TRADING THE WORLD
World events affect the Foreign Exchange Market. Or rather, world events affect
supply and demand forces, which then affect the Foreign Exchange market. World events
(political, social, governmental, etc) and other economic factors shift the supply
and demand forces constantly, which in return shift the price of one currency in
relation to another.
Tuning in to what’s happening in the world is a very smart trading strategy as again
and again we witness that the Foreign Exchange market undergoes movements soon after
major news and/or economic reports are released. The size of the country determines
the amount, and the frequency of its news/reports releases, and therefore it may
be more useful (at first at least!) to trade currencies of economies that have plenty
of releases (such as, for example: USD, EUR, JPY, GBP, CHF).
Useful Information:
Always Remember that the healthier a nation is, the
better its economy will perform (and consequently, the stronger its currency will
be)!! Health is measured (amongst other factors) by high employment levels, retail
sales, capacity utilization, and gross domestic product. It is also measured by
low government deficits and by little fluctuation in inflation.
To determine a nation’s health, look for reports on:
(The below examples are taken from the US market)
- Employment Growth
- Gross Domestic Product (GDP)
- Trade Balance
- Interest Rate decisions
- Retail Sales
- Durable Goods
- Inflation reports
- Foreign Purchases report (TIC Data)
What do reports mean? Here are a few examples:
Employment:
Jobless Claims is released weekly and it measures
how many people filed for unemployment insurance for their first time. The less
people have applied, the better the economy is doing, because unemployed people
tend to spend less money, which has a bad effect on the nation’s economy.
US: Nonfarm Payrolls is released monthly and it measures
the number of new jobs created (excluding the farming industry). The more new jobs,
the stronger the nation’s currency is, because the more people work, the more money
they earn, the more money they are likely to spend.
Consumption:
Core PCE Price Index: measures the rate of inflation
experienced by people; it reflects the price change in consumer goods and services
(excluding Food and Energy). Large price changes have a negative effect on the economy,
because they introduce uncertainty, and uncertainty inclines people to spend less.
Retail Sales: is released once a month and measures
the value of retail sales. A rising trend means that the nation’s economy is growing
stronger, because it means that people are spending more.
GDP (Gross Domestic Product) Annualized: measures
the value of all goods and services that are produced by the nation’s economy. A
rising trend means that the nation’s economy is growing stronger. It encourages
people to invest in the domestic stock and bond markets, and attracts foreign investors.
Trade Balance: measures the value of the difference
between imported and exported goods and services. A positive trade balance means
that more goods and services were exported than imported. A rising trend means that
the nation's currency is growing stronger, because the higher the demand for exports,
the higher the employment and production rates in the exporting country. This usually
means that foreigners will convert their currencies to purchase the currency of
the exporter.
CPI—Consumer Price Index In simple terms, CPI measures
the increase of price in a fixed basket of goods and services (such as food, transport,
housing etc’). A higher CPI means that the price of the basket has increased and
it now costs more to buy the same basket of goods. A rising trend has a positive
effect on the economy (and consequently on the currency), because it reflects that
people are able to purchase the goods and services despite the price increases.
Real Estate:
US: New Home Sales: The new home sales figure serves
as a great indicator for the general direction of the economy. An upwards trend
in new home sales suggests that all is well in the construction industry and that
the nation’s consumers can afford to make large purchases. New home owners tend
to purchase a large amount of goods, while construction companies need to hire workers
and buy materials, thus creating a positive ripple effect in the nation’s economy
and an encouraging effect on its currency.
US: Pending Home Sales: measures activity in existing
(not new) home sales. This includes single-family homes, condos and co-ops. The
higher the demand for housing, the better the economy is doing, because people must
feel comfortable enough in order to invest in homes. Also, such investments are
usually accompanied by purchases—electronic equipment, furniture—and revenues for
realtors, both of which are good for the economy.
US: Housing Starts measures how much construction
began on new residential buildings. The higher the number, the better that nation’s
currency, because it indicates that the construction industry is healthy and that
people are investing in it.
Manufacture:
US: ISM Mfg Index measures the activity of purchasing
managers in the manufacturing sector. A rising trend means that the nation's currency
is growing stronger. Purchasing managers are good indicators since they have access
to a company’s performance, which oftentimes goes hand in hand with overall economic
performances.
