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17e – Economic Indicators

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17e - Economic Indicators

 

 

And now we come to our final installment of economic indicators.  In this last article we will wrap up with a couple index and surveys that are important to the Forex Market.  Then we will talk about a couple ad hoc economic numbers that can have a potential impact on specific currencies.

 

In this Article:

  •         Consumer Confidence Index
  •         IFO Business Climate Survey
  •         GDT Price Index
  •         Crude Oil Inventory Numbers
  •         Economic Indicator Wrap Up

 

Consumer Confidence Index

This is a United States figure and is similar to the ISM report in that it’s a survey of several thousand people.  However, this is a survey of normal everyday people rather than businesses. However, other countries do have their own version of consumer confidence but they tend to be calculated differently or included inside of other indicators.

This is considered important because, as we have already learned, consumer spending is a very large factor that affects the GDP reading for most modern economies.  If this index is really positive then it could possibly indicate that significant growth may follow. If you think about it, if everyday people are very positive then they are more likely to spend their money rather than save it which in turn will help grow the economy.

This means more spending in the economy and more demand for the U.S. dollar which could in turn strengthen the USD over the long run.  The opposite is true if the number is overly negative because if people are worried about the economy and their job security then they are more likely to save their money rather than spend it.  If people are saving their money then this is not going to help local businesses.

The index is released the last Tuesday of each month and is a barometer of the health of the U.S. economy.  It is also based on consumer perceptions of the current business and employment conditions, and expectations of those two plus income for the next six months.

 

IFO Business Climate Survey

This is a German indicator and is similar to ISM in that it gauges the sentiment of the business climate in Germany.

It is widely followed as an early indicator of the state of the German economy.  It’s based on a survey of approximately 7,000 monthly survey responses from firms in manufacturing, construction, wholesale and retail.

As the largest economy in the European Union, Germany’s business climate has implications for the rest of the European Union.  This gives a good reading about the overall economic health in the Eurozone as a whole because other large European nations such as France have similar business climates.

A growing IFO reading signals growing optimism which in turn can lead to a strengthening of the Euro over time if there are other fundamental economic reasons to be buying the Euro as well.

 

GDT Price Index

GDT stands for Global Dairy Trade.  This is an indicator that is unique to New Zealand that is released twice per month.

It represents the change in the average price of dairy products that are sold at auction.  It’s derived from taking a weighted average price of the 9 dairy products that were sold at the current auction then the new number is compared to the previous releases.  The new reading is then expressed as a percentage gain or loss from the previous reading.

This is important because it’s a leading indicator of New Zealand’s trade balance with other countries.  Dairy sales happen to make up a large percentage of New Zealand’s GDP which is another good reason its reading can have an impact on the price of the New Zealand currency.

Rising commodity prices will help boost export income while falling prices will give a decline in export prices.  If the Percentage change is showing a trend of positivity then this could have a positive effect on the New Zealand Dollar.  If the trend is looking not so good then this could weaken the New Zealand Dollar over time. Any significant deviation could produce a sharp move on New Zealand currency pairs.

This one can be a bit tricky because they do not give you a time for when the actual figure will be released.  They only give you a date. So you will need to have a decent audio squawk on if you want to hear this releases as fast as possible.  But if you do see a sudden price spice in New Zealand currency pairs on the date that this is scheduled to be released then it is time for you to hunt for that information to see what the numbers were.

 

Crude Oil Inventory Numbers

This is an American indicator but it tends to have more of an impact on the Canadian Dollar.  This is because, at the time of this writing, Canada is the number one exporter of oil to the United States.  Oil profits also make up a large percentage of Canada’s GDP so these numbers can be important to the Canadian Dollar.

This indicator measures the change in the number of barrels of crude oil held in reserve by commercial firms during the past week.

The way that traders look to trade this is when there is a big drawdown this could cause the Canadian Dollar to strengthen.  This is because if there is a lot less oil in reserve than it is natural to assume companies will need to buy more to keep up with their demand which could push the price of oil higher.  Basically, if the price of oil goes up then Canada’s oil companies will make more money which will contribute to a higher GDP. Happy days!

If there is a large build of oil then traders will look to potentially short that Canadian Dollar because the chances are that there will be less production from Canada and therefore less profits.

You need to take some caution here on not blindly trade a correlation you believe should exist.  The reality is that this indicator may or may not have an impact on the Canadian Dollar. It really all depends what is happening with the price of oil at the specific time.

The Canadian Dollar tends to be impacted by the price of oil when people are panicking about oil and the price is going down hard.  The key is that oil prices need to be volatile to move the Canadian Dollar around significantly.

The market tends to be able to only focus on one or two things at a time when it comes to a specific currency or commodity.  For example, during much of 2017 there was a decent correlation to oil prices and the Canadian Dollar. It wasn’t perfect but it was there.  This was because there was not enough going on in Canada at that time to have traders only focussing on events going on within Canada. SO they would trade the CAD in line with oil.

However, at the time of this writing in early 2018, we have seen no correlation between the CAD and oil.  Just yesterday oil was up 3% and the CAD was down 1% against the USD and there was no fundamental economic news working against the CAD at the time.  This tells us that traders are not interested in trading the oil CAD correlation at this moment. A lot of this is due to oil prices stabilizing for the time being.

 

Economic Indicator Wrap Up

All of these figures are watched closely by the markets but the overall thing to bear in mind with all risk events is that the market will only pay attention to the ones the central banks are currently paying attention to.  Central banks are typically only ever focussed on one or two types of indicators making our job fairly simple.

For example, if the Fed is focussed on inflation with no regard for other data points then NFP will create no significant moves across the FX market.  If on the other hand the Fed is data dependant with major focus on the labour conditions then market NFP will be one of the biggest data releases of the month.  This same principle applies to all central banks and data points around the world. This is perhaps the most important thing to bear in mind if you are trying to position yourself in the markets around key risk events.

We have used the term risk event interchangeably to describe an economic indicator that has the potential to move the market or create risk.

 

Up Next:

Next we are going to switch gears and head on over to central bank analysis resources and where you can find the information that you need to make good fundamental trading decisions.

 


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