In the previous chapter, we briefly spoke about economic data and discussed the kind of impact they have on the Forex market. In this chapter, we will speak about economic data in greater detail. We will discuss each of the major economic report that must be tracked on a regular basis to analyse the potential impact on currencies. Later, we will also mention the list of countries whose economic data matter most to the global Forex market.
An important thing to keep in mind is that one must take a holistic view of the health of the economy in general. This is because a single piece of data is unlikely to have a significant impact on currencies beyond the short-term. Instead, what matters most is that on a collective basis, what are the economic data telling about the health of the economy? Is the economy strengthening based on the incoming set of data, or is it weakening? This has a greater impact on the Forex market, than just one data in isolation.
Another important thing to keep in mind is that an incoming economic data has three components: the actual reading, the forecasted reading, and the prior reading. The actual reading, as the name implies, is the current figure for a specified period;the forecasted reading is the figure that the market expected or expects to come in; and the prior reading, as the name implies, is the figure of the most recent reading of the economic data. As an example, in case of the employment report for the month of June, the actual reading would be the figure for June, the forecasted reading would be the consensus for June, and the prior reading would be the figure for May (assuming that the data is released monthly). Below mentioned is a screenshot of how an economic calendar looks like (screenshot taken from www.forexfactory.com - one of the best websites to keep a track of global economic data).
Notice above that how each data has been classified into three parts: actual, forecast, and prior. This is how a typical economic calendar looks like. Usually, how the actual reading fares versus the forecasted reading has a larger impact on a currency. Occasionally however, market participants may compare the actual reading with the prior reading, especially in case of those data whose prior reading has been revised.
Let us now turn our focus towards the main part of this chapter. Below mentioned are some of the key economic data that must be tracked periodically:
GDP measures the overall value of goods and services that are produced in a country during a specific period, usually each quarter. A rising trend indicates strengthening economy, while a declining trend indicates weakening economy. The data is expressed in percent terms and represents growth over the previous quarter. For instance, a GDP of 3% for the January-March quarter indicates that the economy grew by 3% over the September-December quarter of the previous year. The GDP figure fluctuates above and below the 0% threshold. A reading above 0% indicates that the economy is expanding, while thatbelow 0% indicates that the economy is contracting. Generally, if the GDP posts a negative readingfor two consecutive quarters, the economy is said to be in a recession. As the GDP tells a lot about the overall economic health of a nation, it is closely tracked by market participants and can have a strong impact on the currency, especially if the data deviates from market expectations.
Impact on currency : A stronger-than-expected data means a stronger level of economic activity in the nation, which is positive for the currency. On the other hand, a weaker-than-expected data means the level of economic activity in the economy is not as strong as anticipated, which is negative for the currency.
This can be classified into two groups: one that shows the number of jobs added during a specific period and the other that shows the unemployment rate. Some countries release either of the two figures, while some release both. Some central banks around the world have the mandate to maximise employment in their countries. Hence, they keep a close watch on the employment numbers. As such, employment data are quite crucial for the Forex market. Besides the fact that central banks keep a close watch on the employment data, another reason why these numbers matter a lot is that they impact the economy, in general. For instance, a strong labour market means more jobs are being created, which translates to higher consumer spending, which in turn translates to expansion in economic activity. The employment report is usually released on a monthly basis.
Impact on currency : A stronger-than-expected labour data (increasing job addition and/or declining unemployment rate) is positive for the currency, while a weaker reading (decreasing job addition and/or rising unemployment rate) is negative for the currency.
This data measures the change in the average price level of various goods and services that are purchased by consumers. In other words, this data measures inflation. Most of the central banks around the world have a mandate to maintain stable prices. If prices are rising too fast, the central bank could undertake a contractionary monetary policy in order to slowdown inflationary pressures. Alternatively, if prices are subdued and demand is weak, the central bank could initiate an expansionary monetary policy in order to bring inflation back to normal levels. As the trends in inflation have a strong bearing on a central bank’s monetary policy and interest rates, the CPI data is closely tracked by market participants around the world. This data is released monthly and is expressed in percentage terms. Also, this data is usually released in two forms: the monthly reading (aka CPI m/m), which measures the percentage change in CPI on a monthly basis (one month vs. the previous month); and the yearly reading (aka CPI y/y), which measures the percentage change in CPI on a yearly basis (one month vs. the same month but in the previous year).
Impact on currency : A stronger-than-expected inflation reading is usually positive for the currency, as it increases expectations of a tighter monetary policy. Alternatively, a weaker-than-expected inflation reading is usually negative for the currency, as it increases expectations of a looser monetary policy.