Industrial Production measures the value of output
produced by factories, mines, and utilities. A rising trend means that the nation's
currency is growing stronger, because high values indicate that large amounts of
product are being manufactured and sold, and hence that people earn and spend money.
Producers Price Index examines differences in the
selling prices of goods and services within Euro-zone producers. Since producers
tend to increase retail prices as a result of higher production costs, PPI may be
counted as an indicator for inflation. A higher PPI may result in higher interest
rates determined by the European Central Bank. A falling PPI points at declining
prices, and thus hints at an upcoming economic recession.
Durable Goods Orders: measures the value of goods
with a life expectancy of more than 3 years, purchased by consumers looking for
domestic manufacturing. This indicator predicts how busy the manufacturers are likely
to be, since they need to work to fill the orders. Therefore, a rising trend will
have a positive impact on the nation's currency.
Rate Announcements:
UK: BOE Announcement — the Bank of England (BOE) Monetary
Policy Committee (MPC) votes every month on where to set the nation's short-term
interest rate.
EU:ECB Announcement — the European Central Bank (ECB)
Governing Council votes every month on where to set the union’s short-term interest
rate.
US: FED Announcement — the Federal Open Market Committee
(FOMC) votes eight times a year.
Shortly after each vote, the outcome is released (the BOE Announcement; the EU:ECB
Announcement, and the FED Announcement). It is accompanies by a brief commentary
on the economic conditions that effected the outcome. Interest rates depend mostly
on inflation. The objective is to keep prices stable, so when inflation rises above
an annualized rate of 2%, banks will usually raise interest rates in order to bring
prices down. High interest rates attract foreign investors, who increase the demand
for that nation's currency. This is to say that a rising trend in interest rates
has a positive effect on the nation's economy.
FOMC Meeting Minutes:
The Federal Open Market Committee (FOMC) Meeting Minutes give people insight into
the decisions that have been made with regard to interest rate and policy shifts.
Surveys:
EU: ZEW (Zentrum für Europäische Wirtschaftsforschung) Survey
provides the opinions of financial experts with regard to the economic outlook
for Europe. Every month the difference between investors that expect a growth in
the economy and those that expect a decline is measured.
US: Chicago PMI measures the health of the Chicago
business environment. Every month purchasing managers respond to a survey with regard
to their organization's activity (whether it is higher than, the same as, or lower
than it was in the previous month) in terms of output, purchases, employment, inventories,
orders, and prices.
NET TIC—Treasury International Capital (TIC) Reviews
the flow of money market funds (such as stocks, bonds etc’) to and from the United
States. The key figure, expressed in millions of dollars, represents the difference
between American spending of foreign securities and foreign spending of American
securities. This is a major indicator of the American economy and gives insight
into foreign demand for American investments and dollars. For example, if the US
purchased $5 billion in foreign securities and foreigners purchased $20 billion
in long-term US securities, then the net reading would be $15 billion.
Consumer Confidence: measures consumer attitudes towards
economic conditions, how they evaluate future economic prospects. Higher readings
suggest consumer optimism; this is to say that consumers are optimistic about economic
prospects. As a result consumers tend to purchase more, which in return stimulates
the economy.
Consumer sentiment: Measures consumer attitudes concerning both the present situation and future expectations.
It's derived from a monthly 500-person survey conducted by the University of Michigan.
Higher sentiment levels are a leading indicator of rising consumer spending, which accounts for two-thirds of the economy.
A few more things worth knowing:
- In general it can be said that news releases that follow expected reports do not
cause strong market movements.
- Differences between the market expectations and the news release may cause market
volatility which in turn might lead to a developing trend in a specific direction.
- Such opportunities are usually short-lived; they may last for only a few minutes
or even a few seconds.
- Markets in which constant movements occur will usually not be as strongly affected
by news releases. A quiet market may move more significantly because of a news release.
DON’T FORGET : No matter how many current events you
follow and news releases you absorb, and no matter how familiar you are with the
Foreign Exchange market and its trends--Trading always involves a risk!!!