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Forex Fundamental Analysis

GBP/CAD Global Macro Analysis – Part 3

GBP/CAD Exogenous Analysis

The UK and Canada Current Account Differential

The current account differential between the UK and Canada can determine if the GBP/CAD pair is bullish or bearish. If the differential is positive, it means that the UK has a higher current account balance than Canada. This would imply that the GBP is in higher demand in the forex market than the CAD; hence, it is a bullish trend for the pair. Conversely, if the current account differential is negative, it means that the UK has a lesser current balance than Canada. It would imply that the GBP has a lower demand than the CAD in the forex market; hence, a bearish trend for the pair.

In Q3 of 2020, the UK had a current account deficit of $20.97 billion while Canada had a $5.83 billion deficit. Thus, the current account differential is -$15.14 billion. We assign a score of -2.

The interest rate differential between the UK and Canada

The interest rate differential is the difference between the Bank of England’s interest rate and that by the Bank of Canada. In the forex market, carry traders use the interest rate differential to decide whether to buy or short a currency pair. When the interest rate differential is positive, traders will earn the differential by going long. If the differential is negative, traders can earn the differential by shorting the currency pair.

Therefore, if the GBP/CAD pair’s interest rate differential is positive, the pair is bound to adopt a bullish trend. Conversely, if negative, the pair is bound to be bearish.

In 2020, the interest rate in the UK dropped from 0.75% to 0.1%. In Canada, the BOC cut interest rates from 1.75% to 0.25%. Therefore, the interest rate differential is -0.15%. The interest rate differential between the UK and Canada has a score of -1.

The differential in GDP growth rate between the UK and Canada

This differential measures the changes in the growth rate between the two economies. It is a preferred method of comparison since economies are of different sizes. Naturally, the economy with a higher GDP growth rate will have its currency appreciate more. Therefore, if the GDP growth rate differential is positive, it means that the GBP/CAD pair is bullish. If negative, then the pair is bearish.

During the first three quarters of 2020, the UK economy has contracted by 5.8%, while the Canadian economy has contracted by 3.3%. This makes the GDP growth rate differential -2.5%. Hence, a score of -1.

Conclusion

Indicator Score Total State Comment
The UK and Canada Current Account Differential -2 10 A differential of – $15.14 The UK has a higher deficit than Canada
The interest rate differential between the UK and Canada -1 10 -0.15% Expected to remain at -0.15% until either economy have recovered
The differential in GDP growth rate between the UK and Canada -1 10 3.30% The Canadian economy contracted at a slower pace than the UK economy
TOTAL SCORE -4

The cumulative score for the exogenous factors is -4. This means that we can expect the GBP/CAD pair to trade in a downtrend in the short term.

However, technical analysis shows the pair adopting a bullish trend with the weekly chart trading above the 200-period MA. More so, the pair is seen bouncing off the lower Bollinger band. Keep an eye on the near-term changes in the exogenous factors.

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Forex Fundamental Analysis

NZD/USD Global Macro Analysis – Part 1 & 2

Introduction

The global macro analysis of the NZD/USD pair will involve the endogenous and exogenous analyses of the US and New Zealand economies. The endogenous analysis will focus on domestic macroeconomic factors that drive the economy. The exogenous analysis will focus on economic indicators that comprehensively compare both the US and New Zealand economies.

Ranking Scale

Both the endogenous and exogenous factors will be ranked on a scale of -10 to +10. A negative ranking for the endogenous means that the factor had a negative impact on either the currency, while a positive ranking had a bullish impact on the currency.

Similarly, when the exogenous factor is negative, it has a bearish impact on the currency pair, while a positive ranking means it had a bullish impact.

Summary – USD Endogenous Analysis

From the above table, a clear deflationary effect can be seen on the USD currency and implies that USD has depreciated in its value since the beginning of 2020. For the complete USD Endogenous Analysis, please check here.

Summary – NZD Endogenous Analysis

The NZD endogenous analysis has a total score of 4. This shows that the NZD appreciated in 2020.

  • New Zealand Inflation Rate

The CPI is the most commonly used measure of inflation in New Zealand. Here are the top categories included in the CPI: Housing with a weight of 24.2%; food and non-alcoholic drinks 18.8%; transportation 15%; recreation 9.4%; alcoholic drinks 7%; clothing, household goods and services, health, and education all have a combined weight of 18.2%.

In September 2020, New Zealand CPI increased by 0.7%. Based on the correlation with the GDP, we assign a score of -1.

  • New Zealand Unemployment Rate

This rate shows the number of New Zealand’s working population out of work and actively looking for gainful employment. As an economic indicator, it can be used to show the economy’s ability to add new jobs to the market.

In Q3 of 2020, the New Zealand unemployment rate increased to 5.3% from 4% in Q2. This shows that the labor market is yet to recover from the economic shocks of the coronavirus pandemic. Based on correlation analysis, we assign a score of -5.

  • New Zealand Manufacturing PMI

This is an index that measures the growth in the manufacturing sector in New Zealand. It is a composite of new orders, employment, inventories, and orders delivered from the manufacturing sector. When the index is above 50, it means that the manufacturing sector in New Zealand is expanding. The sector is seen to be contracting when the index is below 50.

In October 2020, the index declined to 51.7 from 54. However, the index is above the pre-coronavirus levels. That implies the manufacturing sector is recovering swiftly. Based on the correlation analysis with GDP, we assign it a score of 3.

  • New Zealand Business Confidence

In any economy, business confidence goes hand-in-hand with business confidence. In New Zealand, the business confidence index is based on a survey of about 700 businesses. The index is the difference between the number of businesses that anticipate economic improvements and those that expect the economic conditions will decline. The index covers export intentions, profit expectations, employment intentions, activity outlook, and capacity utilization.

In November 2020, the ANZ Business Confidence was -6.9 compared to -15.7 in October. Although in the negative territory, the November reading is the highest since September 2017. This shows that more businesses are becoming optimistic about the future operating environment, mostly thanks to the aggressive expansionary monetary and fiscal policies.

