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19th September 2017

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Fundamental Analysis

Fundamental analysis is a method of evaluating an asset; it attempts to measure its intrinsic value by examining the underlying forces that could affect the asset. Fundamental Analysis includes;

  • Geo Political factors – such as interest rates and other government policies
  • Macroeconomic factors – such as the level of unemployment
  • Company or industry specific factors – such as mergers or acquisitions

So why is Fundamental Analysis used so widely, and what does it help us achieve and understand?

  • Through fundamental analysis we are able to determine the overall health of an economy to give us a mid to long term outlook as to the direction of the markets
  • Fundamental Analysis helps us to measure an asset’s intrinsic value. The idea behind fundamental analysis is that each asset has a “correct” price which means we can determine if the current market price is overvalued or undervalued. Keeping in mind that the price will always revert back to what is “correct”, knowing whether the asset is under or overvalued gives us an indication as to whether to buy or sell.

Below is a list of a few major industrialized nations, their central banks and the chairman or governor:

  • USA – The Federal Reserve [FOMC – Federal Open market Committee] – Chairman: Ben Bernanke
  • Europe – European Central Bank (ECB) – Chairman: Mario Draghi
  • UK – Bank of England (BoE) Monetary Policy Committee (MPC) – Governor: Mervyn King
  • Japan – Bank of Japan [BoJ] – Governor: Masaaki Shirakawa

Central banks make decisions that affect the economy, and decisions that affect the economy are decisions that will affect your trading so if you ever see any of news on such topics on TV listen closely as it will effect the FOREX markets and a good chance for profit making.

Every time the chairman of the federal Reserve/FMOC Ben Bernanke, gives a speech everybody is playing the guessing game trying to figure out what’s going to happen with the interest rates.

Interest rate can be defined as;

‘The cost of borrowing money expressed as a % of loan value’

Understanding Interest rates is important when talking about factors such as the money supply or inflation because central banks use the manipulation of interest rates to control the money supply and combat inflation. You might be wondering why this is important to you, well; changes in interest rate cause changes in the economy and changes in the economy affect your trading.

Increasing the interest rates

This effectively makes borrowing money less easy and as a result the amount that people spend goes down. The decrease in expenditure means that the demand for many goods goes down, and as a result, their price will also decrease.
The central bank will often increase interest rates when they fear the economy is “inflamed” – they make borrowing less easy to reduce expenditure and cool the economy down in order to avoid inflation.

Decreasing the interest rates

This effectively allows us to borrow money more easily and as a result the amount that people spend goes up. The increased expenditure means that there is also an increase in the demand for many goods, and as the demand for these goods increases so too will their prices.
The central bank will lower interest rates when they feel as though the economy is facing a potential recession, interest rates will be reduced to encourage spending and promote the growth of the economy.

The main role of any central bank is to control a country’s money supply. By decreasing borrowing costs, central banks are effectively increasing the money supply.

The money supply is a measure of the entire amount of bills, notes, coins, loans, credit and other liquid instruments in circulation within a country’s economy.

Money supply is measured by M0, M1, M2 and M3, with M0 being the narrowest measure of money (cash and liquid assets), and M3 being the broadest. The money supply is an important factor to keep an eye on, especially if you want to trade FX.

Increased money supply demonstrates early signs of inflation – if the supply of money exceeds the supply of goods prices are likely to rise.

Before, the government used to set targets for the growth rate of the money supply and would often manipulate interest rates to force the supply to fall in line with their suggested brackets. In fact, many stipulate that the over manipulation of interest rates back in the 80s [a period when the US government believed the money supply was growing proportionately out of control] was actually responsible for the economic recession of that time. It seems they learnt their lesson; governments don’t force the monetary growth to fall within their target brackets anymore. Governments nowadays just “play it by ear” waiting for the right moment to do the right thing in order to maintain stability, keep inflation in check, and promote sustainable growth.

Inflation:

Inflation simply is ‘Rising prices’. It can also be described as the sustained increase in the prices of goods and services.

Inflation causes what we call loss of the purchasing power of your money. 
 i.e. your money is worth less, you can buy less with it due to inflation.

There are two main causes of Inflation:

Demand-Pull Inflation; this form of inflation occurs when aggregate demand outweighs aggregate supply. When there is more demand than there is supply, prices increase = inflation.

Cost-Push Inflation: this form of inflation occurs as a result of an increase in say the prices of wages and or of raw materials. These increased costs cause supply to decrease and consequently the amount of demand will outweigh supply. Where there is more demand than there is supply, prices increase = inflation.

  • Hyper-Inflation – Extremely rapid or out of control rising inflation
  • Deflation – Falling prices – The opposite of Inflation
  • Stagflation – Sluggish economic growth accompanied with rising inflation
  • Disinflation – Slowing of Inflation rate

Every given period of time, each country around the world will have what is called an economic release. A data release is the periodic publication of economic data and or news of a qualitative and quantitative nature. These data or news releases help paint a picture of the overall health of a company or country’s economy. A stronger outlook for a company or country’s economy should be reflected by a higher company stock price or stronger domestic currency.

This data/news can have both a short and long term impact on prices and traders will look to benefit from any movement created by these economic data releases. So investors will make investment decisions based on their interpretation of the economic data which has been released.

Key Points of Economic Data
  • The key to trading data is to look at the outcome of the data/news release in relation to the expected forecast.
  • The larger the difference between the actual figure and the forecast figure, the greater the likely hood of a larger change in prices.
  • The strength of importance of the data will also be a factor in determining strength of price moves.

An example of an economic data release is as follows;

U.S. Federal Reserve Interest Rate – [Released monthly] Measures the cost of borrowing money in U.S.

ACTUAL PREVIOUS CONSENSUS FORECAST
0.25% 0.3% 0.25% 0.25%

We can see here that the actual figure is inline with forecasted figure – so we would expect to see the USD to react. The drop in interest rates indicated more spending which results in the economic growth and foreign investment, which will inflate the value of that particular economy’s exchange rate.
* The figures outlined are solely used to practically link the scenario above and does not have any actual relevance

The US Dollar’s Presence Globally

The US Dollar has maintained a vital presence on the world stage for nearly a century. Most major governments maintain some of their currency reserves held in USD, this means the ripple effect of inflation and other valuation issues connected to the US Dollar have far reaching consequences.