This data helps to analyse the spending habits of consumers towards a range of finished goods and services at the retail level. These include items such as automobiles, apparels, electronics, furniture, food and beverages, fuel, spending at restaurants and hotels, spending for leisure activities etc. Besides, a lot of products that are sold at various departmental and online stores are also considered when calculating the retail sales figure. As we can see, retail sales take into consideration various necessary (staples) as well as non-necessary (discretionary) products. Hence, it is a very broad-based indicator that reflects consumer behaviour and spending habits. A rising trend of retail sales means consumers are spending more, which benefits the economy. On the other hand, a falling trend of retail sales means consumers are spending less, which puts a drag on the nation’s GDP and slows down the economy. This data is released monthly and is expressed in percentage terms. Also, this data is usually released in two forms: the monthly reading (aka retail sales m/m) and the yearly reading (aka retail sales y/y).
Impact on currency : A stronger-than-expected retail sales data indicates higher spending by consumers, which is usually positive for the currency. Alternatively, a weaker-than-expected reading is usually negative for the currency, as it indicates lower consumer spending.
The consumer confidence data is a survey of households that measures how confident they are towards the current and future economic outlook. This data asks several questions to consumers, trying to seek answers on things such as their current and future financial situation, their expectations about the level of business and economic activity, their current and future employment situation, their current behaviour towards spendinghabits etc. In general, this data tries to find out how optimistic or pessimistic consumers feel about the outlook of the economy. If they feel optimistic about the economy, they are likely to spend more in future, which would benefit the economy. On the other hand, if they feel pessimistic about future economic conditions, they are likely to cut down on their spending, which would have a negative impact on the economy. The consumer confidence figure in most cases fluctuates around 100. A reading above 100 means consumers are optimistic about future economic conditions, while a reading below 100 means consumers are pessimistic. This data is usually released every month.
Impact on currency : A stronger-than-expected consumer confidence data indicates higher spending by consumers, which is usually positive for the currency. Alternatively, a weaker-than-expected reading is usually negative for the currency, as it indicates lower consumer spending.
Housing data can come in various forms, depending on the country where they are is released. The various forms of housing data include house price index, sale of new homes, sale of existing homes, number of residences that have been granted permits for starting construction, number of residences whose construction has started etc. Housing data are considered a vital barometer of an economy’s health. This is because the health of the housing sector has a strong impact on various other sectors of the economy. For instance, housing creates demand for jobs, housing creates demand for construction materials such as cement and metals, housing creates demand for home loans, housing generates revenues to the government by way of taxes etc. Strengthening housing market creates confidence among consumers about the health of the economy. On the other hand, weakening housing market and declining home prices can have a negative impact on the economy. Housing data has gained even more importance since the 2008 global financial crisis, especially considering that housing was the epicentre of that crisis.
Impact on currency : A strengthening housing marketboosts the economy and is therefore positive for the currency. Alternatively, a weakening housing market acts as a drag on the economy and istherefore negative for the currency.
The manufacturing Purchasing Managers’ Index (PMI) is a survey of purchasing managers who work in various industries across the manufacturing sector. The survey asks them various questions relating to the manufacturing activity such as new orders, the level of activity in their region, the level of inventories, the level of employment, the supply of materials, the level of production etc. Because the PMI reflects the present as well as future manufacturing conditions and because manufacturing tells a lot about the economic health of a nation, the data tends to have strong impact on the market. This data is released monthly and fluctuates between 0 and 100, with 50 considered as a boom-bust zone. A reading above 50 indicates the manufacturing activity is expanding, while that below 50 indicates the manufacturing activity is contracting.
Impact on currency : A stronger-than-expected reading indicates strengthening manufacturing activity, which benefits the economy. This in turn is positive for the currency. On the other hand, a weaker-than-expected reading indicates weakening economic activity, which is negative for the currency. The trend and the position of the data relative to 50 also has an impact on the trend of a currency. For instance, a rising manufacturing PMI that is above 50 has a larger positive impact than a rising PMI that is below 50. Similarly, a falling manufacturing PMI that is below 50 has a greater negative impact than a falling PMI that is above 50.
Non-manufacturing PMI, also known as services PMI, is a survey of purchasing managers who work in various non-manufacturing sectors. This data measures the level of business activity in a nation's services sector. Although not as tracked and as market moving as the manufacturing PMI, the non-manufacturing PMI nonetheless offers insights into the health of the services sector, especially the employment component of the report. The data is released monthly and fluctuates between 0 and 100. A reading above 50 indicates the services sector is expanding, while that below 50 indicates the services sector is contracting.
Impact on currency : A stronger-than-expected reading is positive for the currency, while a weaker-than-expected reading is negative for the currency.