Based on correlation analysis with the GDP, we assign ANZ business confidence a score of 4.

  • New Zealand Retail Sales

In New Zealand, retail sales data is aggregated quarterly. It measures the change in the value of goods and services purchased by households. Remember that consumer expenditure is the main driver of economic growth, which makes the retail sales data a leading indicator of GDP growth.

In Q3 of 2020, the New Zealand retail sales increased by 28% from a drop of 14.6% and 1.2% in Q2 and Q1, respectively. The 28% increase is the largest quarterly increase in 25 years. The YoY retail sales increased by 8.3% in Q3 compared to a 14.2% drop in Q2. Based on our correlation analysis, we assign the New Zealand retail sales a score of 6.

  • New Zealand Consumer Confidence

In New Zealand, consumer confidence tends to correlate with households’ willingness to spend in the economy. The Westpac McDermott Miller Consumer Confidence Index gauges the optimist of New Zealand households regarding the economy. The index covers households’ views on their finances, purchases in the economy, and the overall economy.

A score of above 100 shows an increasing level of optimism, while below 100 shows increasing pessimism.

In Q3 of 2020, the New Zealand consumer confidence index dropped to 95.1 from 97.2 in Q2 and 104.2 in Q1. Q3 reading is the lowest in New Zealand since 2008. Based on its correlation with GDP, we assign a score of -4.

  • New Zealand Government Net Debt to GDP

Gross national Debt to GDP helps both local and foreign creditors gauge a country’s ability to service its debt. This indicator shows the level at which the domestic economy is leveraged. A lower ratio is preferable since it means that the country has a higher GDP compared to its debt. This means that it can be able to access cheap debt in the future.

In the 2018/2019 fiscal year, the New Zealand government debt to GDP dropped to 19% from 19.6% in the 2017/2018 fiscal year. In 2020, the New Zealand government debt to GDP is projected to increase to 27% on account of the government’s aggressive spending to ease the economic pressure from the coronavirus pandemic. Based on correlation analysis with GDP, we assign New Zealand government debt to GDP a score of 1.

In the very next article, let’s analyze the exogenous indicators and forecast if this currency pair seems to be bullish or bearish in the near future.

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Forex Fundamental Analysis

USD/JPY Global Macro Analysis – Part 3

USD/JPY Exogenous Analysis

In the exogenous analysis, we will analyze economic indicators that exhaustively compare the performance of the US and the Japanese economies. These factors impact the dynamic of the USD/JPY pair in the forex market. They include:

  • US and Japan interest rate differential
  • The difference in the GDP growth in the US and Japan
  • Balance of trade

US and Japan interest rate differential

The interest rate differential is the difference between the interest rate in the US and that of Japan. Investors would prefer to invest their funds in a country that offers higher returns. Furthermore, carry traders are often bullish on the currency with a higher interest, which ensures that they earn higher yields.

The Bank of Japan has kept the interest rates at -0.1% since 2016. The current federal funds rate in the US is 0.25%. Thus, the interest rate differential for the USD/JPY is 0.35%. Since there are no foreseeable changes in the interest rates in either country, we assign it an inflationary score of 2.

Balance of trade

Balance of trade determines whether a country has a trade surplus or deficit in international trade. A trade surplus results from a country’s exports being of higher value than that of its imports. A deficit occurs when the imports are of higher value than exports. Japan mostly exports machinery and electronics, which puts it at a significant advantage due to the value of these goods. On the other hand, the US is a net importer.

In October 2020, japan has a trade surplus of ¥872.9 billion, which has been steadily increasing since June. The US has a trade deficit of $63.9 billion, which has been growing throughout the year.

The balance of trade differential between the US and Japan has been widening in favor of Japan. Based on our correlation analysis with the USD/JPY, we assign it a score of -6. It means that if this trend persists, we expect the USD/JPY to be bullish in the near term.

The difference in the GDP growth in the US and Japan

Although the US has a higher GDP than Japan, we can compare the two economies based on their growth rates.

The US economy had a GDP growth rate of 33.1% in Q3 2020, while Japan’s economy expanded by only 5%. The US economy is seen to be expanding at a faster pace than that of Japan. Based on the correlation with the price of the USD/JPY pair, we assign an inflationary score of 2. This means that we should expect a bullish trend on the USD/JPY pair if the US economy keeps expanding faster than that of Japan.

Conclusion

The total score from the exogenous analysis of the USD/JPY pair is -2. This implies that in the near term, we should expect a bearish trend in the pair.

Technical analysis of the USD/JPY pair shows that the weekly chart is still trading way below the 200-period MA. Furthermore, the pair has failed to successfully breach the middle Bollinger band, which has served as its resistance level. All the best!

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Forex Course

185. Knowing Which News Release To Trade Is Crucial!

Introduction

Before you develop your trading strategy around the news releases, you first need to decide which news you will use for trading. As we mentioned in our previous course, different economic releases have a varying impact on the forex market. Since the aim of any trade is to gain as many pips as possible, it is only natural that you trade news releases that create high impact – those which can significantly move the forex market in the short-term; or even the longer-term.

The primary way to identify high-impact news releases is by establishing which economic indicator gives a relevant, most current, and comprehensive overview of the economy. The high-impact news releases usually cover these aspects;

Central banks’ monetary policies: These policies can impact future economic growth – both in the short and long term.

Labour market reports: Such reports tend to be of the changes in the previous month. They are a leading indicator of changes in household demand, which is a major contributor to economic growth.

Manufacturing and industrial activities: These sectors are usually among the largest employers in the labor market. Monitoring their growth can be a leading indicator of GDP growth and changes in the unemployment levels.

The services industry: This industry is the first to be impacted by changes in consumer demand.

You don’t have to stress about determining which specific economic indicators are high-impact. The economic calendars take care of this for you. Furthermore, there are several economic calendars out there, so you can compare multiple calendars and check put the consensus about the impact magnitude of the various news releases.

Note that these calendars have a legend to indicate the magnitude of the news release. They show whether the news will have high, medium, or low volatility.

