which in turn increases the aggregate demand and aggregate supply. These increases lead to job creation in various sectors and boost a flourishing economy. With a lower sales tax rate, the GDP growth within the country is guaranteed to bring about a strengthening currency as a result of improved economic conditions.

How the Sales Tax Rate Affects the Economy

In general, the sales tax rate has a negative correlation with the GDP. This negative relationship is shown in the scatterplot graph below of the US state sales tax rate against the GDP.

Source: Georgia Tech Library

At its core, sales tax is a revenue stream for the government. Thus, it can be said that a higher sales tax rate increases government revenues. The increase in government revenues increases government expenditure, hence higher GDP. In this scenario, a conflict arises. This conflicts because sales tax is an extra cost passed on to the consumer.

Thus, in general, the sales tax rate reduces the purchasing power of the consumers.  The reduced purchasing power leads to lesser sales taxes collected by the government, hence lower GDP. As a result of the diminished purchasing power, the consumers will spend less, resulting in a reduction in the aggregate demand within the economy. This reduction in demand leads to a reduction in the economic output hence lower GDP.

On the other hand, a lower sales tax rate returns some of the purchasing power to the consumers. They will spend more of their disposable income hence increasing the aggregate demand and supply within the economy. The increase in demand and supply increase the economic output. Furthermore, spending more implies that the government is bound to collect more revenue in the form of the applicable sales tax. An increase in revenue will increase the government expenditure within the economy, thus increasing the GDP.

How Sales Tax Rate Impacts Currency

The strength of any currency is usually seen as a direct reflection of its economic performance. As already discussed, the sales tax rate is considered to be leading indicators of aggregate demand and aggregate supply within an economy, and by extension, the unemployment levels. An increase in the sales tax rate will result in a drop in the aggregate demand and aggregate supply. This drop leads to increased unemployment levels and consequently reduced GDP. Long term currency traders can take their cue from an increased sales tax rate as an impending loss of strength in the country’s currency.

This loss in the currency’s strength can be brought by the expectations that, in the long run, central banks and the government will employ the use of expansionary fiscal and monetary policies to stimulate a stagnating economy. These policies harm the currency.

On the other hand, lowering the sales tax rate signifies that in the long run, the economy will be stimulated to grow. This growth is brought about by increased demand and supply. For forex traders, a country that is lowering the sales tax rate or entirely removing the sales tax can expect its currency to strengthen. The currency strength is because the traders can anticipate that in the long run, the government and the central banks may be forced to employ deflationary monetary and fiscal policies to avoid an overheating economy. These contractionary policies are good for the country’s currency.

Therefore, it can be expected that an increase in sales tax corresponds to a weakened currency against other pairs while a decrease in the sales tax rate corresponds to the strengthening of the currency.

How Sales Tax Rate News Release Affects The Forex Price Charts

The sales tax rate is not an indicator forex traders consider when placing their trades because it is a low-impact leading indicator. However, it is useful for forex traders to know just how much the impact of this low-level indicator is on the price charts.

In the US, the national government does now impose the sales tax. However, the various local governments set their own local sales tax rates. The detailed list of the US states and the sales tax rate applicable in each state can be found on the Sales Tax Institute website. The data on annual GDP growth can be accessed from the World Bank website. A forecast of the sales tax rate through to 2020 can be found on the Trading Economics website.

Below is a screengrab of the Sales Tax Institute showing the most recent changes sales tax rate in Washington.

In the latest release, Washington state lowered the sales tax rate applicable from 8.0 % to 6.5% in an attempt to alleviate the strain on consumers as a result of the Coronavirus pandemic.

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

EUR/USD: Before Washington Sales tax rate release July 1, 2020

As can be seen in the chart above, we have plotted a 20-period Moving Average on a one-hour EUR/USD chart. From the chart, the pair is one a steady uptrend, represented by the candlesticks forming above the Moving Average. Before the news release at 1730GMT, the pair can be seen to be on a recovering uptrend. This uptrend can also be observed in the AUD/USD pair, as shown by the chart below.

AUD/USD: Before Washington Sales tax rate release July 1, 2020

For the NZ/USD, the pair is on a steady downtrend for hours preceding the news release. This trend is shown in the chart below.

NZD/USD: Before Washington Sales tax rate release July 1, 2020

For long-term forex traders, the pattern offers an excellent opportunity to go long on the EUR/USD and AUD/USD pairs while short on NZD/USD, since the prevailing market trends would favor them. Let us now see how the price action responded to the release of the sales tax rate in Washington State.