Trade balance is the difference between a nation's exports of goods & services and its imports. Mathematically, it is expressed as exports – imports. If a nation's exports of goods and services exceed its imports, the nation is said to have a trade surplus. On the other hand, if a nation's imports of goods and services exceed its exports, the nation is said to have a trade deficit. When a nation has a trade deficit, it must pay more foreign currency than it receives via the export bill. To meet this deficit, the nation borrows foreign currencies from countries that have a trade surplus. As imports and exports involve the movements of currencies at some point in time, they can have a notable impact on determining currency trends. A country that is consistently experiencing a trade deficit will usually see its currency weakening. This is because the outflow of its currency would be more than the inflow. On the other hand, a country that is consistently experiencing a trade surplus will usually see its currency strengthening, because the inflow of its currency would be more than the outflow. Generally, the trade balance data is released every month.
Impact on currency : If a nation is experiencing trade deficit, then a widening of the deficit is likely to pressurize its currency, while a narrowing of the deficit is likely to underpin the currency. On the other hand, if a nation is experiencing trade surplus, then a widening of the surplus is likely to underpin its currency, while a narrowing of the surplus is likely to weaken the currency.
Fiscal balance is the difference between the government’s spending and revenue. A fiscal deficit occurs when the government’s spending exceeds its revenues, and a fiscal surplus occurs when the government’s revenue exceeds its spending. While a modest level of fiscal deficit is quite common today, mountingdeficit beyond a manageable, accepted limit can pose severe challenges. This is because mounting deficit increases the total debt burden of the government, which could potentially impact the credit rating of the nation and subsequently erode the confidence of international investors towards the outlook of that nation. Alternatively, an increase in fiscal surplus improves the financial position of the government, because it enables the government to save money, which could then be used for economic expansion or paying off the existing debts. This improves the outlook of the nation in the eyes of foreign investors.
Impact on currency : A widening fiscal deficit beyond an acceptable level is negative for the currency because it could give rise to financial instability and erode the confidence of international investors towards the outlook of that nation. On the other hand, a widening fiscal surplus is positive for the currency because it improves the financial position of the government and thereby improves the outlook of the nation in the eyes of foreign investors.
The above are the most important economic reports that must be focused on. Besides these, there are various other reports as well, but they do not have as much impact on currencies as do these reports. Let us now look at some of the major data the are released around the world, country wise.
|Economic Data||Importance||Frequency of Release|
|ISM manufacturing PMI||High||Monthly|
|ISM non-manufacturing PMI||Medium||Monthly|
|Non-farm payrolls||Very high||Monthly|
|Consumer Price Index||High||Monthly|
|Economic Data||Importance||Frequency of Release|
|Manufacturing PMI||Very High||Monthly|
|Economic Data||Importance||Frequency of Release|
|Euro area Consumer Price Index||High||Monthly|
|German Economic Sentiment||Medium||Monthly|
|Euro area GDP||High||Quarterly|
|German Manufacturing PMI||High||Monthly|
|Euro area Manufacturing PMI||High||Monthly|
|German Business Climate||Medium||Monthly|
|Economic Data||Importance||Frequency of Release|
|Consumer Price Index||Medium||Monthly|
|Wholesale Price Index||Medium||Monthly|
Lastly, we will now talk about central bank meetings. Central bank meetings are the most important events that influence the trends of the currency market. This is because currencies are primarily driven by interest rates, and the institution that has the most impact on interest rates is the central bank. Based on the incoming set of economic data, such as the ones talked about earlier, central banks determine what kind of monetary policy to employ in the prevailing macro-economic environment. The type of monetary policies that they employ have a significant influence on the trajectory of their currencies vis-à-vis the other currencies. For instance, if the Federal Reserve employs a contractionary policy and if markets expect such a policy to prevail in the foreseeable future, the Dollar is likely to strengthen against its counterparts. Hence, one must closely monitor the outcome of central bank meetings and the clues that they provide about the trajectory of their future monetary stances. Below mentioned are the list of monetary policy meetings that must be closely monitored.
|Central Bank policy meets to monitor||Currency Impacted|
|Reserve Bank of India||Indian Rupee|
|European Central Bank||Euro|
|Bank of England||Great Britain Pound|
|Bank of Japan||Japanese Yen|
|People’s Bank of China*||Chinese Yuan|
* Note that the People’s Bank of China does not hold scheduled monetary policy meetings like other central banks do.
Types of Exchange Rates5 Lessons
In this chapter, we will discuss about the two types of currency systems that are prevalent today: the fixed exchange rate system and the floating exchange rate system. We will also discuss about currency convertibility and how it can impact currencies. Finally, we will briefly speak about the Rupee in terms of the type of the currency system that it is under and its convertibility.