US Economic Indicators:
We know about trends and trend changes, but why a trend changes?
The tops and bottoms of the market are determined by the fundamentals, like news releases, while the technicals show us how we get between those two points.
So a news release can be the cause or trigger of a trend change.
So it is to our advantage to at least be aware of upcoming news releases.
Here are some releases to watch for:
Non-Farm Payrolls
Non-Farm Payrolls have proven itself to be one of the most significant fundamental indicators in recent U.S. history. As a report of the number of new jobs created outside the farming industry each month, a positive or negative NFP can get traders to act very hastily. A better than expected figure is very bullish for the dollar, whereas a more sluggish number usually results in the dollar being sold off. There is another component of unemployment released on the same day: The Unemployment Rate. Unemployment measures the amount of people that are out of a job, but are actively seeking one. If this number is smaller, then it means that the people that are seeking jobs are finding them, possibly meaning that businesses are well off and that the economy is expanding. The NFP is a number, usually between 5-6 figures, whereas the Unemployment rate is a percentage. A higher NFP number and lower unemployment number are generally bullish for the dollar and vice versa. It is difficult to trade the NFP and Unemployment Rate only because many times traders will not pay attention to what seems to be the most significant components, but will instead focus in on what reinforces their bias. Also, the release causes a significant amount of volatility in the markets.
FOMC Rate Decision Interest
Rate decisions for the Fed Funds Rate are very important when trading the U.S. Dollar.
When the Fed raises interest rates, the yield offered by dollar denominated assets are higher, which generally attracts more traders and investors.
If interest rates are lowered, that means that the yield offered by dollar denominated assets is less, which will give investors less of an incentive to invest in dollars.
When the decision is made about the rate it is always accompanied by a statement where the Fed gives a brief summary of what they think of the economy as a whole. When reading the statement it is important to check the exact language.
Many times by the time that the decision is published, it is usually factored into the market. This means that only slight fluctuations are seen if the decision is as expected. The statement on the other hand is analyzed word for word for any signs of what the Fed may do at the next meeting. Remember the actual interest rate movement tends to be less important than the expectations for future interest rate moves.
Retail Sales
The Retail Sales figure is an important number in a series of key economic data that comes out during the month.
Because it measures how much businesses are selling and consumers are purchasing, a strong retail sales figure could signal dollar bullishness because it means strength in the US economy, whereas a less-than-expected number could lead to dollar bearishness.
Again, the logic behind this is that if consumers are spending more, and businesses are making more money, then the economy is picking up pace, and to keep inflation from creeping in during this time period, the Fed may have to raise rates, all of which would be positive for the US dollar.
Traders tend to use the Retail Sales figure more as a leading indicator for other releases such as Consumer Confidence and CPI, and thereby don’t usually “jump the gun,” unless the numbers are terribly out of proportion.
Foreign Purchases of US Treasuries (TIC Data)
The Treasury International Capital flow (TIC) reports on net foreign securities purchases measures the amount of US treasuries and dollar denominated assets that foreigners are holding.
A key feature of the TIC data is its measurement of the types of investors the dollar has; governments and private investors. Usually, a strong government holding of dollar denominated assets signals growing dollar optimism as it shows that governments are confident in the stability of the U.S. dollar. Looking at the different central banks, most important seems to be the purchases of Asian central banks such as that of Japan and China. Waning demand by these two giant US Treasury holders could be bearish for the US dollar.
As for absolute amount of foreign purchases, the market generally likes to see purchases be much stronger than the funding needs of that same month’s trade deficit. If it is not, it signals that there is not enough dollars coming in to match dollar going out of the country.
As a side note, purchases by Caribbean central banks are generally seen to be less consistent since most hedge funds are incorporated in the Caribbean.
Hedge funds generally have a much shorter holding period than other investors.
US Trade Balance
The Trade Balance figure is a measure of net exports minus net imports and tends to be negative for the U.S. as it is primarily a “consuming” nation. However, a growing imbalance in the Trade Balance suggests much about the current account and whether or not if the U.S. is “overspending” on foreign goods and services.
Traders will understand a decreasing Trade Balance number to implicate dollar bullishness, whereas a growing disparity between exports and imports will lead to dollar bearishness.
Because the figure precedes the Current Account release, it pretty much helps project the direction of change in the Current Account and also begins to factor in those expectations.
Current Account Balance
The U.S. Current Account is a figure representing the total accrued deficit of the U.S per quarter against foreign nations. Traders will interpret a greater deficit as bad news for the U.S. and will consequently sell the dollar, whereas a shrinking deficit will spark dollar bullishness.
Usually, the Current Account Deficit is expected to be funded by the net foreign securities, but when ends don’t meet in these data, the Current Account could signal a big dollar sell-off. Additionally, because the Current Account data comes out after the Trade Balance Numbers, a lot of its expectations begin to get priced into the market, so a surprise to either side of expectations could result in big market movements for the dollar.