Here’s our recommended list of high-impact economic indicators.

  • GDP releases
  • Inflation indicators like CPI, PPI, and PCE
  • Interest rate decision
  • Unemployment rate and wages data
  • Industrial production, factory orders, or manufacturing production
  • Retail sales
  • Surveys on the manufacturing sector and services industry
  • Sentiment surveys on consumers and businesses

It is important to note that geopolitical developments can be happenstance. These events could include upcoming elections in major economies, natural disasters like tsunamis, pandemics, and geopolitical conflicts. When these events happen, the impact of the release of the economic indicators may change.

For example, towards the end of Q2 in 2020, the impact of these economic indicators was heightened. The reason is that they signaled the rate of economic recoveries after the coronavirus-induced recessions. Furthermore, they showed whether or not the expansionary policies adopted impacted the economy as expected.

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181. Accurately Interpreting The COT Report

Introduction

To this point, you know how to establish market extremes using the COT report. Since you can create your COT report trading indicator, let’s learn how you can effectively interpret the COT report. While spotting the overbought and the oversold regions using the COT report seems arbitrary, a more accurate way of interpreting the COT report would be using percentages of the long and short positions.

We have already established that the best way to identify tops and bottoms using the COT report is by following the trend of the non-commercial traders. Just like the formula for creating the COT trading indicator, calculating the percentages of the long and short positions helps filter out the biases of the raw data.

Calculating the percentage of long positions

For a given currency pair, we first identify the number of long and short contracts. We then use this formula to determine the percentage of long contracts:

For the week of July 31, 2020, the EUR had a net long speculative futures position of 180,648 contracts. The percentage of the long contracts was

For the week of September 18, 2020, the EUR had a net long speculative futures position of 178,576 contracts. The percentage of the long contracts was

Now, assume that you are asked to pick the market top using the raw data for both the above dates. You would have selected the week of July 31, 2020, as your market top. The reason is that the raw data showed that the net long positions for speculative traders have 180648 contracts, while for the week ended September 18, 2020, they had 178576 net long contracts. Clearly, with the raw data, July 31, 2020, would have been the market top.

However, by calculating the percentage of the long contracts for both periods, we see that the week ended September 18, 2020, had the highest percentage at 63.1% compared to 52.6% for the week ended July 31, 2020.

Looking at the futures chart for the EUR, we can confirm that, indeed, the week ended September 18, 2020, was the actual market top.

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Forex Fundamental Analysis

Impact of ‘Commodity Prices’  On The Forex Market

Introduction

Thanks to international trade, some countries prosper disproportionately than others. The disproportionality in the balance of payments is mostly owed to the type of exports a country produces. Countries that are net exporters of precious commodities tend to have a better balance of payment than net importers. For this reason, the fluctuation of these commodities tends significantly affect their economy.

Understanding Commodity Prices 

A commodity can be defined as any physical product that can be traded in any form of exchange. With commodities, there is little differentiation, if any, regardless of where they originate. For example, we can say that an ounce of gold from South Africa is the same as an ounce of gold from Australia.

Naturally, different parts of the world are endowed with different types of natural resources. Furthermore, since commodities are inherently used to produce other goods and services, their value entirely depends on their rarity and demand. Take Copper and Wheat, for example. Both are commodities. But you cannot compare the value of a kilo of copper and a kilo of wheat. Copper is a rare and limited precious commodity, while wheat is readily cultivated. Therefore, a country that is a net exporter of copper will have a better balance of payment than a country that is a net exporter of wheat.

Furthermore, let’s take an example of country A with the largest deposit of commodity X in the world. In this case, country A is basically a monopoly; if it wanted to control the commodity prices, it would reduce the production of the commodity. By doing so, the demand for commodity X would exceed the supply, which means that country A will receive higher prices. Now, imagine a scenario where vast deposits of commodity X are discovered in country B. It now means that the supply of commodity X in the international market will increase, and as a result, the price of commodity X will decrease.

For countries whose economies heavily dependent on commodity exports, the fluctuation of commodity prices heavily impacts the earnings. Furthermore, the changes in the demand for these commodities also affect the GDP of these countries. Note that the price of these commodities also varies depending on their quality. For commodities which are used for trading in the future market, the minimum quality accepted is called the basis grade,

Using Commodity Prices  in Analysis

The commodity prices usually tend to impact the economies which heavily rely on the export of commodities to fund public expenditures.

An increase in commodity prices means that the producing country will receive more income. In turn, this translates to increased wages for workers involved in the production or mining of the commodity. Since households are well compensated, their welfare will significantly increase. Note that for countries heavily dependent on commodity exports, these commodities’ mining or production usually employs a majority in the labor market. Therefore, an increase in wages will significantly impact the changes in the aggregate demand in the economy for consumer goods and services.

This increase in demand tends to lead to an increase in the production of consumer goods. As a result, there will be an expansion of the consumer industry. More so, the expansion of these sectors leads to more job creation hence lowering unemployment levels. Other sectors of the economy will also benefit from this increase in wages. The real estate sector will also flourish since the increase in wages means that households can now afford to fund the purchase of homes or qualify for mortgages.

Conversely, a decline in the prices of commodities means that the labor involved will be compensated lesser. The resultant effect will be a contraction in demand for consumer goods and services since households will be forced to prioritize expenditure on essential products. Consequently, the consumer discretion industry will contract as producers scale down operations to match the decreased demand. As a result, some jobs in these sectors will be lost, contributing to increased unemployment. Therefore, we can see there is a direct link between the changes in commodity prices to the growth of the domestic economy and changes in the domestic employment levels.

Let’s look at another scenario. Say the economy of country A is intertwined with that of country C – country A imports multiple commodities from country C. Since country A’s economy heavily relies on commodities, the prices of these commodities increase, which means that the balance of payment of country A improves and that its citizens are well off. Thus, country A can afford to import more products from country C. therefore, country C’s economy will prosper. Increased imports from A means that production in C will increase, expand its economy, and improve labor market conditions.