There are many economic indicators pertinent to the US economy. Some of the relevant economic indicators to the US Dollar are released directly through the Federal Reserve (Fed), while others may be released from private data analysis firms. Each of the economic indicators listed and described below have the potential to affect the price and stability of the US Dollar upon their release. This is not a complete list of economic indicators that have an impact on the US Dollar.

The economic indicators outlined below can potentially move the price of any currency pair the US Dollar is involved with, regardless of whether the US Dollar is the base or quote currency in the pair. These currency pairs include:

  • USD/CHF
  • USD/JPY
  • EUR/USD
  • GBP/USD
  • USD/CAD
  • AUD/USD
  • NZD/USD

Below are the core macroeconomic data released in that drive and effect the US markets in alphabetical order

ADP Nonfarm Employment Change

The ADP (Automatic Data Processing, Inc.) Nonfarm Employment Change is a measurement of the number of new jobs created in the previous month (of course excluding farming related employment). This report is said to be a precursor to the much more widely followed Nonfarm Payroll Report, which of course is released two days later. The ADP Nonfarm Employment Change report began in March of 2006, and though it is said to offer insight into the pending Non Farm Payroll Report, its brief history accounts for its lesser credibility with traders.

Average Hourly Earnings m/m

This indicator gathers numbers relevant to wage inflation, specifically price increases in wages paid to nonfarm employees. When corporations and businesses are forced to pay higher wages this increased will soon be seen on the consumer end, thus wage inflation is viewed as a preemptive look into consumer inflation. Higher trends seen in this indicator tend to have a positive impact on a nation’s currency, as wage inflation leads to consumer inflation and consumer inflation is relative to a strong economy.

Beige Book

The Beige Book gathers regional information from Federal Reserve branches on the strength of the economy within their own region. This information is collected two weeks prior to the FOMC‘s (Federal Open Market Committee) monetary policy meetings. The FOMC will use the Beige Book when considering the future of interest rates.

Chicago PMI

PMI stands for Purchasing Managers Index. Measured in Chicago (essentially accounting for the Midwest region of the United States) the Chicago PMI is conducted by the National Association of Purchasing Managers (NAPM). Before the report is published purchasing managers in the area are surveyed on the present situation of their firm, specifically whether the firm’s purchasing activity is lower than, higher than, or equal to the previous month’s activity. The word ‘activity’ is meant in reference to employment, inventories, prices, orders, output, etc. The indicator uses a reading of 50 to measure expansion, or the lack thereof. A reading above 50 would indicate economic expansion in the region.

Consumer Confidence

In a monthly survey respondents are asked to measure and evaluate the future strength of the economy. Consumer optimism will of course have a positive impact on the strength or weakness of an economy, and ultimately the nation’s currency; when consumer confidence is high the purchase of goods and services tends to increase as well, thus stimulating economic growth.

Consumer Sentiment

In a monthly survey conducted by the University of Michigan 500 respondents are asked to measure and evaluate both the present and the future strength of the economy. Consumer optimism will of course have a positive impact on the strength or weakness of an economy, and ultimately the nation’s currency; when consumer confidence is high the purchase of goods and services tends to increase as well, thus stimulating economic growth.

Core Durable Goods Orders m/m

Core Durable Goods Orders essentially reports the same data as does ‘Durable Goods Orders’ minus data including Transportation components. This is because purchase orders for aircraft and automobile components often see rapid increases for brief periods – such numbers weaken the clarity of the overall trend. As such, Core Durable Goods Orders is typically more widely watched than is Durable Goods Orders. Core Durable Goods Orders is a measurement of the total value of purchase orders placed through manufacturers for products with a shelf life of more than three years. This indicator is watched closely by traders primarily because of what it has to say about the future of an economy. When the total value of purchase orders is higher than previous months it can be expected that manufacturers will be pressed to fill the pending orders, as such employment will likely see an increase. When productivity and employment are expected to increase as a direct result of increased purchase orders the coming months are more likely to see an increased GDP (Gross Domestic Product).

Core PCE Price Index m/m

PCE stands for Personal Consumption Expenditures; The Core PCE Price Index is a measurement of consumer inflation rates, as seen when purchasing goods and services. Essentially, PCE is very similar to CPI (Consumer Price Index), the subtle difference lies in the fact that PCE gauges the level of price changes seen within consumer goods and services, specifically those targeted towards individual consumers (as opposed to production consumers). As is the case with other economic indicators, Core PCE Price Index implies that certain statistics are left out of what would be included in the normal indicator. In this case, Core PCE excludes Food and Energy because month-to-month purchase volatility of such can skew underlining consumer trends. The Federal Reserve tends to favor this indicator for its clear look at consumer inflation, for this reason traders watch the Core PCE closely.

Currency Manipulation Hearings

The US House Committee on Ways and Means will conduct a hearing to examine possible evidence of potential currency manipulation seen by countries in the Asian region. China and Japan will be closely looked at. The committee will then recommend whether or not the US should take action, and what the most plausible solution would be.

Durable Goods Orders m/m

Durable Goods Orders is a measurement of the total value of purchase orders placed through manufacturers for products with a shelf life of more than three years, i.e. automobiles and parts, appliances, airplanes and parts, computers, etc. This indicator is watched closely by traders primarily because of what it has to say about the future of an economy. When the total value of purchase orders is higher than previous months it can be expected that manufacturers will be pressed to fill the pending orders, as such employment will likely see an increase. When productivity and employment are expected to increase as a direct result of increased purchase orders the coming months are more likely to see an increased GDP (Gross Domestic Product).

ECI q/q

ECI stands for Employment Cost Index, a measurement of inflation rates found within salaries, wages and benefits paid to non-government employees. A rise in wage inflation rates are seen as a positive for a nation’s currency. This is because wage inflation is directly linked to consumer inflation; when employers are forced to pay higher wages prices seen by consumers will soon be increased in order to compensate. Traders keep an eye on wage inflation as a means to gauge pending consumer inflation, which will of course ultimately affect GDP (Gross Domestic Product).

