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World events affect the Foreign Exchange Market. Or rather, world events affect supply and demand forces, which then affect the financial markets. 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 frequency of its news/reports releases, and therefore it may be more efficient (at first at least!) to trade the currencies of large economies that have plenty of releases (such as, for example: USD, EUR, JPY, GBP, CHF).
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 (among 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:
- Employment Growth
- Gross Domestic Product (GDP)
- Trade Balance
- Interest Rate decisions
- Retail Sales
- Durable Goods
- Inflation reports
- Foreign Purchases report (TIC Data)
* The above examples are taken from the US market
What do reports mean? Here are a few examples:
Jobless Claims is a report released weekly and it measures how many people filed for unemployment insurance for the 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 likely to be, because the more people work, the more money they earn, the more money they are likely to spend.
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 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. However, it can also indicate inflation, which is generally not healthy for the economy.
US 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.
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.
- 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 affected 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 and currency.
- 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.
- 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.
It is the differences between the market expectations and the news release that 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 risk!!!