Conversely, when commodity prices fall, it means that economic conditions in country A might deteriorate. Consequently, imports from country C will decrease, leading to either C’s economy to contract or a slowdown in its growth. This is usually the case with Australia and New Zealand, whose economies are close to each other.

Source: St. Louis FRED

Therefore, commodity prices do not just affect the economy of countries whose exports are majorly comprised of commodities.

Impact on Currency

The impact of the changes in the commodity price in the forex market is pretty straightforward.

When a country exports a commodity to the international market, it is paid in its currency. Therefore, when the commodity prices increase, it means that the domestic currency will be in high demand. Importers of the commodity will have to convert more of their currencies into the domestic currency. As a result, the value of the domestic currency will appreciate relative to other currencies.

On the other hand, a fall in the commodity means fewer amounts of the domestic currency will be required to purchase the exports. Consequently, the domestic currency will marginally depreciate relative to others.

Sources of Data

In Australia, the Reserve Bank of Australia publishes the Index of Commodity Prices report monthly.

Source: RBA

Trading Economics has a comprehensive list of commodity prices in both the spot and futures market.

How Commodity Prices Data Release Affects The Forex Price Charts?

The latest publication of the Index of Commodity Prices report by the RBA was on October 1, 2020, at 6.30 AM GMT and can be accessed at Invetsing.com. The release of the commodity prices is expected to have a low impact on the AUD.

In September 2020, the YoY the Australian commodity index decreased by 5.8% compared to a 10.2% decline in the YoY index for August 2020.

Let’s see if this release had an impact on the AUD.

GBP/AUD: Before Commodity Price Release on October 1, 2020, 
just before 6.30 AM GMT

The GBP/AUD pair was trading in a neutral pattern before the publication of the Australian commodity index. The 20-period MA was flattened with candles forming just around it.

GBP/AUD: After Commodity Price Release on October 1, 2020, at 6.30 AM GMT

The pair formed a 5-minute bullish candle when the commodity prices were released. Subsequently, the 20-period MA steadily rose with candles forming above it, showing that the AUD weakened against the GBP.

Bottom Line

In Australia, commodity exports account for about 50% of the export income. While this report plays a vital role in forecasting the Australian economy, it is a low-impact economic indicator in the forex market.

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Forex Course Forex Daily Topic

180. Picking Accurate Tops & Bottoms Using the COT Report

Introduction

Our previous lesson covered how you can use the Commitment of Traders report to trade in the forex market. In this lesson, we will learn how you can use the COT report to identify the tops and bottoms, i.e., the levels where a currency is overbought or oversold.

Any forex trader would know that the best timing for a reversal trade is when the market is at extreme levels. The COT report helps us understand the trades’ volume and how the different types of traders are positioned. In the previous lesson, we learned that non-commercial traders’ positioning could be used to determine the market trend. On the other hand, commercial traders accumulate their trades around extreme levels where they believe a market reversal could occur. Thus, the positioning of hedgers can be used to determine the market tops and bottoms.

Now, let’s see how you can identify these extreme levels in forex using the COT report.

How to identify Tops (Overbought Levels) Using the COT Report

It is worth noting that when the markets are rising, the non-commercial traders are buying, i.e., they are bullish. Conversely, the commercial traders (hedgers) are bearish when the markets are rising, meaning they are actively shorting the futures contracts in a bullish market. Therefore, in a bullish market, when speculators continually go long as the hedgers keep shorting, a market top will form.

However, it is almost impossible to predetermine a market top. The best way to spot a market top is to notice a reversal beginning to occur in the market when the spread between the commercial traders and non-commercial traders has widened.

The screengrab above shows a market top formed when the short positions by commercial traders were at maximum. Also, notice that the spread between the commercial and non-commercial traders was wider.

How to identify Bottoms (Oversold Levels) Using the COT Report

When the market prices are falling, non-commercial traders are bearish while the commercial traders are bullish. Therefore, a bearish market will reach the bottom when the non-commercial traders keep selling, and the commercial traders maximize their futures bullish positions.

The best way to spot a market bottom is to notice a bear market trend reversing while the spread between the commercial traders and non-commercial traders has widened.

The screengrab above shows a market bottom forming when the long futures position by the commercial traders was at the maximum. Also, note that the spread between the commercial and non-commercial traders was widest at this point.

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Forex Fundamental Analysis

The Impact Of The ‘US Redbook’ News Release On The Forex Market

Introduction

The growth in any economy is primarily driven by the growth of retail sales to households. For this reason, monitoring retail sales data can be the most suitable way of gauging if the economy is expanding or not. In most national retail sales data, the data is collected through surveys. However, having an index solely based on the growth of same-store sales can help provide a more accurate sense of growth in the retail industry.

Understanding US Redbook

Redbook Research Inc. is an American company primarily dealing with market research on the momentum of retail sales, macro and quantitative analysis, and consumer demand factors in public and private retail sectors. The company publishes the Johnson Redbook Retail Sales Index, also known as the US Redbook, which is considered one of the most respected proprietary indicators on retail sales in the US.

The Redbook index measures the growth in the US retail sector. The index uses a sales-weighted of the year-over-year growth in sales of the same store. About 9000 large general merchandise stores primarily operating in the US retail sector are sampled. When these sampled stores’ monetary value is measured, their combined output accounts for about 80% of the national retail sales. Note that in the US, the official government retail sales data is compiled and released by the Department of Commerce.

The Redbook index is published weekly. In this publication, the report extensively analyses and explains the current trends in retail sales and the economy. Since households’ demand is highly elastic, the weekly US Redbook publication can capture the most recent trends in consumer demand. Thus, the Johnson Redbook Retail Sales Index provides advance data on the trends in retail sales in the US.

In this report, the comprehensive analysis covers the sales in the current month, the quarterly sales, year-on-year and annual sales, company rankings, and data on historical sales. The 9000 retailers are categorized into; Apparel Specialty, Sporting Goods, Home Improvement, Home Furnishings, Books, Toy & Hobby, Department, Discount, Footwear, Furniture, Drug, Electronic, Jewellery, and Miscellaneous.