Existing Home Sales

Each month the National Association of Realtors releases a report measuring the number of homes sold in the prior month. Existing Home Sales and New Home Sales have collectively gained more respect from traders since the beginning of 2007, when sub-prime lending in the US began to fall under scrutiny. Most traders view Existing Home Sales as the report that carries the most weight between the two.

GDP Annualized q/q

This release is a quarterly look at Gross Domestic Product, revisions will follow in next two months. Gross Domestic Product is considered by most the broadest, most comprehensive barometer of a country’s overall economic condition. It measures the sum of all market values on final goods and services produced in a country (domestically) during a specific period of time. A rising trend seen in a country’s GDP of course indicates that the economy of said country is improving; as a result foreign investors are more inclined to seek investment opportunities within that nation’s bond and stock markets. It is not uncommon to see interest rate hikes as a follow-up to a rising GDP, as central banks will have an increased confidence in their own growing economies. The combination of a rising GDP and potentially higher interest rates can lead to an increase in demand for that nation’s currency on a global scale.

GDP is calculated and reported on a quarterly basis as part of the National income and Product Accounts (NIPAs). NIPAs were developed and are maintained today by the Commerce Department’s Bureau of Economic Analysis (BEA). NIPAs are the most comprehensive set of data available regarding US national output, production, and the distribution of income. Each GDP report contains the following:

  • Personal income and consumptions expenditures
  • Corporate profits
  • National income

GDP Deflator Annualized q/q

Aside from basic GDP (Gross Domestic Product) figures the government also releases GDP deflators. The GDP Deflator report publishes the difference between nominal and actual GDP. The report takes a measurement of annualized quarterly inflation rates as applicable to all economic activity.

Interest Rate Statement

The Federal Open Market Committee (FOMC), which is the governing body of the US central bank, publishes an Interest Rate Statement eight times each year. Perhaps at the core of all economic indicators are those that relate to interest rate decisions. In fact, most would argue that other economic indicators are used by the average trader as nothing more than a means to anticipate pending interest rate changes. The bulk of the statement includes an explanation of the various economic factors that influenced the change in rates (or lack thereof) for the nation’s short term interest rate, also referred to as the “fed funds rate”. The report will also include insight as to what the next interest rate decision might be. Short term interest rates are of monumental importance to traders in any of the major financial markets. This is due to the fact that high interest rates attract foreign investors who are seeking the highest possible return in exchange for the lowest possible risk. Central banks are most concerned with price stability. If inflation rates are continually rising interest rates will likely be increased in an effort to bring prices back down. Globally, increased interest rates are said to entice foreign investment flows, which would of course, in turn, increase the demand and the standing of a nation’s currency on a global scale. Seasoned economists understand the relationship between inflation and interest rates, namely that inflation tends to precede higher interest rates, which ultimately increases the global demand for a nation’s currency.

ISM Manufacturing Index

The ISM Manufacturing Index is a monthly report released by the Institute of Supply Management that tracks the amount of manufacturing activity that occurred the previous month. The values for the index range between 0 and 100. If the index has a value below 50, due to a decrease in activity, it tends to indicate an economic recession, particularly if they trend continues over several months. A value substantially over 50 likely indicates a time of economic growth.

ISM Manufacturing Prices

This manufacturing indicator, conducted by the Institute of Supply Management, surveys 400 firms in an attempt to gauge price inflation seen within the manufacturing sector. Firms are asked whether or not there has been an increase seen in the prices of materials and services.

ISM Non-Manufacturing Index

ISM stands for the Institute of Supply Management. The NON-Manufacturing Index of course focuses on the non-manufacturing portion of the services sector. In the US this Manufacturing Index seems to be closely watched by traders in each of the major financial markets. Before the report is published purchasing managers are surveyed on the present situation of economic factors relevant to their position; factors such as new orders, inventories, production, employment, etc. Traders tend to keep an eye on this indicator because it tends to lead (leading indicator) into data that will later be released. This is because purchasing managers have an early view at the performance of their company. The indicator uses a reading of 50 to measure expansion, or the lack thereof. A reading above 50 would indicate economic expansion.

New Home Sales

New Home Sales reports the number of new privately owned homes sold or for sale in a given period (generally reported once a month). Economists note the correlation between changing mortgage rates and new home sales; namely that new home sales numbers tend to lag slowly behind changes made to mortgage rates. Also measured is the number of homes for sale in relationship to current sales prices; these numbers of course in turn will affect housing starts. Because the new home sales report is often subject to large revisions monthly numbers are often seen as unreliable. As a result this indicator’s potential impact on the market is rather inconsistent; instead traders tend to give more credence to the existing home sales report which is released earlier in the month.

Nonfarm Employment Change

This indicator is a measurement of the total number of non farming related new jobs created in America for the previous month. It is perhaps the most important of all economic indicators in terms of its potential for immediate impact upon the currency market. The Nonfarm Employment Change (also referred to as the Nonfarm Payroll Report) is so largely influential because of its implications concerning the strength, or perhaps the weakness of the US economy. The number of new jobs created is closely connected to consumer spending, which in turn plays into GDP (Gross Domestic Product). This indicator is released on the first Friday of every month and contains data for the month prior. The report is the first of its kind (related to labor statistics) every month and is often regarded as an indicator in which surprise figures are generally anticipated. Traders in every major financial market watch this release very closely and are often forced to adjust trading strategies because of its immediate impact on the market.

Nonfarm Productivity q/q

This indicator takes a look at quarterly growth (annualized) in the non farming sector. Essentially labor efficiency for the production of goods and services is analyzed. This report is watched closely by traders because it tends to give a glimpse into the potential for inflation; as manufacturers may be forced to raise prices.

Personal Spending m/m

Personal spending is a simple measurement of the total amount spent by consumers in a given period (month) on goods and services. As consumer spending has far reaching implications into the overall picture of an economy, and considering that it accounts for more than half of GDP (Gross Domestic Product) a rise seen in the trends of this indicator should have a positive effect on a nation’s currency.

Unemployment Rate

The Unemployment Rate, as one might presume, measures the total number of Americans that are unemployed and who are presently seeking employment. Because consumer spending is such a large part of economic health, and those who are employed tend to spend more than those who are not, a downtrend seen in this indicator will have a positive effect on a nation’s overall economic strength. The Unemployment Report is considered by traders a lagging indicator, meaning that its insight offers little in the way of future projections. As such, this indicator is not as heavily regarded as perhaps its name would suggest.

