economic news
Economic News Reports in Forex Trading
News reports are pretty important. It allows people to know about their environment and find out what is happening in other parts of the globe. But in forex trading, news reports are vital and they are not just ordinary news reports. Forex traders must read up and research on economic news reports which can say a lot about a country’s current economic status and the economic policies which they are instituting. These two, believe it or not, can affect how foreign currencies are traded and made.
With thousands of economic news reports in almost every type of media, it is sometimes hard to discern what to read or what to put an interest in. But forex traders should know that there is actually just a handful of information that they need to know in order to trade effectively. Here are some of them.
The country’s trade balance
A country’s trade balance can spell explain how much value is placed on its currency. To those who are unfamiliar with the term, trade balance refers to a country’s trade surplus or its trade deficits. Still foreign sounding? Trade balance measures the country’s exports against its imports. A deficit happens when you import more from other countries that you export. A surplus occurs when the opposite happens: you export more than you import. A trade surplus is a good indication of a robust and thriving economy and this may lead to a stronger currency.
Sales in retail
Even the number of items that people buy can also tell a lot about a country’s economy and therefore have an effect on the way the currency appreciates or depreciates. When a country reports on bigger sales or higher sales in a month, this means that people have the money to spend and therefore the economic wheels are running smoothly. When the economy is good, the currency of that country often becomes stronger.
However, you have to be careful with seasons which are considered buying seasons like Christmas, Halloween, Thanksgiving and Valentines, which may have a higher sales rates than other months. Having many retails sales during these months is not always an indication of economic gain but of necessity. People do buy during this period of time. What most economic analysts do though is to compare the spending of people in the current year to the previous year. If there is growth in it, then economy may be in the upswing, so to your forex trading business.
US Economic Performance – Upbeat Economic News Props the Dollar
There seems to be a clear green signal on the US economy as suggested by the US Fed. As a reflection of better economic performance, the US dollar hardened, notwithstanding the fact that the Fed did not change interest rates, which have been held close to zero for some time now.
However, the Fed appears to be in a state of readiness to implement an exit policy as and when required. The exit policy will help curb the excess liquidity that has been pumped into the system and can turn inflationary. Though, the Fed may be in a state of readiness to implement an exit policy, it still continues with its stance of having an extended low interest rate regime. Thus, the exit policy may initially start with the withdrawal of extraordinary support that has been extended followed by tightening of the interest rate regime.
The news of better economic performance and the possibility of an exit policy seem to have boosted the sentiment towards the dollar and investors seem to be showing interest in it again. As per the Fed statement, the labor market seems to be headed for better performance. Improvement in employment conditions is an important key to US economic performance, which is largely a consumer driven economy. Better employment conditions imply higher disposable income and better consumer demand, which can put the US economy back on track.
Higher disposable income would also lead to inflationary pressures and it is widely held that the Fed is tracking the labor market closely and would implement the exit policy based on improved labor market conditions. The news on housing starts was also upbeat and they rose 8.9% in November. Building permits also displayed a positive trend and stood at 584,000 for November at an annualized rated as against 551,000 for October.
Mortgage applications also displayed positive growth. US consumer prices also showed some signs of hardening with an increase of 0.4% in November. These indicators viewed along with the positive GDP growth in the last quarter, suggest that the US economy is gradually shedding its recession pangs and is headed for a recovery.
It may be noted that the strengthening of the dollar took place in the face of no change in interest rates. Usually, an upward revision in the interest rate attracts foreign funds towards US treasury investments and the dollar gets a boost. However, this time around, the interest rate remained unchanged and yet the dollar got a boost.
This clearly implies that the dollar’s gain this time is due to the intrinsic strength that the US economy has begun to display. The hardening of the dollar is also not related to risk aversion led gains and thus is indicative of intrinsic gains.
Key to the dollar’s long term strength will be the exit policy and how the Fed manages to curtail the huge amount of liquidity that it has pumped into the economy as a part of various bailout packages.
Excess liquidity, with consumer demand increasing, will lead to inflationary pressures, which can start eroding the value of the dollar. Thus, the Fed needs to be very alert to various economic indicators and time its exit policy well in order to maintain the value of the dollar.
Negative Economic News Over the Top
If you have been watching the news and reading the newspapers obviously you have seen the heavy handed negative press when it comes to the economy. Generally in an election year we have a good economy.
So why are we getting such bad reports? Well much of it is a created reality, perhaps to assist a certain candidate and political agenda. But why would anyone drag down the entire economy just to impose a change of power?
Personally, I think such negative economic titles in the newspapers are irresponsible and add to the consumer confidence issues, which appears to be 1/3 of the problem in the first place. Our economy is around +1-2% and – 1-2% and to me that’s flat. Business cycles occur and this time they have been assisted by bad choices in the banking sector and higher energy costs. But, entrepreneurs adapt or they die, it’s survival of the fittest, competition and the best continue, this is a good thing, it makes us strong.
In 1993, I was interviewed by a local paper about my business. They asked about the recession and I said; “I don’t participate in recessions!’ and went on to grow my company in the middle of a decline when everyone else had emotionally destroyed themselves through this negative bio-feedback. There is more opportunity in downturns than up-cycles.
When it’s a little tougher, you need to cut your teeth and figure it out, no big deal. Before you allow yourself to buy into the negative press about the economy, you may wish to consider how great things are here in the US compared to the rest of the world.