Consumer Price Index (CPI)/Producer Price Index (PPI)
The Consumer Price Index is one of the leading economic gauges to measure the pace of inflation. Many investors and the Fed constantly monitor this figure to get an understanding about the future of interest rates. Interest rates are significant because not only do they have a direct impact on the amount of capital inflow into the country, but also say much about dollar-based carry trades.
If the inflation number comes in higher than expected, traders will interpret that to mean that an interest rate hike is more likely in the near future and will thus buy dollars, whereas a figure that falls short of expectations may cause traders to wait on the sideline until the Fed actually makes a decision. Essentially, trading a negative change in CPI is much more difficult than trading a positive change due to the nature of different interpretations. A significant increase in the CPI will result in much dollar bullishness, but a decrease will not necessarily result in dollar bearishness.
The CPI measures inflation at the retail level (consumers), while the PPI measures the inflation at the wholesale level (producers).
Gross Domestic Product (GDP)
The U.S. Gross Domestic Product is a gauge of the overall output (goods & services) of the U.S. economy. If the figure increases, the economy is improving, and often the dollar will strengthen. If the number falls short of expectations or meets the consensus, dollar bearishness may be triggered.
This sort of reaction is again tied to interest rates, as traders expect an accelerating economy to be mired by inflation and consequently interest rates will go up. However, much like the CPI, a negative change in GDP is more difficult to trade; just because the pace of growth has slowed does not mean it has deteriorated. On the other hand, a better than expected number will usually result in the dollar rising as it implicates that a quickly expanding economy will sooner or later require higher interest rates to keep inflation in check.
Overall though, the GDP has fallen in significance and its ability to move markets since most of the components of the report are known in advance
Durable Goods
The Durable Good figure measures the amount of capital spending the U.S. is doing, such as on equipment, transportation, etc., both on a business and personal level.
Essentially, the more the U.S. spends the more the dollar stands to benefit; the opposite is also true. This is because increased spending could very well be a harbinger for inflation, and thus consequently, interest rate hikes.
Traders will usually focus in on the durable goods figure, but not too deeply, as it usually precedes data regarding housing starts and the annualized GDP figure release. Therefore trading based on the Durable Goods number is only voluminous when stagnancy in other key economic releases has been confirmed by a market consensus.
We know about trends and trend changes, but why a trend changes?
The tops and bottoms of the market are determined by the fundamentals, like news releases, while the technicals show us how we get between those two points.
So a news release can be the cause or trigger of a trend change.
So it is to our advantage to at least be aware of upcoming news releases.
Here are some releases to watch for:
Non-Farm Payrolls
Non-Farm Payrolls have proven itself to be one of the most significant fundamental indicators in recent U.S. history. As a report of the number of new jobs created outside the farming industry each month, a positive or negative NFP can get traders to act very hastily. A better than expected figure is very bullish for the dollar, whereas a more sluggish number usually results in the dollar being sold off. There is another component of unemployment released on the same day: The Unemployment Rate. Unemployment measures the amount of people that are out of a job, but are actively seeking one. If this number is smaller, then it means that the people that are seeking jobs are finding them, possibly meaning that businesses are well off and that the economy is expanding. The NFP is a number, usually between 5-6 figures, whereas the Unemployment rate is a percentage. A higher NFP number and lower unemployment number are generally bullish for the dollar and vice versa. It is difficult to trade the NFP and Unemployment Rate only because many times traders will not pay attention to what seems to be the most significant components, but will instead focus in on what reinforces their bias. Also, the release causes a significant amount of volatility in the markets.
FOMC Rate Decision Interest
Rate decisions for the Fed Funds Rate are very important when trading the U.S. Dollar.
When the Fed raises interest rates, the yield offered by dollar denominated assets are higher, which generally attracts more traders and investors.
If interest rates are lowered, that means that the yield offered by dollar denominated assets is less, which will give investors less of an incentive to invest in dollars.
When the decision is made about the rate it is always accompanied by a statement where the Fed gives a brief summary of what they think of the economy as a whole. When reading the statement it is important to check the exact language.
Many times by the time that the decision is published, it is usually factored into the market. This means that only slight fluctuations are seen if the decision is as expected. The statement on the other hand is analyzed word for word for any signs of what the Fed may do at the next meeting. Remember the actual interest rate movement tends to be less important than the expectations for future interest rate moves.
Retail Sales
The Retail Sales figure is an important number in a series of key economic data that comes out during the month.
Because it measures how much businesses are selling and consumers are purchasing, a strong retail sales figure could signal dollar bullishness because it means strength in the US economy, whereas a less-than-expected number could lead to dollar bearishness.
