Market Factors in Forex
Indicators display a host of variables and influences on national and global economies. They become factors of the currency market after their public release, as they start to influence traders’ minds. In this chapter you will find descriptions of some specific macroeconomic market indicators, mostly from the United States (except where noted). You will learn briefly about each of them, find out the time and periodicity of
their updates and some other peculiarities which will help you to use them properly.
Some notes about what we have included and excluded: we excluded from our list such indicators as Redbook (a questionnaire which provides statistics about weekly sales in some of the big supermarkets in the USA) as their influence on the Forex market is very small, on the order of rounding error. At the same time we included some weak factors that can be used as a confirmation for strong factor tendency in the list and
have stated this feature in the description. Finally, we specify certain values wihch represent a “Trading signal” for the factors strong enough to be favorable to opening a position. This means the value of change for a given indicator may indicate an advantageous time to open a trade.
Humphrey-Hawkins testimony
This is a report from the head of the Federal Reserve System of the USA (Fed). The testimony is given twice a year, every summer and winter. The testimony is given first to the Senate, then to the House of Representatives. This report contains information about the goals and plans of the Fed in relation to current monetary policy. Investors try to use the report to guess future Fed actions concerning changes in the base interest. This speech is the strongest factor affecting the market and one of the most important
events in Forex.
Gross domestic product (GDP)
GDP is the sum total of all goods and services produced by all companies in a country (produced nationally and abroad). This index is the main indicator of the condition of the national economy and it influences the Forex market to a considerable degree. In fact, the growth of a GDP index means that country’s economy grows too. The Trading signal is a change in the index of 0.4%.
Usually there are three GDP values published: GDP advance which is released near the end of Jan., April, July and Oct. of each year, at 08:30 a.m. EST (New York); GDP provisional or GDP revised, which is published a month after advance GDP also at 08:30 a.m. EST (New York); then one more month later at the same time the GDP final is released which is only usually slightly different from the previous one.
GDP deflator
This is a coefficient used to modify the GDP value in accordance with current prices in order to aquire a value relative to the prices in a ‘base’ year (the year which GDP is considered to be the base one in the corresponding country). The GDP deflator is a good indicator of inflation. It is released together with the GDP final and has a strong influence over the Forex market. When major discount rates rise together with the GDP deflator, the national currency exchange rate rises too.
Money supply M1, M2, M3
These are the indicators of aggregate monetary volume. The M1 part includes the most liquid assets: cash, money on “till called for” accounts and traveler’s checks. The M2 aggregate includes the M1 part, as well as all fixed deposits up to $100000 and other highly liquid investments. M3 includes the M2 part and all fixed deposits of more than $100000.
All three (M1, M2 and M3) indicators are released weekly on Thursdays at 16:30 EST (New York) and display the change in aggregate monetary volume for the week. They are more an informational index with less influence on the market compared to other indicators. Only in the case of some European countries do they have a strong influence on the Forex market, such as GBP (by M1) and EUR (by M3).
Beige book
The Beige book is a review of the US economy from the Fed, compiled by the Fed’s 12 district banks. It includes industry, nonmaterial, agriculture, labor and real-estate markets and data from all financial organizations. It can be useful when studying the tendency of other indicators. For example, if there are rumors about an interest rate change it could be consulted to analyse labor-market data and prices. The beige book is released 8 times a year, a fortnight before the USA Fed Market Committee meeting on Wednesdays at 14:00 EST (New York).
Capacity utilization
This indicator displays the level of use of a country’s industrial potential. If the volume of this level is 80-85%, the balance between economic growth and the inflation level may be called good. If the volume strays outside of this “corridor” it may be an indicator of inflation, and if inflation grows, the national currency grows too. This factor has a moderate influence on the currency markets and its data is published monthly together with the Industrial Production Index (see below) at 09:15 EST (New York).