Unit Labor Costs q/q

This indicator is a measurement that calculates output per hour minus inflation, or in other words the correlation between productivity per hour and compensation per hour. An increase in hourly compensation will of course increase unit labor costs; the only way to offset this cost is to facilitate higher labor productivity per hour. Higher trends seen in this indicator should positively affect a nation’s economy and thus their currency as well. This is because when companies are forced to pay more for labor (wage inflation) consumers will soon see an increase in cost as well (consumer inflation). This indicator is important to traders, as wage inflation is often a precursor to consumer inflation, which will in turn affect Gross Domestic Product, interest rates, etc.

The British Pound is third only to the US and the Euro in terms of the currency reserves held in GBP around the globe. The Bank of England has been operating since the late 1600s, but wasn’t nationalized until the mid 1900s. The Bank of England is responsible for determining England’s monetary policy, which is key to the positioning of the Pound on a global level. Various economic and political factors combine to drive the ever-changing value of the GBP, but key to traders are the many economic indicators pertinent to the British economy. Some of the relevant economic indicators to the GBP are released directly through the Bank of England, while others are released from private data analysis firms.

Each of the economic indicators listed and described below have the potential to affect the price and stability of the GBP upon their release. There are other indicators that are directly relevant to the GBP that are not listed below.

The economic indicators outlined below can potentially move the price of any currency pair the GBP is involved with. These currency pairs include:

  • GBP/USD
  • EUR/GBP
  • GBP/JPY
  • GBP/CHF

Some of the below reports are commonly released by most economic powers around the globe, others are specific only to the British Economy.

Average Earnings Index + Bonus q/y

AEI (Average Earnings Index) is a measurement of averages wages + bonuses paid to employees on a quarterly basis. The indicator compares the results of a new quarter not to that of the most recent quarter, but rather to that same quarter the year prior.

BOE Inflation Rate

BOE Inflation Rate The Bank of England publishes an Inflation Rate Statement each quarter. The purpose of the statement and data included therein is to outline the various methods of economic analysis that will be used by the bank’s Monetary Policy Committee to later determine potential changes to interest rates. The publication will also include projections for the coming two years and potential inflation rates.

BOE Meeting Minutes

BOE Meeting Minutes is an exact transcript of the Bank of England’s meeting, usually held about two weeks prior. The transcript offers a record of official voting as it pertains to changes in interest rates and other fiscal policy. Though very straightforward in its content, this report is considered one of key importance to the British economy and the strength of the Pound.

BRC Retail Sales Monitor y/y

BRC stands for British Retail Consortium. In conducting the Retail Sales Monitor the BRC surveys retailers in an effort to gauge sales increases or decreases seen over the previous year. Retailers that have been open for less than are of course excluded from the survey. This indicator examines annual trends seen in retail sales.

CBI Distributive Traders Expected q/q

CBI stands for the Confederation of British Industry. In this indicator executives are surveyed on expected sales numbers for the coming year. As is the case with most economic indicators, specifically those that are considered leading indicators, expectations are often everything. Though simply stated, a positive trend seen in this indicator should positively affect the nation’s economy; high expectations for the coming year may have positive short term implications for the economy, but if sales numbers in fact do not increase and thus expectations are not met, overzealous numbers seen in this indicator could potentially damage the economy.

CBI Distributive Trades Realized

CBI stands for the Confederation of British Industry. In this indicator executives are surveyed on the sales numbers of their firms. More specifically, they are asked whether their firm saw an increase or a decrease in sales in comparison to the previous year. The collected data of this indicator gives traders a look at the economy in relation to the retail sector. An increasing trend would of course positively affect an economy, as Retail Sales account for a large portion of consumer spending; and consumer spending is a very key source of economic strength, or if consumer spending is low, economic instability.

Claimant Count Change

This indicator is a measurement of the number of people within the British economy claiming unemployment related benefits (data is for the month prior). A drive down in the trends of this indicator would of course positively impact the position of the nation’s currency. This is because of the simple fact that those who are employed tend to spend more than those who are not. Low unemployment rates translate to increased levels of consumer spending, which of course accounts for a large portion of many other economic indicators.

Core CPI y/y

CPI stands for Consumer Price Index, a fundamental indicator that establishes the rate of price inflation or price increase as seen by consumers when purchasing goods and services. Core CPI as released by the British government excludes energy, food, tobacco and alcohol items from collected data, as they are considered more volatile and can thus skew overall inflation trends. With the exclusion of volatile food and energy items, Core CPI shows a smoother trend than does normal CPI. The Consumer Price Index is touted as a timely and detailed inflation indicator. Typically, it is assumed that a rising trend in CPI will positively impact a nation’s currency. Central banks are most concerned with price stability. If inflation rates are continually rising interest rates will likely be increased in an effort to bring prices back down. Globally, increased interest rates are said to entice foreign investment flows, which would of course, in turn, increase the demand and the standing of a nation’s currency on a global scale. CPI is a well respected fundamental indicator and is ranked highly in terms of its potential impact in the market.

CPI y/y

CPI stands for Consumer Price Index, a fundamental indicator that establishes the rate of price inflation or price increase as seen by consumers when purchasing goods and services. The Consumer Price Index is touted as a timely and detailed inflation indicator. Typically, it is assumed that a rising trend in CPI will positively impact a nation’s currency. Central banks are most concerned with price stability. If inflation rates are continually rising interest rates will likely be increased in an effort to bring prices back down. Globally, increased interest rates are said to entice foreign investment flows, which would of course, in turn, increase the demand and the standing of a nation’s currency on a global scale. CPI is a well respected fundamental indicator and is ranked highly in terms of its potential impact in the market.

GDP q/q

GDP q/q Gross Domestic Product is considered by most the broadest, most comprehensive barometer of a country’s overall economic condition. It measures the sum of all market values on final goods and services produced in a country (domestically) during a specific period of time. A rising trend seen in a country’s GDP of course indicates that the economy of said country is improving; as a result foreign investors are more inclined to seek investment opportunities within that nation’s bond and stock markets. It is not uncommon to see interest rate hikes as a follow-up to a rising GDP, as central banks will have an increased confidence in their own growing economies. The combination of a rising GDP and potentially higher interest rates can lead to an increase in demand for that nation’s currency on a global scale.

