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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). 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 yesterday's news is kept in the past if the current situation shows something different. How to use the dataWhile 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. 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. 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 The 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 - It is a chain-weighted measure of the change in the production of the nation's factories, mines and utilities as well as a measure of their industrial capacity and of how many available resources among factories, utilities and mines are being used (commonly known as capacity utilization). The manufacturing sector accounts for one-quarter of the economy. The capacity utilization rate provides an estimate of how much factory capacity is in use. 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, constructed from data on new orders, production, supplier delivery times, backlogs, inventories, prices, employment, export orders, and import orders. It is divided into manufacturing and non-manufacturing sub-indices. Producer Price Index (PPI) - The Producer Price Index (PPI) is a measure of price changes in the manufacturing sector. It measures average changes in selling prices received by domestic producers in the manufacturing, mining, agriculture, and electric utility industries for their output. The PPIs most often used for economic analysis are those for finished goods, intermediate goods, and crude goods.
Consumer Price Index (CPI) - The Consumer Price Index (CPI) is a measure of the average price level paid by urban consumers (80% of population) 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 goods is defined as a good that lasts an extended period of time (over three years) during which its services are extended.
Employment Cost Index (ECI) - Payroll employment is a measure of the number of jobs in more than 500 industries in all states and 255 metropolitan areas. The employment estimates are based on a survey of larger businesses and counts the number of paid employees working part-time or full-time in the nation's business and government establishments. Retail Sales - The retail sales report is a measure of the 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. Excluded are sales taxes collected directly from the customer. Housing Starts - The Housing Starts report measures the number of residential units on which construction is begun each month. A start in construction is defined as the beginning of excavation of the foundation for the building and is comprised primarily of residential housing. Housing is very interest rate sensitive and is one of the first sectors to react to changes in interest rates. 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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