Durable goods orders
This indicator displays the level of consumer confidence in the current economic situation. This is because people only generally buy durable goods like new furniture, cars, big and modern TV-sets when they are in a favourable financial situation. This factor is positive in relation to the economic development of a country and a higher reading will have the effect of increasing the value of the national currency. In order to more accurately reflect consumer sentiment, defense data (Durable goods orders excluding defense) and transportation (Durable goods orders excluding transportation), are sometimes excluded from this indicator. These catagories generally reflect the spending of big corporates and the government, and don’t necessarily reflect consumer sentiment. This indicator is released every fourth week of every month at 08:30 EST (New York).
Business Inventories
This indicator can alert investors to stagnation in the economy if the levels of inventory – that is, of stock, basically such as ready-to-use goods, components and semi-finished products – increases onsiderably. Usually this factor has a weak influence on the market; however, if it shows a stable tendency, its nfluence may become serious.The data for this factor is published in the middle of every month at 08:30 EST
(New York).
Construction spending
This indicator is released in two variants: as an absolute value on all summarized spending or as a correlation between the current reporting period and the previous one. This indicator is highly dependent on the change in interest rates as construction projects usually require the use of credit. Also, because of market peculiarities the construction spending index varies from season to season. In addition, this index indirectly characterizes the level of income of the population as the rise of construction spending indicates growth in the well-being of the people. The influence on the market is moderate. Construction spending growth is a favourable condition for national currency growth. The index is released on the first working-day of every month at 10:00 EST (New York).
Jobless claims
This is the difference in the quantity of unemployment benefit claims for the week. The indicator itself is rather a weak factor in the Forex market but it may contribute to the growth of the national currency. Besides that, a long-term and steady decrease in the number of claims can be an early alert that a much stronger indicator called Non-farm payrolls (see below) will be higher when it is released. The index is released weekly at 08:30 EST (New York) on Thursdays.
Chicago PMI (Purchasing Managers Index)
This indicator is composed from a survey of purchasing managers in Chicago and includes data about the prices of the products manufactured and their reserves in warehouses. If the index volume goes below the level of 45 units it means that there are some negative shifts and the pace of economic development has decreased. A rise in the Chicago PMI often leads to a rise in the US dollar. The Chicago PMI is very strong factor for the Forex market as it prepares the ground for the NAMP (see below) release predictions. It is
published on the last day of every month at 10:00 EST (New York).
Philadelphia Fed index
It is the result of the survey of manufacturers in Philadelphia about the current economic situation in the country. A value below zero indicates a decrease in the pace of development. Growth of the index often leads to the growth of the US dollar quotation.
The indicator itself is a weak factor for the Forex market, but because it is published before the NAMP, it may hint at the value of this more influential national index.
The index is published on the third Thursday of every month at 10:00 EST (New York).
National Association of Purchasing Managers Index (NAPM or PMI)
This report represents the results of a national survey of industrial purchasing managers. One could say that it is an optimism indicator of high and middle-level managers. It is measured in percentages (the maximum is 100).
The PMI allows you to understand changes in the value of national industrial manufacturing; industrial employment; new manufacturing orders; storehouse resources and suppliers work speed – all on a national scale, for about six months in the future. GDP is also dependent on this index: if PMI is higher than 50% the GDP growth tempo will likely increase; if the value is less than 50% the tempo may decrease. At the level of 44% the beginning of an economic recession (when GDP is negative for two consecutive quarters) might be expected.
This indicator is released by the National Association of Purchasing Managers on the first working day of every month following the reported period, at 10:00 a.m. (Washington)
ISM services index
It is the result of a survey of non-manufacturing purchasing and supply managers released as an index with a maximum value of 100. If the index value goes below a level of 45-50 units it means that the sector is weakening and the pace of its development has decreased. As the index is based on a survey it may be affected by some psychological aspects and its value may reflect the manager’s moods and feelings – rather than the real state of affairs. Loss of perspective due to mood extremes is often represented by sharp changes in the index, although true changes normally occur much more gradually in this sector as it is connected with people’s consuming processes .