Industrial Production

Industrial production is a measurement of the cumulative dollar amount of product produced by factories and other industrial production facilities. Increased levels of production would of course signify a strengthening economy, thus an increased trend seen in this indicator should positively affect the position of a nation’s currency. Industrial production is closely tied with personal income, manufacturing employment and average earnings in that its quick reaction to the business cycle often allows for a preemptive leading look into these indicators.

Interest Rate Statement

The Monetary Policy Committee of the Bank of England (BOE) publishes an Interest Rate Statement every month. Perhaps at the core of all economic indicators are those that relate to interest rate decisions. In fact, most would argue that other economic indicators are used by the average trader as nothing more than a means to anticipate pending interest rate changes. The bulk of the statement includes an explanation of the various economic factors that influenced the change in rates (or lack thereof) for the nation’s short term interest rate, also referred to as the “bank rate”. The report will also include insight as to what the next interest rate decision might be. Short term interest rates are of monumental importance to traders in any of the major financial markets.

Central banks are most concerned with price stability. If inflation rates are continually rising interest rates will likely be increased in an effort to bring prices back down. Globally, increased interest rates are said to entice foreign investment flows, which would of course, in turn, increase the demand and the standing of a nation’s currency on a global scale. Seasoned economists understand the relationship between inflation and interest rates, namely that inflation tends to precede higher interest rates, which ultimately increases the global demand for a nation’s currency.

Manufacturing PMI

PMI stands for Purchasing Managers Index. Before the report is published purchasing managers are surveyed on the present situation of economic factors relevant to their position, factors such as new orders, inventories, production, employment, etc. Traders tend to keep an eye on this indicator because it tends to lead (leading indicator) into data that will later be released. This is because purchasing managers have an early view at the performance of their company. The indicator uses a reading of 50 to measure expansion, or the lack thereof. A reading above 50 would indicate economic expansion.

Manufacturing Production

This indicator is a measurement of the total value of output (produced materials) by manufacturers within the sub-sector of production. It is important to note that while this indicator is very similar to Industrial Production, it differs slightly because it is specific to only manufacturing industries, which by most estimates account for approximately 80% of total Industrial Production.

MPC Treasury Committee Hearings

The Monetary Policy Committee (MPC) of the Bank of England (BOE), along with Governor Mervyn King, will speak on the standing of the British economic picture. The testimony is given before Parliament’s Treasury committee.

Nationwide House Prices m/m

The Nationwide House Prices report in the UK acts as a preemptive inflation indicator within the housing market. The report includes data collected on any monthly changes of average sale prices for houses in the UK.

PPI Input m/m

PPI stands for Producer Price Index, a fundamental indicator that establishes the rate of inflation, or in other words, the rate of price changes as seen by manufacturers who must purchase goods and services. As PPI relates to the GBP it is broken into two separate economic indicators; PPI Input (measure of goods and services bought) and PPI Output (measure of goods and services sold). Of the two, PPI Input is generally more closely watched by traders. The Producer Price Index is touted as a timely and detailed inflation indicator. Typically, it is assumed that a rising trend in PPI will positively impact a nation’s currency. When manufacturers are forced to pay higher prices for the goods and services they need, these higher prices are then soon seen by the consumer. As such, the PPI is considered an indication of consumer inflation. The potential impact of PPI in the market is well respected by traders, though it is generally not thought to have as large of an impact as does its closely related cousin; Consumer Price Index (CPI), which is usually released shortly after PPI.

Public Sector Net Borrowing

Public Sector Net Borrowing as its name suggests measures borrowing in the public sector, including government corporations. Increased trends seen in the amount of borrowing are said to imply economic expansion (investment flows), thus a positive or rising trend seen in this indicator should positively affect a nation’s economy and their currency.

Retail Sales m/m

Retail Sales is a measurement of the total value of retail sales in a given period. Because a large portion of consumer spending is accounted for in this indicator and because this indicator is typically the first of the month to report numbers concerned with consumer spending, traders tend watch this indicator closely. Retail Sales gives traders a good look at the consumer spending situation, which of course, will account for approximately half of GDP (Gross Domestic Product). In other words, traders watch Retail Sales because of its lead into consumer spending, which, in turn, is important because of its lead into GDP.

RICS House Price Balance

RICS stands for the Royal Institute of Chartered Surveyors; their House Price Balance indicator is a measurement of price increases or decreases seen within the housing market in the UK. The information used to report this indicator is gathered through the means of survey; chartered surveyors report on price changes seen in their area. The percentage reading of the indicator would indicate that more surveyors saw an increase in price. 25%, for example, would indicate that 25% more surveyors saw an increase in price than did those who reported declining prices.

Rightmove House Price Index m/m

This indicator may be noteworthy simply because it is reported in the same month that figures are gathered. This is important when considering that most fundamental indicators released concerning the housing market are lagging indicators. Rightmove is a leading property website in the UK; their publication of same month housing data, specifically changes seen in the average asking price of residential properties, leads well into potential inflation that might be seen soon thereafter in the housing sector.

RPI y/y

RPI – Retail Price Index is much like CPI in that it measures inflation rates as seen by consumers. However, RPI differentiates itself in the sense that it looks only at goods and services bought for the purpose of household consumption.

Services PMI q/q

Measuring essentially the same information as normal PMI, the Services PMI simply focuses on the services sector. PMI stands for Purchasing Managers Index. Before the report is published purchasing managers are surveyed on the present situation of economic factors relevant to their position, factors such as new orders, inventories, production, employment, etc. Traders tend to keep an eye on this indicator because it tends to lead (leading indicator) into data that will later be released. This is because purchasing managers have an early view at the performance of their company. The indicator uses a reading of 50 to measure expansion, or the lack thereof. A reading above 50 would indicate economic expansion.

Trade Balance

Trade balance compares the amount of imported goods and services to the amount of exported goods and services of a given economy. Economically, it is in the best interest of an economy to have more goods and services exported than have been imported. Thus, a positive trade balance measures a period in which more goods and services were exported than were imported. An increased number of exports translate to an increase in the demand for said nation’s currency, as other countries will be forced to exchange currency in order to purchase the exports. GDP (Gross Domestic Product) is also largely impacted by the trade balance, as an increase in the demand for exports will increase the work load of domestic factories, thus increasing employment levels.