EUR/USD: After the sales tax rate release July 1, 2020

Lowering the sales tax rate should have a strengthening effect on the USD. However, as shown in the chart above, the news release of the sales tax rate had no impact on the EUR/USD since the uptrend continued with the same magnitude as before. The same trend can be observed on the AUD/USD and NZD/USD pairs since the previous trends were no reversed. This trend is shown in the charts below.

NZD/USD: After the sales tax rate release July 1, 2020

AUD/USD: After the sales tax rate release July 1, 2020

It is evident from the after-news charts that the release of the sales tax rate does not have any impact on the price action. Although it is has a significant impact on the GDP, it is a low-level economic indicator in the forex market. Cheers!

Categories
Forex Daily Topic Forex Fundamental Analysis

Understanding ‘Retail Sales MoM’ Fundamental Forex Driver

Introduction

Introduction

Introduction

The Month-over-Month Retail Sales figures are one of the closely watched statistics in the financial markets and have a lot of volatility in the markets around these figures. An increase in sales is one of the earliest signs of growth for businesses that can imply a multitude of things for the economy. It is a closely watched high impact leading indicator. Hence, an understanding and analysis of Retail Sales are paramount for our fundamental analysis.

What is Retail Sales Month-over-Month?

Retail Sales

In the purest sense, it is just the dollar amount of purchase of goods and services made by end-consumers for a given period. Here, the period is MoM, which stands for Month-over-Month. It is the sale of durable and non-durable goods at the retail outlets to consumers.

It can also be defined as the purchase of finished goods and services by consumers and businesses. The goods and services have reached the end of the supply chain. The chain generally starts with the manufacturer or provider and ens up at the retailer where the general population or other businesses consume it.

The Retail Sales figures are often presented in two ways: including and excluding auto and gas sales. As the Auto (vehicle purchase) figures and Oil prices fluctuate frequently, the exclusion helps to identify the trends better once the volatile components are removed. The excluded version is called the Core Retail Sales report.

Retail Sales statistic covers the in-store (retail) sales, catalog sales, and out-of-store sales of durable (goods that last more than three years) and non-durable goods (that have short-life span). The major categories include:

Retail Stores have the following categories:

How can the Retail Sales MoM numbers be used for analysis?

The Retail Sales figures provide us a reliable measure of CURRENT economic activity. It is essential to an objective assessment of the need for and impact of a broad range of policy decisions. Hence, the policymakers use this statistic to keep a pulse-check on the economy’s health.

The Retail Sales figures are significant statistics for many as the Consumer Spending makes up 66% of the United States Gross Domestic Product. The remainder is from Government Spending, Business Spending, and Net Exports. It is also essential as it represents the end of the supply chain figures. All the statistics that precede the Retail Sales figures like Inventory Changes or Manufacturing Production figures all lead up to the Retail Sales, which confirms and triggers the next wave in the trend change in the other indicators, in a feedback loop.

In other terms, once Retail Sales figures improve, businesses see an increase in their revenue and correspondingly demand their products, which leads to an increase in their Manufacturing Production figures, and that would later translate to Change in Inventory statistics. So, we see how the Retail-Sales figure operates amongst the economic indicators in a feedback loop cyclical pattern.

Once Retail Sales figures improve, businesses see profits that encourage expansionary plans, that would increase investment in their business, employment, or even wage growth. It is necessary to understand, Sales improve business, once business improves, wage growth or employment increase is a possibility. Hence, the Retail Sales figure is an essential leading macroeconomic indicator for our fundamental analysis.

The US Bureau of Economic Analysis releases quarterly GDP statistics. If the Month-over-Month Retail Sales figures have been influential, then there is a good chance that the GDP print will be higher. The only downside to the Retail Sales figures that we need to be careful of is that it does not account for inflation, and the increase in the Retail Sales figures could also be a by-product of inflation.

To be noted: The Retail Sales figures are seasonal. It generally tends to increase around the holiday season. Hence, care must be taken during analysis that the decline in stats is due to a business slowdown or seasonal effects. In this case, the Retail Sales figures Year-over-Year is also another parameter that we can use to compare the current conditions with the preceding year to understand the growth trend better, as the GDP is also compared with the last year.

Although data is available in the seasonally adjusted format, to account for the seasonal patterns but it does not adjust for inflation. Hence, it is essential for users of the data to check for the seasonally adjusted figures.