This factor has a moderate influence on the Forex market. It is important to differentiate psychological jumps from real rising and falling trends. The rise of the index may indicate a potential rise in the US dollar.
It is published monthly; a day after the NAMP is released at 10:00 EST (New York).
Michigan consumer sentiment index
This index reflects the results of a nationwide survey of consumers about their confidence in the current economic state of their country. The survey is conducted by Thomson Reuters and University of Michigan. In fact, this index reflects the desire of a consumer to spend his money. The growth of this index can be an important factor for the US dollar exchange rate, but only moderately influences the Forex market. Reports are released twice a month at 10:00 EST (New York). The preliminary one is published on the second Friday of each month, and the final report is released a fortnight later.
Leading indicators index
This is a weighted average value of the following indicators: Money Supply (M1, M2, M3), Cumsumer Confidence, Jobless Claims, Average Workweek, Factory Orders, Durable Goods Orders, Building Permits and Fundamental Shares Prices.
This index is considered to be the decisive factor in the economic development for the next six months. There is one empirical rule for this factor: if the index has a negative value three months in succession it may be a sign that a country is in an economic recession. The growth of this index is a factor in the growth of the value of the US dollar.
This Index has a moderate influence on the market, as its value is published after all other indicators had been already released. The index is released in the first days of every month following the reported period, at 10:00 EST (New York).
Consumer price index (CPI)
This indicator demonstrates the change in the price for a fixed basket of goods and services. Imported goods prices are counted too during the calculation of this index.
This indicator is based on consumer data which demonstrates very well the inflation level nationally. It is analyzed together with the PPI (Producer Price Index). If there are no anomalies in the economy of a given country, the growth of CPI and PPI leads to the rise of national discount rates, and this leads to a rise in the quotes of the currency.
It is also very important to keep an eye on the measure known as “core CPI”. Its data is released immediately after the index has been released. Core CPI provides changes in prices without without food and energy goods (electricity, gas, oil and so on). A given reading of the overall CPI is more valuable if the core follows the changes of the CPI itself. This Index is usually released on or around the 15th of every month at 08:30 EST (New York).
Producer price index (PPI)
PPI is similar to CPI, but demonstrates the level of the prices for a basket of manufacturing goods. Before 1978 this indicator was called the “Wholesale price index”. It consists of two parts: entering price (raw materials, components, etc.) and output price (cost of the ready product). Naturally, the output price includes the labor costs used to produce the goods so this index can predict inflation connected with the growth of labor costs, i.e. wages. Like CPI, readings from this index can be more reliable if you exclude food and energy costs. One difference is that imported goods prices are excluded from this index (as they deal with the manufacturing basket of goods of another country).
This index is a noticeable one for its influence on the market. In cases where the growth of interest rates is expected – the rise of this index often indicates a rise of the US dollar quotation. It is released monthly, the next week after the Non-farm payrolls data is published, at 08:30 EST (New York).
Employment cost index
This indicator is calculated out of wages and dole money. It is meant to demonstrate the rise of inflation in the economy. It is one of those factors which the US Fed watches out for in order to plan its future financial policy. The employment cost index influences the market very much. It is used to make predictions for medium and long-term investments. In cases where the rise of interest rates is expected, the growth of this index lends confirmation and leads to the rise of the US dollar rate. The data is refreshed quarterly near the end of the release month at 08:30 EST (New York).
Consumer confidence
This is a so-called leading indicator meant to indicate the level of optimism amongst consumers about their financial future. It is calculated by means of a survey and is evaluated in percentage terms. Usually this factor is used to predict tendencies in the labor market and the general economic state of a country. Growth of this indicator is a factor indicating possible growth of the national currency. The results of this survey are published on the last Wednesday of the month at 10:00 EST (New York).