The Japanese GDP (Gross Domestic Product) generally ranks among the top 3 – 4 globally. Their currency, the Yen, is the primary Asian representative in the off exchange retail foreign currency market.

The Bank of Japan is the stabilizing force behind the Yen and is central to Japan’s financial infrastructure. Some of the relevant economic indicators to the Yen are released directly through the Bank of Japan, while others may be released from private data analysis firms. Each of the economic indicators listed and described below have the potential to affect the price and stability of the Yen upon their release. There are other indicators that are directly relevant to the Yen that do not appear in the list below.

The economic indicators outlined below can potentially move the price of any currency pair the Yen is involved with. These currency pairs include:

  • USD/JPY
  • EUR/JPY
  • GBP/JPY
  • CHF/JPY
  • AUD/JPY
  • NZD/JPY

Some of the below reports are commonly released by most economic powers around the globe, others are specific only to Japan.

Bank of Japan Outlook Report

The BOJ (Bank of Japan) publishes a semi-annual report in April and October that outlines the Bank’s stance and feelings on economic issues. The report includes an overall gauge of the economy, a look at inflation (which ultimately relates to interest rates), and a detailed look at economic policy. Because the report is semi-annual its outline projections are for the coming six months.

Core CPI

CPI stands for Consumer Price Index, a fundamental indicator that establishes the rate of price inflation or price increase as seen by consumers when purchasing goods and services. Core CPI as released by the Japanese government excludes fresh food items from collected data, as they are considered more volatile and can thus skew overall inflation trends. With the exclusion of volatile food items, Core CPI is considered a more reliable calculation of CPI. The Consumer Price Index is touted as a timely and detailed inflation indicator. Typically, it is assumed that a rising trend in CPI will positively impact a nation’s currency. Central banks are most concerned with price stability. If inflation rates are continually rising interest rates will likely be increased in an effort to bring prices back down. Globally, increased interest rates are said to entice foreign investment flows, which would of course, in turn, increase the demand and the standing of a nation’s currency on a global scale. CPI is a well respected fundamental indicator and is ranked highly in terms of its potential impact in the market.

Core Machinery Orders

Core Machinery Orders is a measurement of the sum value of new orders for machinery related products placed with machine manufacturers. An increased trend seen in this indicator is a sign of a strengthening economy and thus a strengthening currency. An increase in orders placed from manufacturers implies that the manufacturing industry is poised for expansion.

GDP y/y

Gross Domestic Product is considered by most the broadest, most comprehensive gage of a country’s overall economic condition. It measures the sum of all market values on final goods and services produced in a country (domestically) during a specific period of time. A rising trend seen in a country’s GDP of course indicates that the economy of said country is improving; as a result foreign investors are more inclined to seek investment opportunities within that nation’s bond and stock markets. It is not uncommon to see interest rate hikes as a follow-up to a rising GDP, as central banks will have an increased confidence in their own growing economies. The combination of a rising GDP and potentially higher interest rates can lead to an increase in demand for that nation’s currency on a global scale.

GDP Deflator q/q

Aside from basic GDP (Gross Domestic Product) figures some governments also releases GDP deflators. The GDP Deflator report publishes the difference between nominal and actual GDP. The report takes a measurement of annualized quarterly inflation rates as applicable to all economic activity.

Industrial Production

Industrial production is a measurement of the cumulative dollar amount of product produced by factories and other industrial production facilities. Increased levels of production would of course signify a strengthening economy, thus an increased trend seen in this indicator should positively affect the position of a nation’s currency. Industrial production is closely tied with personal income, manufacturing employment and average earnings in that its quick reaction to the business cycle often allows for a preemptive leading look into these indicators.

Interest Rate Statement

Perhaps at the core of all economic indicators are those that relate to interest rate decisions. In fact, most would argue that other economic indicators are used by the average trader as nothing more than a means to anticipate pending interest rate changes. The Bank of Japan’s (BOJ) Monetary Policy Committee publishes its interest rate statement monthly. The bulk of the statement includes an explanation of the various economic factors that influenced the change in rates (or lack thereof) for the nation’s short term interest rate, also referred to as the “overnight call rate”. The report will also include insight as to what the next interest rate decision might be. Short term interest rates are of monumental importance to traders in any of the major financial markets. This is due to the fact that high interest rates attract foreign investors who are seeking the highest possible return in exchange for the lowest possible risk. Central banks are most concerned with price stability. If inflation rates are continually rising interest rates will likely be increased in an effort to bring prices back down. Globally, increased interest rates are said to entice foreign investment flows, which would of course, in turn, increase the demand and the standing of a nation’s currency on a global scale. Seasoned economists understand the relationship between inflation and interest rates, namely that inflation tends to precede higher interest rates, which ultimately increases the global demand for a nation’s currency.

Manufacturing PMI

PMI stands for Purchasing Managers Index. Before the report is published purchasing managers are surveyed on the present situation of economic factors relevant to their position, factors such as new orders, inventories, production, employment, etc. Traders tend to keep an eye on this indicator because it tends to lead (leading indicator) into data that will later be released. This is because purchasing managers have an early view at the performance of their company. The indicator uses a reading of 50 to measure expansion, or the lack thereof. A reading above 50 would indicate economic expansion.

Monetary Base

This indicator is a measurement in changes seen annually to Japan’s total currency in circulation. This would include current account balances and of course banknotes and coins. Essentially the report exposes the total amount of additional currency being issued by the Bank of Japan each year. When the monetary base increases in the course of a year, or over the course of a few years, the result is usually a higher rate of inflation for the Yen.

Overall Household Spending

Overall household spending measures the total amount of consumer expenditures on household goods and services. Rising trends seen in this indicator tend to strengthen the position of a nation’s currency. Quite obviously, an increase in consumer spending will positively impact an economy. Important to note is the correlation between consumer spending and GDP (Gross Domestic Product), namely that consumer spending accounts for approximately half of GDP, which of course is considered a very key economic indicator.

