How forex works? (Session 8)

Fundamental

The key that affect the movement is news and the expectation of the demand and supply of money to the economy.

News is about confidence. When you buy a country currency, you buy into the confidence that the economy of that country will do well.

When a country do well- meaning that there is employment, low inflation, good consumer confidence, good export, good growth ...

There are economic indicator shat show whether the country is really doing well. Often it is compare quarter to quarter or monthly to monthly or yearly to yearly. A trend will be built and that gives projection into the future and indicate whether the country is doing well.

The key indicators for the above are:

Consumer Price Index (CPI)

Gross Domestic Product (GDP)

Employment Rate

The two main pillar of the economy is the equity market and the property market. As such the performance of these markets affect the movement of the country currency. The cost of commodities can affect the cost of doing business and may therefore affect the movement of currency.

Besides fiscal policy, which general measures by demand and supply of goods and services, e next key important news is Interest Rate and its monetary policy.

Political stability do affect the movement. For example, when Obama is confirmed the presidential candidate, it cause a good movement in favour of the USD. Of course, news of wars and coup are important.

Below are some economic news definition and each country name them differently.

US Unemployment claims: The number of individuals who filed for unemployment insurance for the first time during the past week; The market impact of this indicator fluctuates from week to week. There tends to be more focus on the release when traders need to diagnose the effect of recent developments that relate to labor conditions;

US Nonfarm Employment Change: Job creation is an important leading indicator of consumer spending, which accounts for a majority of overall economic activity;

US The Institute of Supply Management (ISM) Non-Manufacturing Composite: measures activity level, new orders, empoyement and supplier deliveries of purchasing managers in the services sector, with a reading above 50 indicating expansion. A rising trend has a positive effect on the nation's currency. To produce the index, purchasing managers are surveyed on a number of subjects including employment, production, new orders, supplier deliveries, and inventories. Traders watch these surveys closely because purchasing managers, by virtue of their jobs, have early access to data about their company’s performance, which can be a leading indicator of overall economic performance.

US FOMC (Federal Open Market Committee) and Federal Fund Rate: Interest rate announcement

US Housing Starts: Measures the annualized number of new residential buildings that began construction during the previous month. A rising trend has a positive effect on the nation's currency because the housing market is a leading gauge for the overall economy. A high level of housing activity signals that the construction industry is healthy and that consumers have the capital to make large investments. More importantly, new housing activity creates an economic ripple effect as home owners buy goods such as appliances and furniture for their homes, and builders buy raw materials and hire more workers to meet demand.

US Existing Home Sales: Measures the annualized number of existing residential buildings that were sold during the previous month. A rising trend has a positive effect on the nation's currency because large purchases tend to be made by consumers that are optimistic and confident in their financial position. The sale of a home also triggers commissions for real estate agents, and often home owners will purchase goods such as appliances and furniture shortly after purchasing a home. Traders watch this report closely as it's the month's first demand-side housing indicator to be released.

UK Bank of England, Monetary Policy Committee (MPC); It's one of the primary tools the MPC uses to communicate with investors about monetary policy. It contains commentary about the economic conditions that influenced their vote, projects the economic outlook, and offers clues on the outcome of future votes;

UK Bank of England Interest Rate Annoucment: When there is a change in rates the MPC will also issue a statement. The rate shift is often priced in the market so it tends to be overshadowed by the MPC Statement which is focused on the future; Short term interest rates are the paramount factor in currency valuation - traders look at most other indicators merely to predict how rates will change in the future;

UK Halifax House Price Index : Measures the monthly change in the average sale price of homes finances by the Halifax Bank of Scotland (HBOS). Halifax is the UK's largest mortgage lender uses internal mortgage lending figures to produce the index.

UK/EUR Services Purchasing Manager's Index (PMI): measures the activity level of purchasing managers in the services sector, with a reading above 50 indicating expansion. A rising trend has a positive effect on the nation's currency. To produce the index, purchasing managers are surveyed on a number of subjects including employment, production, new orders, supplier deliveries, and inventories. Traders watch these surveys closely because purchasing managers, by virtue of their jobs, have early access to data about their company’s performance, which can be a leading indicator of overall economic performance.

UK Nationwide House Prices: Measures the monthly change in the average price for a house in the UK. It serves as a leading inflation indicator for the housing market. Also The Royal Institution of Chartered Surveyors (RICS) House Price Balance measures the price change of homes in the UK. This leading indicator represents the percentage of chartered surveyors reporting a price rise in their designated area.

UK Claimant Count Change: It's the first indication of the employment situation, the number of unemployed people is an important signal of overall economic health because consumer spending is highly correlated with labor conditions

European Central Bank (ECB) Press Conference: It's the primary method the ECB uses to communicate with investors regarding monetary policy. It covers in detail the factors that affected the most recent interest rate decision, the overall economic outlook, inflation, and most importantly, clues regarding future monetary policy;

EUR German Ifo Business Climate Index: The Information and Forschung (Ifo) Business Climate Index measures the mood of firms in manufacturing, construction, wholesale and retail. The index is derived from a monthly survey of over 7,000 firms where respondents are asked to give their assessments of the current business situation and their expectations for the next six months.

GDP: It's the broadest measure of economic activity and the primary gauge of the economy's health

JPY Overnight Call Rate: Interest rate at which the BOJ rediscounts bills or extends loans to financial institutions.

Where to get the news?

www.forexfactory.com (when and what news is going to be announced); www.yahoo.finance.com (equity market, headlines news)

I am not teaching how to play by news, but it is good to know what is really happening around you. Reading and getting in touch with the news, make you a more rounded person and to be factual, you can make use of your understanding of the global and individual country economy for your own advantage. 

The next sessions I will zoom into technicals analysis.