New home sales
This statistic provides the number of sales of newly constructed houses. The amount is connected with national rates of interest as houses are usually purchased on credit. For the index calculation the moving average is used, just as for many other indicators which are the subject of seasonal shifts. In general, if this indicator tends higher it is a positive factor for the national currency, although the influence on the Forex market is limited overall. Index data is published at the beginning of every month at 10:00 EST (New York).
Building permits
This is the index of the quantity of permissions given to build new houses. It is a rather interesting and informative factor though it has limited influence on the market. The thing is that demand for new houses is dependent on the level of income of the population, and on the level of discount rates for home loans in banks. Roughly speaking, the higher the index, the more stable the situation in the country. On its own, however, Building Permits has a rather weak effect on the market. Growth of this index indicates possible growth of the national currency rate. The indicator is published on the third week of every month at 08:30 EST (New York) together with Housing starts data.
Housing starts
This index demonstrates the quantity of new houses which have begun construction. It is very sensitive to the country’s interest rate (for the same reason as other building indeces are). The level of construction and future sales is directly connected with living standards and the income of the population. The higher this index is, the more stable the economy of the country, and its growth is an indicator of potential growth of the national currency. The data is published twice a month after the 20th at 08:30 EST (New York).
Existing home sales
This is an indicator of the quantity of already built houses sold during a year. This index demonstrates
the optimism of consumers, their willingness to buy expensive durable goods and the growth of the size of families. The level of constructions and further sales is directly dependent on living standards and the income of the population, so the higher the index is, the more stable the economy of the country, and its
growth may indicate growth of the national currency. This index is released on or near the 25th of every month at 10:00 EST (New York).
Personal income
This index is calculated from quite a comprehensive range of sources including data of office workers’ salaries, other workers’ earnings, money earned through share dividends, bank interest on deposits, social insurance payments, rent incomes and so on. This indicator is usually analyzed together with the Personal Spending Index. It has a limited influence on the market. A change in the index represents a change in the
income of the population and thereby a change in buyer concentration. A marked increase in this index can indicate growth of retail sales and further growth of the national currency. This indicator is published after the 20th of every month at 08:30 EST (New York).
Personal Spending, Consumption
This indicator consists of three parts: service spending, durable goods spending and all other goods. It is similar to the Retail Sales Index except it also includes services spending, which Retail Sales does not (see below). Personal spending displays a smoother picture of change due to this component, as all real changes in the sphere of services tend to occur gradually because of the specificity of the consumption process of citizens. However, in comparison with ISM the Personal Spending Index is more accurate as it is less dependent on psychological factors. Only considerable deviation of this index from the norm is a factor that influences the Forex market. An increase in this index may positively affect the national currency.
Balance of payments, Current account
This indicator demonstrates correlation between the value of payments coming from abroad to the value of payments going overseas. If the income value is bigger than the outgoing value, the balance of payments is
called active (a positive balance); if visa versa, the balance of payments is passive (a negative balance). A positive balance or a decrease of the negative balance are factors which can contribute to the increased value of the national currency. The value of Balance of Payments is released quarterly in the middle of the month at 10:00 EST (New York).
Consumer credit
This is an indicator of customer demand that shows the value of credit in a country (via credit cards), personal loans and purchases with a delay in the repayment. It has a rather limited but noticeable nfluence on the market. The higher this index is, the less people are afraid of incurring debt. This can become
a factor with a positive influence on the economic situation which, in turn, may lead to the growth of the national currency. This index’s data is released monthly near the 7th at 15:00 EST (New York).
Productivity
This is a specific indicator of working efficiency, demonstrating average (general) change in the volume of produced goods per worker. It is a very important factor characterizing the economic state of a country. However, you should keep an eye on resource data, because during a period of economic stagnation there can be an increased number of layoffs which lead to the formal growth of productivity (as a ratio of production volume to amount of workers increases). The same effect can be observed during economic strikes. In all other cases a rise in this indicator is a positive factor in the economic development of a country which may lead to the growth of the national currency rate. The index is released quarterly, before the 10th of the month in which it is published, at 08:30 EST (New York).