Retail Sales

Retail Sales is a measurement of the total value of retail sales in a given period. Because a large portion of consumer spending is accounted for in this indicator and because this indicator is typically the first of the month to report numbers concerned with consumer spending, traders tend watch this indicator closely. Retail Sales gives traders a good look at the consumer spending situation, which of course, will account for approximately half of GDP (Gross Domestic Product). In other words, traders watch Retail Sales because of its lead into consumer spending, which, in turn, is important because of its lead into GDP. Rising trends seen within this indicator should positively affect the standing of a nation’s currency.

Tertiary Industry Activity Index

This indicator gathers a measurement of spending related changes seen in the services sector. Increased spending seen in this sector may be representative of increased employment rates, which in theory should precede a hike in consumer spending; thus a positive trend seen in this indicator should positively affect the economy of a nation and its currency.

Economics of, Euro (EUR)

The Euro finds itself in an interesting position globally. Because the Euro is used by many countries across Europe its global economic impact is substantial. Listed in alphabetical order the Euro is the official currency of the following countries: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain – these countries comprise what is known as the Eurozone. The economic standing of any of the aforementioned countries can potentially impact the stability and price direction of the Euro. That said, traders dealing in Euro must pay close attention to political factors, and the various economic indicators of each country in the Eurozone.

Some of the relevant economic indicators to the Euro are released directly through the European Central Bank (ECB), while others are released from private data analysis firms. Each of the economic indicators listed and described below have the potential to affect the price and stability of the Euro upon their release. There are other indicators that are directly relevant to the Euro, but that have been excluded from the list below.

The economic indicators outlined below can potentially move the price of any currency pair the Euro is involved with. These currency pairs include:

  • EUR/USD
  • EUR/JPY
  • EUR/CHF
  • EUR/GBP
  • EUR/CAD
  • EUR/AUD

Some of the below reports are commonly released by most economic powers around the globe, others are specific only to countries within the Eurozone.

French GDP

Gross Domestic Product is considered by most the broadest, most comprehensive barometer of a country’s overall economic condition. It measures the sum of all market values on final goods and services produced in a country (domestically) during a specific period of time. A rising trend seen in a country’s GDP of course indicates that the economy of said country is improving; as a result foreign investors are more inclined to seek investment opportunities within that nation’s bond and stock markets. It is not uncommon to see interest rate hikes as a follow-up to a rising GDP, as central banks will have an increased confidence in their own growing economies. The combination of a rising GDP and potentially higher interest rates can lead to an increase in demand for that nation’s currency on a global scale.

French Nonfarm Employment

Nonfarm Employment Change is a measurement of the number of new jobs created in the previous quarter (of course excluding farming related employment). The number of new jobs seen in a given economy is of course largely influential in regards to the strength of that nation’s currency; as the number of new jobs directly impacts consumer spending. Consumer spending accounts for nearly half of Gross Domestic Product. GDP is of course one of the most important economic indicators in terms of driving economic progression and the increase of a nation’s currency.

German CPI

CPI stands for Consumer Price Index, a fundamental indicator that establishes the rate of price inflation or price increase as seen by consumers when purchasing goods and services. The Consumer Price Index is touted as a timely and detailed inflation indicator. Typically, it is assumed that a rising trend in CPI will positively impact a nation’s currency. Central banks are most concerned with price stability. If inflation rates are continually rising interest rates will likely be increased in an effort to bring prices back down. Globally, increased interest rates are said to entice foreign investment flows, which would of course, in turn, increase the demand and the standing of a nation’s currency on a global scale. CPI is a well respected fundamental indicator and is ranked highly in terms of its potential impact in the market.

German GDP

Gross Domestic Product is considered by most the broadest, most comprehensive barometer of a country’s overall economic condition. It measures the sum of all market values on final goods and services produced in a country (domestically) during a specific period of time. A rising trend seen in a country’s GDP of course indicates that the economy of said country is improving; as a result foreign investors are more inclined to seek investment opportunities within that nation’s bond and stock markets. It is not uncommon to see interest rate hikes as a follow-up to a rising GDP, as central banks will have an increased confidence in their own growing economies. The combination of a rising GDP and potentially higher interest rates can lead to an increase in demand for that nation’s currency on a global scale.

German IFo Business Climate Index

The IFo (Information and Forschung) Business Climate Index surveys manufacturing, wholesale, retail and construction firms in an effort to measure economic confidence in the coming months. Over 7,000 firms are said to participate in the survey which has become a very key indication of economic confidence, or the lack thereof, in the German economy.

German Industrial Production

Industrial production is a measurement of the cumulative dollar amount of product produced by factories and other industrial production facilities. Increased levels of production would of course signify a strengthening economy, thus an increased trend seen in this indicator should positively affect the position of a nation’s currency. Industrial production is closely tied with personal income, manufacturing employment and average earnings in that its quick reaction to the business cycle often allows for a preemptive leading look into these indicators.

German Manufacturing PMI

PMI stands for Purchasing Managers Index. Before the report is published purchasing managers are surveyed on the present situation of economic factors relevant to their position, factors such as new orders, inventories, production, employment, etc. Traders tend to keep an eye on this indicator because it tends to lead (leading indicator) into data that will later be released. This is because purchasing managers have an early view at the performance of their company. The indicator uses a reading of 50 to measure expansion, or the lack thereof. A reading above 50 would indicate economic expansion.

German ZEW Economic Sentiment

ZEW stands for Zentrum fur Europaische Wirtschaftsforschung; for non German speakers, probably an irrelevant fact. At any rate, the ZEW Economic Sentiment takes a look at investor sentiment on the institutional level. Participants in the gathering of data state whether they feel optimistic or pessimistic concerning the state of their investments and the health of the economy in the coming six months. The indicator compares the percent of investors who feel positive about the pending economy to those who feel negative and then factors the number of those who expect no change. If 40% of investors feel optimistic concerning the pending economy and 30% expect a falling economy, leaving a remaining 30% that expect no change the reading would measure +10. Investor sentiment, particularly investors on an institutional level, can largely impact overall economic sentiment, thus a positive trend seen in this indicator should positively impact the economy.

Industrial New Orders

Industrial New Orders is a simple measurement of the number of new purchase orders as seen by domestic manufacturers for either durable or non-durable goods in a given period of time.