Impact on Currency

Retail Sales is a leading macroeconomic high impact indicator. An increase in Retail Sales is the first sign of growth for businesses in monetary terms. Due to a multitude of economic factors that are affected by the Retail Sales figures, the volatility around the release of these figures is generally high.

It is a proportional indicator, meaning that a consistent or significant increase in the Retail Sales figures translates to increased profits for the businesses, indicates reasonable Consumer Confidence and Consumer Spending, and in turn it will also translate to increased employment, and wage growth. It is a cyclical effect that further promotes spending, and business booms and the economy prospers. It translates to higher GDP prints, which is appreciating for the currency.

Low Retail Sales figures are indicative of a slowdown of business, bearish Consumer Sentiment, where consumers are saving more and spending less. It stagnates the businesses, in the worst case, could lead to lay-offs, and ultimately recession. It will translate to lower GDP prints, which is depreciating for the currency.

Economic Reports

In the United States, the Census Bureau publishes monthly reports of the Retail Sales figures on its official website under the section “Monthly Retail Trade.” The report is released at 8:30 AM about two weeks after the reference month (13-15th day of the month). The schedule for the year is already posted on the website for the user’s convenience. The report details the total sales, percentage changes, and also YoY (Year-over-Year) changes.

Sources of Retail Sales MoM

  • The Month-over-Month Retail Sales statistics can be found here
  • Both advance estimates and Retail Sales figures are available in aggregated format in St. Louis FRED website here
  • We can find Retail Sales monthly figures for various countries here

Impact of the ‘Retail Sales – MoM’ news release on the Forex market

In the previous section of the article, we understood the Retail Sales economic indicator and its consequences on the economy. We will take this discussion forward in identifying the impact of Retail Sales on the value of the currency. Retail Sales is an important economic indicator because consumer spending drives much of our country.

When consumers spend more, the economy tends to hum along, whereas if consumers are uncertain about their financial future, they hold off their purchases that lead to the slow down of the economy. The release of Retail Sales numbers is said to have a large impact on the currency, as shown in the below image.

In this section, let’s analyze the Retail Sales data of the Unites States that was gathered in the month of March. The below image shows that there was a big drop in the Retail Sales compared to the previous month indicating a major disruption in the economy. Let’s see how the market reacts to this data.

USD/JPY | Before the announcement

We will start with the USD/JPY currency pair to witness the impact of the news announcement. The above image shows the state of the chart before the news announcement, where we see that the overall trend of the market is up, and currently, the price is on the verge of continuation of the trend. Depending on the impact of the news, we will position ourselves in the currency pair.

USD/JPY |  After the announcement

After the news announcement, there is a surge in the price, and volatility jumps to the upside. Even though the Retail Sales were very poor in the month, the market reaction was opposite to what was expected. After the news release, traders bought US dollars and strengthened the currency much more. The bullish ‘news candle’ shows the impact of the news on the currency. Since the market reacted very positively to the data, we should take a ‘buy’ trade only after a price retracement.

EUR/USD | Before the announcement

EUR/USD | After the announcement

The above images represent the EUR/USD currency pair, where we see that the market is in a significant downtrend indicating the great amount of strength in the US dollar. The price is currently is at its lowest point, which means we need a pullback in the market to join the trend. If the news announcement results in a retracement of the price, this could be taken as an opportunity for taking a ‘short’ trade.

After the news announcement, the market moves lower, and volatility increases to the downside. Although the Retail Sales data was weak, it did not result in weakening of the currency, but rather the US dollar strengthened. This means the news data was not bad enough to turn the markets to the upside. We will still be looking to enter the market only after a price retracement to a key technical level.

USD/CAD | Before the announcement

USD/CAD | After the announcement

The above price charts are of the USD/CAD currency pair, where we see that the market is aggressively moving up with almost no price retracement. This indicates the US Dollar is very strong, or the Canadian dollar is weak. In any case, we will join the trend only if the price retraces to a ‘support’ or ‘demand’ area.

After the news announcement, volatility expands on the upside, and the price closes, forming a bullish ‘news candle.’ Here too, the Retail Sales data has an opposite impact on the currency as the market reacts positively to the data even though the Retail Sales were largely lower in this quarter. It is advised not to chase the market after the news release since it against the rules of risk management.

We hope you understood Retail Sales MoM fundamental Forex driver and the relative impact of its news announcement on the Forex price charts. Cheers!