Unit labor cost
This indicator displays the production costs of one reference unit of a product. It is a rather important index demonstrating the state of economic efficiency. It has a considerable influence on the market as a factor. The unit labor cost is a very effective inflation indicator when used in conjunction with the growth of wages. Often this indicator is analyzed together with the Productivity Index (see above). An increase in this indicator together with productivity growth usually leads to the rise of base rates of interest in a country and that in turn causes the exchange rate of the national currency to increase. This index is released simultaneously with the Productivity Index, that is, before the 10th of the month in which it is published, at 08:30 EST (New York).
Wholesale inventories
It is obvious that when goods are in poor demand and find no retail market it means a country’s economy is going through a stagnation period. This indicator has a rather a weak effect on the market, although stable trends of increasing or decreasing stock on wholesale inventories will influence the market considerably in time. The higher this index is the more it is likely the exchange rate of the US dollar will fall. This index is published monthly in the first 10 days of each month at 10:00 EST (New York).
Factory orders
This indicator includes orders for durable and non-durable goods. The second group includes food, clothes and auxiliary goods which are meant to be used together with durable goods (in plain words, consumable materials or supplies). The first group contains all the goods with a durability of more than 3 years (cars, consumer electronics, furniture and so on). This indicator has a rather weak impact on the market. However, you should pay attention to it if it is trending higher as then it becomes a positive economic factor that may lead to the rise of a national currency. Factory orders index is released in the beginning of every month at 10:00 EST (New York).
Industrial production index
This is one of the major indicators used to assess the economic health of a country. This index demonstrates changes in the volume of industrial production and utilities. It can have a considerable influence on the market. If the indicator rises it can lead to an increase in the national currency rate. A trading signal is 0.4%. Index data is published in the middle of every month at 09:15 EST (New York).
Confederation of British Industries (CBI)
This report is a kind of a business optimism index in the industrial sphere published monthly by the Confederation of British Industries. It is an important market factor influencing British currency (GBP). It is interesting that the numerical values of the report are less important than their comments, so it is harder to state categorically how changes in the data will influence changes in the exchange rate.
Retail sales
This indicator demonstrates the volume of retail sales and is usually divided into two parts: cars and all other goods. The thing is that car sales volume is very changeable and has less correlation with global economic processes than summarized sales of other goods. Besides that, it is worth considering seasonal demand (school year, Christmas, New Year and other holidays). This factor works simply: the higher the level of Retail Sales, the more developed the economy of a country is, thus you can expect a potential rise in the exchange rate of the national currency rate. This index has a moderate influence on the market; it is a factor for middle and longterm predictions. The trading signal is 0.5%. Index data is published in the middle of every month at 08:30 EST (New York).
Business climate index (IFO)
This is quite a simple indicator released by the German Institute for Economic Research in the middle of every month. This index value deals with psychological aspects, rather than economic ones, but may have a significant influence on the market. It is easy to analyze this index: a value below 100 means a decrease in the rate of economic growth, and a value above 100 leads to an appreciation of the Euro and Swiss franc rates.
Unemployment rate
This is a percentage ratio of the volume of unemployed persons to the number of all able-bodied people in the country. It is released together with the Non-Farm Payrolls index. You should analyze both indicators in order to learn the current state of affairs in the agricultural sector. An increase in the Non-Farm Payrolls index together with an increase in the unemployment rate will tell you that the bulk of the new unemployed are farmers. It can be a considerable influence on the market. In case the rise of base interest rates is expected, a decrease of this index value can lead to the growth of a national currency rate. Trading signal is the change by 0.1%.
