Article wit compliments from http://www.finexo.com/
Economic indicators are pieces of financial
and economic data published regularly by governmental
agencies and the private sector. These statistics
help market observers monitor the economy's
pulse - so it's no surprise that they're religiously
followed by almost everyone in the financial
markets.
With so many people poised to react to the
same information, economic indicators have tremendous
potential to generate volume and to move prices.
It might seem like you need an advanced economics
degree to parse all this data accurately - but
in fact people trading the Forex need only keep
a few simple guidelines in mind to making trading
decisions based on this data.
Know when the data is going to be released
Knowing when each piece of information will
be released is important to successful trading.
You can find these calendars on the Finexo.com
web site – click here to see it.
Watching the economic calendar not only helps
you decide how to trade using these events,
it can help explain unanticipated price actions
during those periods. For example: it's the
first Monday of a given month and the Dollar
(USD) has been falling for close to two weeks,
with many currency traders short USD positions
as a result (meaning they sold the dollar and
bought another currency). Friday, however, U.S.
employment data is scheduled to be released.
If that report looks promising, traders may
start unwinding their short positions before
Friday, leading to a short-term rally in USD
through the week.
The reports and their effect on the
overall economy
It is not important to understand every nuance
of each data release, but it is vital to try
and grasp the key, large-scale relationships
between reports and what they measure in the
economy. For example, you should know which
indicators measure the economy's growth (gross
domestic product, or GDP) versus those that
measure inflation (PPI, CPI) or employment strength
(non-farm payrolls).
Not all economic data moves currency
markets
The market usually pays more attention to some
data, virtually ignoring others – it is
important to know which ones can “move
the market” and which ones are benign.
The thing is, the focus given to a specific
piece of information can change as the situation
in that specific country changes. For example,
if consumer prices, a.k.a. inflation are not
a crucial issue for Japan, but its economic
growth is problematic, currency traders might
pay less attention to inflation data like the
CPI (consumer price index) and focus on employment
data or GDP reports.
Expectations and perceptions are everything
Many times, the data itself may not be as important
as whether or not it is within the expectations
set forth by the analyst, experts and pundits.
If a specific report differs widely and unexpectedly
from what economists and market gurus were expecting,
market volatility and potential trading opportunities
may result.
As well, be mindful to not act in haste when
a piece of data does not come in with the expected
range. Every piece of data that is released
usually has adjustments to prior data. For example,
the US PPI (producer price index) came in for
November, it was lower than expected –
however the dollar only got stronger, why? Along
with the November data was an adjustment to
the October data that showed a stronger PPI
for that month. It is hard to factor these changes
into a trade, however these changes usually
only affect a currency after it is released
– it is difficult to predict adjustments
to prior data. Also, it is rare for a data adjustment
to actually be so far off from the original
data that it affects the position greatly. Traders
rely on recent data, most of the time yesterdays
news is kept in the past if the current situation
shows something different.
How to use the data
While an economist on television might appreciate
the small nuances of a report, stretching a
small piece of information into a ten minute
sketch, traders need to sift through the data
for their own purposes allowing them to make
intelligent trading decisions.
For example, many new traders watch business
news networks when the Employment Report is
released. They assume that new jobs are key
to economic growth. That might be true, most
of the time, but in trading terms non-farm payrolls
is the figure traders watch most closely and
therefore has the biggest impact on markets.
Similarly, PPI measures changes in producer
prices generally - but traders tend to watch
the PPI excluding food and energy as a market
driver. Food and energy data tend to be much
too volatile and subject to the revisions we
spoke about earlier to provide an accurate reading
on producer price changes.
The world is a very small place –
the trickle down effect
Keeping up to date on the economies of the
world is vital to trading currencies. Knowing
not only what is happening in the countries
of the currency you are not trading is as important
as knowing what is happening in the countries
that you trading.
It is important to understand that it is not
just the data of a specific country that can
affect that countries currency. The world is
linked together very tightly, and the data from
one country can have significant affects on
others. As an example, the US exports most of
the cotton that is grown there (the US is the
largest cotton grower) to countries like China,
whose economy is based on manufacturing. Sensing
a slowdown in the recent world economy, China
has cut production on clothing and textiles.
