FUNDAMENTALS PART 3
Central bank indicators continued
Producer Price Index (PPI)
PPI measures changes in the price of goods offered by farmers and manufacturers and financial traders follow these trends as they are released monthly. This indicator is subsequent to frequent revisions, due to seasonal food prices and highly unstable nature of energy. Usually if PPI increases then the expectation in the markets is that interest rates will also increase sending the currency higher with it. Vice versa if the PPI comes in lower.
Industrial Production
This indicator measures the monthly raw volume of goods produced by industrial firms such as: factories, mines and utilities companies. Industrial production can reflect the tone of the overall economic activity. So a positive reading is generally positive for the overall currency and vice versa.
ISM Manufacturing Index
This is a US data point and is a survey of more than 300 companies.
The purpose of this indicator is to monitor: employment, production inventories, new orders and supply deliveries. This monitors the overall conditions in industry, the US Federal reserve bank places great value on this indicator which makes it important to us as well.
Trade Balance
Trade Balance measures the value of imported and exported goods and how they compare to each other. When imports and spending exceed exports and earnings the country is said to have a trade deficit; which is obviously negative because money is literally flowing out the country. If exports and earnings exceed imports and spending the country is said to have a trade surplus which is a good thing for the country particularly for it’s currency. This is all due to demand.
The Current Account
This indicator measures all the money coming into the country and all the money going out of the country. Generally a positive reading shows demand for the local currency which is good and vice versa.
Unemployment Rate
This is used by the banks as a short term target whilst managing monetary policy. Employment figures show the overall numbers but also a number of specific data to digest; these specific details can often over take the main headline when researched and is worth looking out for. For example if employment figures have risen, but then in the details it shows that the majority of new employment are part time jobs, this could actually have a negative affect because the average earning will be down. But generally unemployment is never good for a currency
Consumer Confidence Report
This is another US data point, its’ a survey of around 1000 normal everyday consumers. This is considered important because consumer spending is a very large factor affecting the overall GDP reading for the country. So if this index is really positive it could indicate significant growth to follow.
IFO Business Sentiment
This indicator from Germany, gauges the feelings of businesses and gives a good reading of overall economic health. A growing IFO reading leads to growing optimism which leads to the strengthening of the euro.
Durable Goods Orders
Durable goods orders focuses on products that have a generally useful purpose long after purchase such as: cars, washing machines, etc. This can make the market quite volatile and be subsequent to frequent revisions and in the short term they can move the market a lot.
Homes sales
This measures the amount of homes sold or available for sale which is a direct reflection of the US property market. High readings indicate periods of boom and low readings signify stagnation and even recessions.
Housing Starts and Building Permits
This indicator focuses again on US property market and is heavily influenced by the level of mortgage interest rates so is of great interest to us as Forex traders.
Non Farm Payroll
This is when the monthly report is released by the U.S Bureau of Labour Statistics which represent the total number of paid US workers of any business excluding: farm employees, private household employees, general government employees and employees of non profit organisations that provide assistance to individuals. This figure is released the first Friday of every month.
​
The best way to trade NFP is to firstly research how much focus the central bank is having on it for the given month and then position yourself accordingly. The market will only react to the indicators which the Central banks have a key focus on.
We need to identify what the central banks are focused on and predict what there reaction will be to the news. How do we do that? Research.
Do your research on all the sites which we covered earlier and the answers will suddenly become very clear.
Economic Calendars
Everyone who trades the Forex market or even stocks rely on two things:
Technical analysis (charts), and fundamentals.
Fundamentals and economic data is released on a daily basis from the likes of central banks like BOE (Bank of England) or announcements such as: fed minutes, job numbers, information regarding inflation etc.
​
I USE
An example of an economic calendar
The data could already be priced into the market with the consensus or dramatically impact the market on the release of the information. All of these data releases impact price action. One very useful page, which you will have to get very familiar with, is the economic calendar
Familiarise yourself with these calendars: they show you what will likely affect the market and which currency it will affect the most. The economic calendar updates you with a previous, consensus and results when released.
How important or how volatile the news will make the market is shown in the form of a coloured bar; yellow being not much volatility, orange being potentially volatile and red being very volatile. Be very careful when trading around high impact news because it can throw all of your technicals straight out of the window.
But if you are in tune with what the central banks are trying to accomplish data releases present excellent trading opportunities.
Fundamentals provide markets with huge volatility and are usually what a currency needs to start off a big move or change in direction.
​
So before we even look for setups on your charts or jump into a trade, make sure you look at the economic calendar, and do your research into the central banks and the short term market sentiment.