Non-Farm Payrolls (NFP)
This measures the volume of newly held positions reported in the last month (excluding employment in the agricultural sphere). Payroll is a report of wages for workers at a given company. This indicator is very strong and directly displays the change of the unemployment rate in a country. It often moves the market as its decrease can lead to a rise in GDP and the national currency rate. There is even one empirical rule: an increase in the NFP value of 200000 units per month means the GDP will likely rise by approximately 3%. The minimal change required for making trade decisions is 40000 and greater changes (of 150000 – 300000) usually provoke very strong movements in the Forex market. This indicator is released on the first Friday of every month at 08:30 EST (New York).
Average hourly earnings
This indicator is released as an absolute value and as a relative index between values of previous and current reporting periods. It is one of the inflation indicators connected with the growth of labor force costs. As a factor this indicator is able to considerably influence the Forex market. In cases where the rise of the base interest rate is expected, an increase in the value of this index could be influential in increasing the value of the US dollar. Usually the results for this index are released together with Non-Farm Payrolls.
Real Earnings
These are released as an absolute value and as a relative index between values of previous and current reporting periods. In order to exclude inflationary factors, calculations are made in relation to the base year of 1982. It is one of the inflation indicators connected with an increase. in labour costs. As a factor this indicator is able to considerably influence the Forex market. In cases where a rise in the base interest rate is expected, an increase in this index may become a serious factor contributing to US dollar growth – although, overall, it it has only a limited influence on the market. The index is released in the middle of every month at 08:30 EST together with the Consumer Price Index (CPI).
Average Workweek
This index displays the average length of a working week during a given month. It is used as a factor for long-term analyses, for example to indicate employment in a country. It is considered to be a eterminative factor in the calculation of the Industrial Production and Personal Income indicators which are released later. These indicators have a strong and direct influence on market conditions although the Average Workweek in its pure form has almost no influence at all. It is released on the first Friday of every month at 08:30 EST (New York) together with Non-Farm Payrolls.
Import prices
This indicator demonstrates changes in prices of imports over a month’s period. It indicates inflation and influences the Consumer Price Index as CPI considers prices for imported goods and services. The value of these prices are included in a basket of goods and services and influence the picture of retail price change.It has a moderate influence on the market. In cases where a rise in the base rate of interest is expected an increase in this index may lead to a rise in the value of the US dollar. Index data is released once a month after the 10th at 08:30 EST (New York) together with the Export Prices Index.
Export prices
This index demonstrates changes in the prices of exports over a month’s period. Just like Import Prices it indicates inflation. It has a moderate influence on the currency market. In cases where a rise in the base interest rate is expected, an increase in this index tends to lead to a rise in the US dollar exchange rate. The data for this index is released once a month after the 10th at 08:30 EST (New York) together with Import Prices.
Trade balance
This indicator demonstrates the ratio of the value of goods sold abroad to the value of goods bought by a country. Simply put it is the export to import of goods ratio. If the export value is higher than the import value then the trade balance is positive (active); and if vice versa the trade balance is passive (negative). A positive balance or an increase in the value of the negative balance (a growth in the value) is often a harbinger for the national currency rate to grow. It has a considerable influence on the urrency
market but at the same time it is one of the more ambiguous factors affecting a currency’s fluctuations from a trader’s point of view. Besides that, it is a lagging indicator. You should only start to make trading decisions using this factor if it changes by more than 3 billion US dollars. This index’s data are released on the third week of every month, usually on a Thursday at 08:30 EST (New York).
Bank of Japan report(BOJ, Tan Kan)
This report is an indicator of Japan business optimism. It brings together evaluations of the mood of the largest manufacturers, leaders of corporations, businesspeople, managers and others in Japan. It is a very influential factor in the currency market, especially for the Japanese yen (JPY). A decrease in the
index indicates negative predictions for Japanase businesses in general and correspondingly can lead to a fall in the rate of the yen. An increase in the index can lead to currency appreciation. This index’s data is released on the first Monday of every quarter and coincides with the end of financial year and half-year.