This means that less cotton will be purchased
by the Chinese over the next year, causing the
price of Cotton to drop (supply and demand economics),
in turn causing farmers in the US to make less
money – in turn causing them to lay off
workers – causing the unemployment level
to grow. This action also brings down sales
as the more unemployed eventually leads to a
reduction in consumer spending.
Knowledge is everything – to successfully
trade the Forex the key is to stay informed
and remember the world is a very small place
where the economic decision of one country can
have a damaging affect on another.
What are the Key Indicators?
Traders can gauge the financial health of a
given country (and its currency) through its
economic data. But, just like a doctor monitoring
a patient's vital signs, the information is
not equal in terms of its impact. Here's a primer
of the key economic indicators that often impact
currency traders.
Economic indicators divide into leading and
lagging indicators:
Leading indicators are economic factors that
change before the economy starts to follow a
particular trend. They're used to predict changes
in the economy.
Lagging indicators are economic factors that
change after the economy has already begun to
follow a particular trend. They're used to confirm
changes in the economy.
Major economic indicators
Gross Domestic Product (GDP)
The sum of all goods and services produced
either by domestic or foreign companies. GDP
indicates the pace at which a country's economy
is growing (or shrinking) and is considered
the broadest indicator of economic output and
growth.
Industrial Production
A chain-weighted measure of the change in the
production of the nation's factories, mines
and utilities, industrial production also measures
the country's industrial capacity and how fully
it's being used (capacity utilization).
The manufacturing sector accounts for one-quarter
of the major currencies' economies, so it's
critical to watch the health of factories and
whether their capacity is being maximized.
Purchasing Managers Index (PMI)
The National Association of Purchasing Managers
(NAPM), now called the Institute for Supply
Management, releases a monthly composite index
of national manufacturing conditions. The index
includes data on new orders, production, supplier
delivery times, backlogs, inventories, prices,
employment, export and import orders. It is
divided into manufacturing and non-manufacturing
sub-indices.
Producer Price Index (PPI)
Measures average changes in selling prices
received by domestic producers in the manufacturing,
mining, agriculture, and electric utility industries.
The PPIs most often used for economic analysis
are those for finished goods, intermediate goods,
and crude goods.
Consumer Price Index (CPI)
Measures the average price level paid by urban
consumers (80% of the population in major currency
countries) for a fixed basket of goods and services.
It reports price changes in over 200 categories.
The CPI also includes various user fees and
taxes directly associated with the prices of
specific goods and services.
Durable Goods
Durable Goods Orders measures new orders placed
with domestic manufacturers for immediate and
future delivery of factory hard goods. A durable
good is a product that lasts over three years,
during which its services are extended.
Companies and consumers sometimes put off purchases
of durable goods during tough economic times
- so this figure is a useful measure of certain
kinds of customer demand.
Employment Cost Index (ECI)
Payroll employment is a measure of the number
of jobs at larger companies in more than 500
industries in all 50 U.S. states and 255 metropolitan
areas. ECI counts the number of paid employees
working part-time or full-time in the nation's
business and government establishments.
Retail Sales
Measures total receipts of retail stores from
samples representing all sizes and kinds of
business in retail trade throughout the nation.
It is the timeliest indicator of broad consumer
spending patterns and is adjusted for normal
seasonal variation, holidays, and trading-day
differences.
Retail sales include durable and nondurable
merchandise sold, and services and excise taxes
incidental to the sale of merchandise. It doesn't
include sales taxes collected directly from
the customer.
Housing Starts
Measures the number of residential units on
which construction is begun each month. A "start"
refers to excavation of the foundation of a
residential home.
Housing is usually one of the first sectors
to react to interest rate changes. Significant
reaction of start/permits to changing interest
rates signals interest rates are nearing trough
or peak. To analyze, focus on the percentage
change in levels from the previous month. Report
is released around the middle of the following
month.
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