Using US Redbook in Analysis

We have already established that the US Redbook’s retail index provides a comprehensive and advance trend in household consumption patterns.

When the weekly US Redbook retail index increases, it means that households’ consumption is on the rise. At its core, higher levels of consumption are driven by increased disposable income in the economy. An increase in household consumption means that there is a general increase in demand in the economy. When households’ demand increases, it could mean that the economy’s unemployment levels have reduced. Since more people are gainfully employed, there is increased disposable income for households, hence the increase in consumption represented by the rise in the Redbook index. Similarly, it could also mean that wages received by households are increasing, which increases disposable income.

Conversely, when the weekly Redbook retail index drops, it means that households have reduced disposable income. The reduction in disposable income could directly result from increasing levels of unemployment or a reduction in wages received by households. With less disposable income, people will be forced to cut back on their consumption. In both these cases, the US Redbook retail index increase implies that the economy is expanding; conversely, a drop in the index shows that the economy is contracting.

Source: Trading Economics

The US Redbook retail index can also be used as a precursor to economic recessions and recoveries. We already know that the majority of growth in the economy is driven by consumer demand. It is estimated that household consumption accounts for up to 70% of economic growth. Now, picture this. When the consumer demand is consistently dropping, suffice to say the GDP should also be expected to drop significantly. This period will be marked by a reduction in production and increased unemployment levels. Note that recession is described as a consistent drop in GDP for two successive quarters.

Source: St. Louis FRED

At the onset of the 2020 coronavirus pandemic, the weekly US Redbook retail index continuously dropped. From the period between March to May, the index dropped steadily. This period coincided with a drop in the US GDP. Due to the nationwide imposed lockdowns and social distancing rules, unemployment surged to historic highs of 14.7%. Naturally, demand in the economy was depressed.

In times of recessions, the US Redbook retail index can be handy in changes in household consumption. Policymakers can implement several expansionary policies meant to stimulate the economy. Since the official government retail sales data is published monthly, the US Redbook can be used to show any immediate response by households. The US Redbook index can therefore be used to show if the expansionary policies are working as they are expected to. One such instance can be seen after the US government implemented the 2020 stimulus package worth $2 trillion. The US Redbook retail index can be seen to be rising from the lowest points of May 2020.

Impact of US Redbook on USD

When the US Redbook retail index increases, we can expect the USD to appreciate relative to other currencies in the Forex market. A consistently rising index implies that the economy is steadily expanding, the unemployment rate is falling, and there is a general increase in money in the economy. In such a situation, governments and central banks might step in with contractionary fiscal and monetary policies. These policies are meant to prevent the economy from overheating and avoid unsustainable inflation levels due to the increase in the money supply. Such policies make domestic currency appreciate.

Conversely, a dropping US Redbook retail index shows that the general economy might be contracting. Consequently, expansionary fiscal and monetary policies like lowering interest rates might be implemented to stimulate the economy. Such policies make the domestic depreciate relative to others.

Sources of Data

Redbook Research Inc. published the weekly, monthly, and annual US Redbook Retail Sales Index. In-depth and historical data on the US Redbook Index is available at Trading Economics.

How US Redbook Index Release Affects The Forex Price Charts

Redbook Research Inc. published Retail Sales Index the latest data on October 20, 2020, at 8.55 AM EST. The news release can be accessed at Investing.com. This release is expected to have a low impact on the USD.

The MoM index increased by 1.0% in the latest publication compared to 0.4% in the previous reading. Similarly, the YoY index showed an increase of 2.5% compared to the previous 1.2%.

Let’s find out if this release has an impact on the USD.

EUR/USD: Before US Redbook Release on October 20, 2020, just before 8.55 AM EST

Before the release of the US Redbook data, the EUR/USD pair was trading in an almost neutral trend. The 20-period MA is seen to be flattening with candles forming just around it.

EUR/USD: After US Redbook Release on October 20, 2020, at 8.55 AM EST

The EUR/USD pair formed a 5-minute bearish candle immediately after the publication of the US Redbook report. Subsequently, the pair continued trading in the earlier observed subdued uptrend.

Bottom Line

This article has established that the US Redbook report is a crucial leading indicator of retail sales and consumer demand. However, in the forex market, its significance is diminished since most traders pay close attention to the US Department of Commerce’s monthly retail sales data.

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Forex Course

165. Knowing More About Trading The Euro & Yen Crosses

Introduction

In cross-currency trading, the Euro and Japanese Yen are the most traded currency. Therefore, after major currencies, EUR and JPY has the highest liquidity in the forex market. Overall, trading in the Euro and Yen crosses are secure compared to the other cross currencies.

Understand the European Economy

When trying to trade in any Euro cross pairs, we should understand the European economy even if we only follow technical analysis. In technical analysis, traders can make decisions based on previous price movements. Therefore, many traders think that there is no need for fundamental analysis.

However, in trading, we aim to increase the probability of our analysis. Therefore, when we add Europe’s economic condition, we will have a better outlook of trading Euro crosses like- EURCHF, EURAUD, EURNZD, etc.

The European economy consists of several countries, including France, Italy, Germany, etc. Therefore, trading in the Euro cross requires to know interest rate decisions, retail sales, employment export-import, GDP, and other economic releases of these countries.

Moreover, in Euro cross trading, we should focus on other currencies that combine with the Euro. For example, if we want to trade in the EURCHF pair, we should focus on Switzerland’s economic condition.

Understand the Japanese Economy

In Yen cross trading, we should have extensive knowledge of the Japanese economy. Japan is an export-oriented country. Therefore, it tries to depreciate its value against other major currencies by keeping the interest rate lower.

Overall, any increase in interest rate, retail sales, employment, and GDP are suitable for the Japanese economy.

Besides the Japanese economy, we need to understand the economic condition of the Japanese Yen combination. For example, trading in the CADJPY pair requires a fundamental analysis of both the Japanese and Canadian economies.