Again, the logic behind this is that if consumers are spending more, and businesses are making more money, then the economy is picking up pace, and to keep inflation from creeping in during this time period, the Fed may have to raise rates, all of which would be positive for the US dollar.
Traders tend to use the Retail Sales figure more as a leading indicator for other releases such as Consumer Confidence and CPI, and thereby don’t usually “jump the gun,” unless the numbers are terribly out of proportion.
Foreign Purchases of US Treasuries (TIC Data)
The Treasury International Capital flow (TIC) reports on net foreign securities purchases measures the amount of US treasuries and dollar denominated assets that foreigners are holding.
A key feature of the TIC data is its measurement of the types of investors the dollar has; governments and private investors. Usually, a strong government holding of dollar denominated assets signals growing dollar optimism as it shows that governments are confident in the stability of the U.S. dollar. Looking at the different central banks, most important seems to be the purchases of Asian central banks such as that of Japan and China. Waning demand by these two giant US Treasury holders could be bearish for the US dollar.
As for absolute amount of foreign purchases, the market generally likes to see purchases be much stronger than the funding needs of that same month’s trade deficit. If it is not, it signals that there is not enough dollars coming in to match dollar going out of the country.
As a side note, purchases by Caribbean central banks are generally seen to be less consistent since most hedge funds are incorporated in the Caribbean.
Hedge funds generally have a much shorter holding period than other investors.
US Trade Balance
The Trade Balance figure is a measure of net exports minus net imports and tends to be negative for the U.S. as it is primarily a “consuming” nation. However, a growing imbalance in the Trade Balance suggests much about the current account and whether or not if the U.S. is “overspending” on foreign goods and services.
Traders will understand a decreasing Trade Balance number to implicate dollar bullishness, whereas a growing disparity between exports and imports will lead to dollar bearishness.
Because the figure precedes the Current Account release, it pretty much helps project the direction of change in the Current Account and also begins to factor in those expectations.
Current Account Balance
The U.S. Current Account is a figure representing the total accrued deficit of the U.S per quarter against foreign nations. Traders will interpret a greater deficit as bad news for the U.S. and will consequently sell the dollar, whereas a shrinking deficit will spark dollar bullishness.
Usually, the Current Account Deficit is expected to be funded by the net foreign securities, but when ends don’t meet in these data, the Current Account could signal a big dollar sell-off. Additionally, because the Current Account data comes out after the Trade Balance Numbers, a lot of its expectations begin to get priced into the market, so a surprise to either side of expectations could result in big market movements for the dollar.
Consumer Price Index (CPI)/Producer Price Index (PPI)
The Consumer Price Index is one of the leading economic gauges to measure the pace of inflation. Many investors and the Fed constantly monitor this figure to get an understanding about the future of interest rates. Interest rates are significant because not only do they have a direct impact on the amount of capital inflow into the country, but also say much about dollar-based carry trades.
If the inflation number comes in higher than expected, traders will interpret that to mean that an interest rate hike is more likely in the near future and will thus buy dollars, whereas a figure that falls short of expectations may cause traders to wait on the sideline until the Fed actually makes a decision. Essentially, trading a negative change in CPI is much more difficult than trading a positive change due to the nature of different interpretations. A significant increase in the CPI will result in much dollar bullishness, but a decrease will not necessarily result in dollar bearishness.
The CPI measures inflation at the retail level (consumers), while the PPI measures the inflation at the wholesale level (producers).
Gross Domestic Product (GDP)
The U.S. Gross Domestic Product is a gauge of the overall output (goods & services) of the U.S. economy. If the figure increases, the economy is improving, and often the dollar will strengthen. If the number falls short of expectations or meets the consensus, dollar bearishness may be triggered.
This sort of reaction is again tied to interest rates, as traders expect an accelerating economy to be mired by inflation and consequently interest rates will go up. However, much like the CPI, a negative change in GDP is more difficult to trade; just because the pace of growth has slowed does not mean it has deteriorated. On the other hand, a better than expected number will usually result in the dollar rising as it implicates that a quickly expanding economy will sooner or later require higher interest rates to keep inflation in check.
Overall though, the GDP has fallen in significance and its ability to move markets since most of the components of the report are known in advance
Durable Goods
The Durable Good figure measures the amount of capital spending the U.S. is doing, such as on equipment, transportation, etc., both on a business and personal level.
Essentially, the more the U.S. spends the more the dollar stands to benefit; the opposite is also true. This is because increased spending could very well be a harbinger for inflation, and thus consequently, interest rate hikes.
Traders will usually focus in on the durable goods figure, but not too deeply, as it usually precedes data regarding housing starts and the annualized GDP figure release. Therefore trading based on the Durable Goods number is only voluminous when stagnancy in other key economic releases has been confirmed by a market consensus.
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