Trading the News
A county’s economic state will without doubt have an impact on the value of its currency, as a currency is a proxy for the country it represents, and therefore the economic health of that country is priced into the currency. One very important way to measure the health of an economy is through economic indicators. That’s why we closely watch these data, such as unemployment, gross domestic product (GDP), political stability, changes in interest rates, inflation etc… as they can all play a role in the value of a country’s currency.
Economic indicators are statistic financial and economic data published by various agencies of the government or private sector, and made public on a regularly scheduled basis. All economic releases are published on various sources on the web; most brokers and economic analysis websites make them available to investors mainly through the economic calendar.
Such indicators help market observers monitor the pulse of the economy. Therefore, they are religiously followed by almost everyone in the financial markets. With so many people poised to react to the same information, economic indicators in general have tremendous potential to generate volume and to move prices in the markets. While on the surface it might seem that an advanced degree in economics would come in handy to analyze and then trade on the glut of information contained in these economic indicators, a few simple guidelines are all that is necessary to track, organize and make trading decisions based on the data.
For instance, if we look at the unemployment figures of a country and see there is a rise in employment, that is a sign that economic growth is flourishing and vice versa a country that has been through economic difficulty can lead to inflation which would then move the currency downwards.
Gross Domestic Product (GDP) is the entire goods and services that a country has produced during a given time. GDP is calculated from private consumption, government spending and total net exports. GDP is the best way to look at a country’s economic strength.
Interest rates are also one of the most important economic indicators to watch by traders in the forex markets as they have the power to move the market immediately. It is imperative for forex traders to watch and analyze the news and actions of central banks as changes in the monetary rules will most certainly cause exchange rates to change. So if you can recognize and predict these changes you will be able give yourself trading opportunities.
How to act on economic news?
Economic indicators and figures are created with equal importance but along the way, some have acquired much greater potential to move the markets than others. Market participants will place higher regard on one stat vs. another depending on the state of the economy, the country of the release, the actual figure compared to market expectations, and other factors.
An indicator of a certain country may have strong impact on the market and on the price of its currency, yet a small or even hardly noticeable impact in another country. For example, if prices (inflation) are not a crucial issue for a particular country, inflation data will probably not be as keenly anticipated or reacted to by the markets. On the other hand, if economic growth is a vexing problem, changes in employment data or GDP will be eagerly anticipated and could precipitate tremendous volatility following their release.
If you are going to trade the currency of a particular country, you need to find out the particulars about their economic indicators, as not all of these indicators carry the same weight in the markets and not all of them are as accurate as others.
In addition, knowing the key aspects of each indicator helps you determine the ones that are major market movers than others. The unemployment rate might be a significant figure, but the most closely watched detail in the payroll data is the non-farm payrolls figure. Other economic indicators are similar in that the headline figure is not nearly as closely watched as the finer points of the data. PPI for example, measures changes in producer prices. But the stat most closely watched by the markets is PPI for ex-food and energy. Traders know that the food and energy component of the data is much too volatile and subject to revisions on a month-to-month basis to provide an accurate reading on the changes in producer prices.
It is vitally important that you know what economists and other market pundits are forecasting for each indicator. For example, knowing the economic consequences of an unexpected monthly rise of 0.3% in the producer price index (PPI) is not nearly as vital to your short-term trading decisions as it is to know that this month the market was looking for PPI to fall by 0.1%. You should know that PPI measures prices and that an unexpected rise could be a sign of inflation. But analyzing the longer-term ramifications of this unexpected monthly rise in prices can wait until after you’ve taken advantage of the trading opportunities presented by the data.