Interest Rate Statement

The Governing Council of the European Central Bank (ECB) publishes an Interest Rate Statement every month. Perhaps at the core of all economic indicators are those that relate to interest rate decisions. In fact, most would argue that other economic indicators are used by the average trader as nothing more than a means to anticipate pending interest rate changes. The bulk of the statement includes an explanation of the various economic factors that influenced the change in rates (or lack thereof) for the nation’s short term interest rate, also referred to as the “cash rate”. The report will also include insight as to what the next interest rate decision might be. Short term interest rates are of monumental importance to traders in any of the major financial markets. This is due to the fact that high interest rates attract foreign investors who are seeking the highest possible return in exchange for the lowest possible risk. Central banks are most concerned with price stability. If inflation rates are continually rising interest rates will likely be increased in an effort to bring prices back down. Globally, increased interest rates are said to entice foreign investment flows, which would of course, in turn, increase the demand and the standing of a nation’s currency on a global scale. Seasoned economists understand the relationship between inflation and interest rates, namely that inflation tends to precede higher interest rates, which ultimately increases the global demand for a nation’s currency.

Economics of, Swiss Francs (CHF)

The Swiss economy is largely impacted by the activity of the Swiss National Bank and its active participation in the forex process. Since the US’s abandonment of the gold standard in 1971 it has been the policy of the Swiss National Bank to actively push the Franc in and out of the forex market place. As such, traders dealing in Franc should pay very close to the activity of the Swiss National Bank. Various economic and political factors combine to drive the ever-changing value of the CHF, but key to traders are the many economic indicators pertinent to the Swiss economy.

Some of the relevant economic indicators to the CHF are released directly through the Swiss National Bank, while others may be released from private data analysis firms. Each of the economic indicators listed and described below have the potential to affect the price and stability of the CHF upon their release. There are other indicators that are directly relevant to the CHF, but that have been excluded from this list.

The economic indicators outlined below can potentially move the price of any currency pair the CHF is involved with. These currency pairs include:

  • USD/CHF
  • EUR/CHF
  • GBP/CHF
  • CHF/JPY

Some of the below reports are commonly released by most economic powers around the globe, others are specific only to the Swiss economy.

Consumption Indicator

The consumption indicator is a measurement of the total consumer expenditure on goods and services for a given period of time. This indicator is typically released 3 months before actual or official statistics are reported to the public.

CPI m/m

CPI stands for Consumer Price Index, a fundamental indicator that establishes the rate of price inflation or price increase as seen by consumers when purchasing goods and services. The Consumer Price Index is touted as a timely and detailed inflation indicator. Typically, it is assumed that a rising trend in CPI will positively impact a nation’s currency. Central banks are most concerned with price stability. If inflation rates are continually rising interest rates will likely be increased in an effort to bring prices back down. Globally, increased interest rates are said to entice foreign investment flows, which would of course, in turn, increase the demand and the standing of a nation’s currency on a global scale. CPI is a well respected fundamental indicator and is ranked highly in terms of its potential impact in the market.

Employment Level

Employment Level measures the total workers, both full and part-time, that were employed during the previous quarter. Because consumer spending is so closely tied to the number of new jobs created, the Employment Level indicator is closely watched by traders and economists alike who understand its ultimate connection to GDP (Gross Domestic Product). Positive trends seen in this indicator imply a strengthening economy.

GDP q/q

Gross Domestic Product is considered by most the broadest, most comprehensive barometer of a country’s overall economic condition. It measures the sum of all market values on final goods and services produced in a country (domestically) during a specific period of time. A rising trend seen in a country’s GDP of course indicates that the economy of said country is improving; as a result foreign investors are more inclined to seek investment opportunities within that nation’s bond and stock markets. It is not uncommon to see interest rate hikes as a follow-up to a rising GDP, as central banks will have an increased confidence in their own growing economies. The combination of a rising GDP and potentially higher interest rates can lead to an increase in demand for that nation’s currency on a global scale.

PPI m/m

PPI stands for Producer Price Index, a fundamental indicator that establishes the rate of inflation, or in other words, the rate of price changes as seen by manufacturers who must purchase goods and services. The Producer Price Index is touted as a timely and detailed inflation indicator. Typically, it is assumed that a rising trend in PPI will positively impact a nation’s currency. Logically enough, when manufacturers are forced to pay higher prices for the goods and services they need, these higher prices are then soon seen by the consumer. As such, the PPI is considered an indication of consumer inflation. The potential impact of PPI in the market is well respected by traders, though it is generally not thought to have as large of an impact as does its closely related cousin; Consumer Price Index (CPI), which is usually released shortly after PPI.

Retail Sales y/y

Retail Sales is a measurement of the total value of retail sales in a given period. Because a large portion of consumer spending is accounted for in this indicator and because this indicator is typically the first of the month to report numbers concerned with consumer spending, traders tend watch this indicator closely. Retail Sales gives traders a good look at the consumer spending situation, which of course, will account for approximately half of GDP (Gross Domestic Product). In other words, traders watch Retail Sales because of its lead into consumer spending, which, in turn, is important because of its lead into GDP. Rising trends seen within this indicator should positively affect the standing of a nation’s currency.

SVME PMI

SVME stands for Schweizerischer Verband fur Materialwirtschaft und Einkauf; PMI of course standing for Purchasing Managers Index. Before the report is published purchasing managers are surveyed on the present situation of economic factors relevant to their position, factors such as new orders, inventories, production, employment, etc. Traders tend to keep an eye on this indicator because it tends to lead (leading indicator) into data that will later be released. This is because purchasing managers have an early view at the performance of their company. The indicator uses a reading of 50 to measure expansion, or the lack thereof. A reading above 50 would indicate economic expansion.

Trade Balance

Trade balance compares the amount of imported goods and services to the amount of exported goods and services of a given economy. Economically, it is in the best interest of an economy to have more goods and services exported than have been imported. Thus, a positive trade balance measures a period in which more goods and services were exported than were imported. An increased number of exports translate to an increase in the demand for said nation’s currency, as other countries will be forced to exchange currency in order to purchase the exports. GDP (Gross Domestic Product) is also largely impacted by the trade balance, as an increase in the demand for exports will increase the work load of domestic factories, thus increasing employment