Conclusion

Overall, the Euro and Japanese Yen cross are mostly traded currency in currency crosses. Therefore, to trade Euro and Yen crosses, we should know these two countries’ economic conditions. Even if we don’t trade based on fundamental analysis, having good knowledge is essential to have an overall outlook of the economy. Cheers.

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163. Trading Currency Crosses Using Fundamentals

Introduction

In fundamental analysis, we can interpret two countries’ economic data of a cross-currency to predict the upcoming price movement. On the other hand, even if we ignore the US dollar, it has some shadow effect on a currency cross.

How to Trade Fundamentals with Currency Crosses

Let’s say Australia’s economic condition is good, and the Reserve Bank of Australia increased the interest rate. As a result, the primary expectation is that the AUD will be stronger against other currencies. On the other hand, we can find other currencies that are facing economic difficulties. Let’s say Eurozone is struggling, and ECB provided some dovish tone to provide an outlook of the current economic condition.

In this situation, we can evaluate the Eurozone’s economic condition and Australia to determine which country is doing well. If Australia shows a better than expected employment report, our first aim would be to buy AUDUSD. However, what happens if the USA showed a strong employment report?

Yes, AUDUSD might consolidate, and the difference between supply and demand would not change. In this situation, it is better to find other currencies that are weaker than in Australia.

Is Fundamental Trading Profitable for Currency Crosses?

In Forex trading, we predict a currency pair’s upcoming movement based on the technical and fundamental analysis. When we see that one currency has reason to become stronger than other currencies, we anticipate the price towards the stronger currency. The fundamental analysis is a process to find a stronger or weaker currency in a currency pair.

Due to having a lot of equity and market participants’ involvement, any fundamental news works well in USD related currency pairs. However, it does not mean trading currency crosses with fundamental analysis is not profitable.

We can quickly evaluate the UK and Japan’s economic conditions to identify the price direction of GBPJPY. Therefore, we can apply the same theory to every currency cross, like AUDJPY, AUDCHF, NZDCAD, or AUDNZD.

Concussion

Fundamental analysis is a process to anticipate the movement of a currency pair based on the two countries’ economic conditions. However, making an analysis ideally is the primary tool to make a profit from the forex market. Therefore, we should focus on money management, risk management, and trade management to get the ultimate trading result.

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Forex Fundamental Analysis

Everything You Should Know About ‘Job Cuts’ As A Forex Fundamental Indicator

Introduction

The labor market plays play a crucial role in determining the strength of the economy. Perhaps one of the most closely watched fundamental economic indicator is the unemployment rate since it is one of the leading indicators of demand. The growth of any economy is entirely dependent on the forces of demand and supply. Entire industries have been built by surging demand and crippled by lack of it.

Understanding Job Cuts

Job cuts represent the number of corporate employees who have been laid off over a given period. The job cuts report shows the national number of people who were laid off. This number is further broken down by industry, ranking those with the most job cuts to the least. The job cuts are compared monthly, quarter-on-quarter, yearly, and year-to-date. The report goes further to include the hiring plans announced by the various sectors, thus showing the potential number of job vacancies.

Therefore, we notice that the job cuts report serves to show job losses and future openings. Thus, it is a powerful indicator in the labor market and the economy since it can be used to predict whether recessions are coming, the state of economic recovery, and show the sentiment about the economy from employers’ perspective.

Using Job Cuts Report for Analysis

As an indicator of economic health, job cuts can signal the following.

An increasing number of job cuts is a precursor to higher unemployment levels and signals a shrinking economy. It is considered a leading indicator of unemployment. With more and more people losing their jobs, households’ disposable income will be on a decline. Consequently, the aggregate demand in the economy will decline, and with it, the aggregate supply. These declines imply that producers are scaling down their operations, matching the lowering demand to avoid market price distortion.

Source: St. Louis FRED

Since the job cuts report is categorized by industry, it serves to show which sectors of the economy are performing poorly. Job cuts are a result of the general challenging operating environment. It shows that companies are attempting to reduce operating costs as a result of a decline in demand. With this report, we can analyze which sectors are hard hit by tough economic times and which sectors are resilient. For investors, this analysis is instrumental in deciding which sector to invest in. the report can also be used to show which industries are worse affected by economic recessions.

It will be useful for policymakers to implement sector-specific policies to help cushion the labor market in the future. The job cuts report can be used to establish which economic sectors are susceptible to business cycles by analyzing which sectors have the most cuts in times of recessions. During a recession, the aggregate demand is falling, and when the economy is recovering, the aggregate demand increases. Thus, it is expected for job cuts to reduce in time of recovery and economic expansion.

Similarly, investors can use historical figures to help pinpoint the peak and trough levels of the business cycle. Typically, the economy has the most job cuts when the recession is at its worst. This point can be considered the trough – and it precedes a recovery. Here would be the optimal point of investing for investors who would want to capitalize on the effects of recovery. When the economic recovery is at its peak and unemployment levels are their lowest, it signifies that the economy might overheat.

Source: St. Louis FRED

Together with the analysis of business cycles, the job cuts report can provide a clear picture of the number of temporary workers in the labor market. It goes to reason that in times of recovery, businesses tend to hire more workers. However, businesses most impacted by the economic cycles would opt to engage temporary labor instead. In times of recession, most of these jobs are lost. Therefore, the job cuts report can be used to identify which industries hire the most temporary workers.

Job cuts could also be a result of automation, not entirely because of a decrease in the aggregate demand. It is worth noting that the automation of business processes results in improved efficiency, higher output, and possibly higher quality of goods and services. While all these might be good for the businesses and possibly the economy, the effects of the jobs lost will still be reflected in the economy.

Impact on Currency

When analyzing the labor market, most forex traders concentrate their attention on the employment report. However, job cuts report is released ahead of the employment situation report; it can provide leading insights. Here are some of the ways job cuts can impact the forex market. The job cuts are used to forestall recessions and recoveries.

When the job cuts are increasing, it signals that the aggregate demand in the economy will decline. Businesses scaling down operations implies low investor confidence in the economy, which could mean there is a net outflow of capital. Increasing unemployment levels, a shrinking economy, and more households relying on the government social security programs signal a recession. Expansionary fiscal and monetary policies will be implemented. One such policy includes lowering interest rates, which make the currency depreciate relative to others.

A reduction in the job cuts signals economic recovery, making the currency increase in value relative to others. When job cuts are steadily reducing, businesses are retaining more of their employees as time goes by. This retention is a sign of improving economic fundamentals.

Sources of Data

Challenger, Gray & Christmas publishes the US job cuts data. Challenger, Gray & Christmas is a global outplacement and career transitioning firm. Comprehensive historical coverage of the US job cuts is accessed at Trading Economics.

How Job Cuts Data Release Affects Forex Price Charts?

The most recent release of the US Challenger job cuts was on October 1, 2020, at 7.30 AM ET and accessed at Investing.com. The screengrab below is of the monthly Challenger job cuts.

Low volatility is to be expected when the job cuts report is released.

In September 2020, the number of US job cuts was 118.804K compared to 115.762K in August. In terms of the YoY change, the September job cuts represented a 185.9% change compared to a 116.5% change in August.

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

EUR/USD: Before the Challenger Job Cuts Release on October 1, 2020, 
Just Before 7.30 AM ET

Before the new release, the EUR/USD pair was trading in a general uptrend. As shown in the above 5-minute chart, the candles were forming above a rising 20-period MA.

EUR/USD: After the Challenger Job Cuts Release on October 1, 2020, 
at 7.30 AM ET

After the US job cuts report release, the pair formed a bullish 5-minute candle as expected, due to the weakening of the USD. Subsequently, the pair continued trading in a subdued uptrend with the 20-period MA flattening.

Bottom Line

The job cuts report plays a vital role in the economy, especially now, by showing the state of economic recovery from the coronavirus-induced recession. However, in the forex market, the job cuts report is a low-impact indicator since most traders and analysts pay the most attention to the employment situation report. The low impact nature can be seen as the release of the Challenger job cuts report failed to advance the bullish momentum of the EUR/USD pair.

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Forex Course

158. Where to Find Authentic Forex News and Market Data?

Introduction

Fundamental analysis is an integrated part of forex trading. It provides an exact logic and reason behind the movement of a currency pair. However, the fundamental analysis depends on several fundamental releases and news. Therefore, it is evident for a trader to know the source of this news.

What is Forex News and Market Data?

Forex news is economic, geopolitical, and financial news that may directly affect the price of a currency pair. Moreover, fundamental data are economic releases that show the current and upcoming economic conditions of a country.

The price of currency pairs depends on many factors, and traders evaluate it to anticipate the market movement. For example, if a country achieved its targeted inflation rate, and the central bank raised the interest rate, it will indicate stronger economic conditions that may influence traders to take traders in a specific direction.

However, it is essential to find the source where the forex news and market data are available.

Where to Find Forex News and Market Data

Forex trading becomes very easy nowadays as most economic news and market data are available on the internet as soon as it releases. Therefore, forex trading becomes very attractive to retail traders as they can operate all their activities from home with a computer and a stable internet connection.

Let’s have a look where we can find this information:

Forex Brokers

Many forex brokers provide integrated market news and an economic calendar where the upcoming economic releases and events are scheduled. It will update as soon as the news comes and will provide historical data. Some brokers provide exclusive technical and fundamental analysis based on forex news and market data, which is also helpful for traders.

News Portal

Besides the forex broker, there are many websites where forex economic calendar and events are released. It also provides technical and fundamental analysis based on the available information. However, some trading portals offer live charts with economic data.

Image Source: www.forexfactory.com

Forex Indicator

Besides the MT4 and MT5 trading platform’s stock indicator, several custom-based indicators show the upcoming news in a box within the price chart. When the news comes, it shows the result immediately on the chart. On the other hand, MT4 and MT5 have a built-in economic and fundamental news service, which is very useful.

Conclusion

It is not very hard to find forex news and market data as it is available publicly, and anyone can access it. However, the challenging part is getting the news immediately after release. The news’s timing may differ based on the quality of the internet connection and execution speed of the news providing website.

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Forex Fundamental Analysis

Everything About ‘Durable Goods Orders’ Macro Economic Indicator

Introduction

Industrial production contributes to over 62% of the jobs in the goods production industry. Therefore, any changes in this sector’s production activity bring forth ripple effects into the overall economy. Owing to the significant role that industrial production plays in the economy, the investment goods bought for use in the industrial sector offer invaluable insights into the changes in the sector. Thus, durable goods orders as an economic indicator can be used to signal economic growth and businesses’ and consumers’ sentiment.

Understanding Durable Goods Orders

Durable goods are expensive and long-lasting items that have a lifespan of at least three years. These goods do not depreciate quickly. They include; heavy-duty machinery used for industrial purposes, computers and telecommunication equipment, raw steel, and transport equipment.

Core durable goods are the totality of durable goods, excluding data from transportation and military orders. The transportation equipment is excluded to ensure smoothening out the effects it would have on the durable goods data as a result of one-time large orders of new vehicles.

Durable goods orders data is, therefore, a monthly survey that tracks the purchase of durable goods. This data is used to assess the prevailing trend in industrial activity.

How to use Durable Goods Orders in Analysis

Since durable goods are expensive and long-lasting, their purchase is made on an occasional basis. For analysis reasons, the durable goods orders are treated as capital expenditure. The durable goods orders are used to signal near-term and future economic prospects. Let’s see what this data tells us about the economy.

Firstly, durable goods are heavy-duty machinery whose assembly and manufacture takes a long time. Therefore, the duration from when the assembly line of these goods begins to the time they are delivered to the buyers shows a period of sustained economic activity.

Capital expenditure in the industrial sector has a multiplier effect. The data on durable goods orders implicitly shows the level of activity in the industries along the supply chain of making and delivering these goods. Higher durable goods orders imply higher commercial activities in the relevant industries, while lower durable goods orders show reduced activities. So, what does this data tell us about the economy? Let’s take the example of increasing durable goods orders.

Higher durable goods orders imply that more jobs are created in the assembly lines, manufacturing, and mining. The resultant increase in employment levels leads to improved living standards and an increase in aggregate demand for consumer products in the economy. The increased aggregate demand for discretionary consumer products will force producers in these sectors to scale up their production, leading to more job creation and economic growth. Thus, the increase in durable goods orders can have both a direct and indirect impact on economic growth and the growth of other consumer industries.

Durable goods are used to further the process of production or service delivery. Therefore, the data on durable goods orders can gauge the sentiment of businesses and consumers. It is fair to say that businesses and consumers purchase durable goods when they are convinced that the economy is on an uptrend. Durable goods orders can thus be used as a testament to improving economic conditions and living standards. It follows the logic that businesses would not be scaling their productions or engaging in capital expenditure if they did not firmly believe that the economy is growing and a future increase in their products’ demand.

Due to their expensive nature, the purchase of durable goods heavily relies on credit financing. Thus, an increase in durable goods orders can be used to show that lending conditions are favorable. This willingness of lenders can be taken as a sign of improved liquidity in the banking sector, which in itself shows that the economy is performing well.

When capital expenditures are made, it is to replace the existing technology with a better one. Therefore, an increase in durable goods orders can be seen as businesses upgrading their current production means. Consequently, improved technology leads to efficiency in the production process and service delivery. This efficiency not only applies to improved quality and quantity of output but also in the allocation of factors of production.

Impact on Currency

In the forex market, the central banks’ perceived monetary policy is the primary mover of exchange rates. Forex traders pay close attention to economic indicators to gauge the health of the economy and speculate on the central banks’ policy decisions. Here’s how the durable goods orders can be used to this end.

Higher durable goods orders are associated with higher employment levels, increased wage growth, and steady growth in the aggregate demand and supply in the economy. When this trend is sustained for an extended period, governments and central banks may have to step in with contractionary monetary and fiscal policies to avoid an overly high inflation rate and an overheating economy. Therefore, sustained growth in the durable goods orders can be seen as a precursor to higher interest rates, which leads to the appreciation of the currency.

Conversely, a continuous decline in durable goods orders is an indication that businesses and consumers have a negative sentiment about the future. This sentiment could result from higher levels of unemployment, dropping levels of aggregate demand, or a stagnating economy. To spur economic growth, expansionary fiscal or monetary policies will be adopted. One such policy is lowering interest rates to encourage borrowing by making the cost of money cheap. Thus, a continuous drop in the durable goods orders can be seen to forestall a drop in the interest rates, which depreciates the currency relative to others.

Source of Information related to Durable Goods Orders

The US Census Bureau collates and publishes the data on the US durable goods orders. An in-depth and historical review of the US’s durable goods orders is found at St. Louis FREDTrading Economics publishes global data on durable goods orders.

We hope you got an understanding of what this Fundamental Indicator is all about. Please let us know if you have any questions in the comments below. Cheers!

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155. Getting Started With Forex Fundamental Analysis

Introduction

Fundamental analysis and technical analysis are an essential part of Forex trading. A Forex trader cannot be a profitable trader unless he knows this analysis. Fundamental analysis provides a logical reason for the upcoming movement of a currency pair based on economic releases. Traders evaluate these releases to determine the exact movement of a currency pair.

What is Fundamental Analysis?

According to finance and accounting, Fundamental analysis is the process of analyzing the business’s financial statement, including the competitor and market analysis. Moreover, it considers the core feature of a country’s macroeconomic factor, including the interest rate, inflation, GDP, manufacturing index, export, import, etc.

However, in forex trading, the fundamental analysis focuses on macro-economic factors mostly. The currency pair in a forex market represents the economy of two separate countries. In fundamental analysis, traders usually focus on major economic events and releases and their impact on a currency pair. Moreover, most professional traders consider both technical and fundamental analysis to get the best output from the market.

Elements of Fundamental Analysis

The fundamental analysis has two major elements- the fundamental releases and the fundamental events.

The Fundamental Releases

Fundamental releases are economic news of releases of a country that is published at regular intervals. Among the fundamental releases, the primary 4 economic releases are most important as it creates an immediate impact on a currency pair. Let’s have a look at four major economic releases:

  • Interest rate: The interest rate is how much we have to pay to the central bank if we take any loan. Central banks raise the interest rate if the economic condition is excellent. On the other hand, the central bank reduces interest rates if the economic condition is terrible.

Image Source: https://www.ecb.europa.eu/

  • Inflation Rate: Inflation is the buying power of the money. The increase in inflation indicates a rise in the consumer product’s price that reduces the buying power of money. Any increase in the inflation rate is terrible for the economy.

Image Source: RBA

  • Gross Domestic Product: Gross Domestic Product or GDP refers to the country’s products and services’ total value. Any increase in GDP is positive for a particular currency.
  • Employment: The number of employed and unemployed persons for a country works as a crucial fundamental indicator. Any decrease in employment is bad for the economy, and any increase in employment is reasonable.

Image source: https://www.bankofcanada.ca/

Fundamental Events

Besides fundamental releases, some essential fundamental events put a significant impact on a currency pair as mentioned below:

  • Central Bank Meeting: Central of a country meets once a quarter and discusses its economic condition. Any dovish tone negatively impacts the currency, while a hawkish tone creates a positive impact.
  • Geopolitical Events: There is some condition when one country meets another country to discuss the trade deal or conflict. Any positive news from a country’s geopolitical event may create a bullish momentum of the country’s currency.

In fundamental analysis, traders usually evaluate these releases and events to measure the strength and weaknesses of a currency pair.

Conclusion 

Traders usually gather recent economic releases and compare the result with the previous result. Any better than expected result indicates a buying opportunity on a particular currency. On the other hand, traders often evaluate fundamental releases to measure the volatility of a currency pair.

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Forex Daily Topic Forex Fundamental Analysis

Understanding ‘Retail Sales MoM’ Fundamental Forex Driver

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!