On the 23rd July, I published an article that attempted to match news articles to the AUDUSD charts. It proved informative and despite being studied in a microcosm that might not be reflective of actual forex performance, the study contained results that helped affirm some faith that, with a little more refinement and research, a model could be built.
I want to look at a similar form of analysis in this article, but this time with a focus on individual economies. Theoretical knowledge is part of understanding the forex markets, but so is being able to adapt it to live scenarios and that’s the focus of this article. The format will be as follows -> for each of the previous 4 days in this week, I will look through some of the important economic announcements (if you’re interested in keeping a track of the upcoming releases, you can do so by following our twitter account). For each announcement, we’ll discuss what it represents, its impact and most recent figure.
Monday August 2
Chinese Caixin Manufacturing PMI
The Chinese Caixin Manufacturing PMI is an index that aggregates the results of a series of managers in the manufacturing industry. Managers are surveyed on their thoughts of recent performance and expectations for the future. For countries in which manufacturing is a significant component of their economy, the manufacturing PMI can be a useful leading indicator, as many people believe that manufacturing managers have a good insight into the underlying status of an economy.
The Manufacturing PMI is presented as a figure on a scale of 0 - 100. A score above 50 represents an expansion of the manufacturing sector, whilst a score below 50 represents a shrinking.
The Chinese Caixin Manufacturing PMI for the month of July (the release occurs at the start of the following month) came in at 50.3 vs a 51.0 forecast and down from 51.3 in the previous month.
Tuesday August 3
Australia RBA Interest Rate Decision
Theoretically, Interest Rates are the single most important feature in determining the direction of currency pairs, because they directly represent the cost of holding a currency. When interest rates are higher in Country A vs Country B, investors are motivated to put their money in the currency of Country A, because they make money while they hold that currency in a bank. This is a concept called the carry trade, which I will discuss in a future article.
Currently however, in many economies, interest rates have remained fairly fixed and low. The reason for this is generally to promote spending. As countries begin to come out of COVID-19 restrictions and assess the disastrous situation the pandemic has left their economies in, there has been an obvious need to promote economic growth as quickly as possible. Because of this, central banks have prioritised encouraging people to spend as opposed to save, so that the circulation of money in the economy is increased.
The Reserve Bank of Australia’s (RBA) Interest Rate Decision came in at 0.10% vs a 0.10% forecast and steady with 0.10% from the previous announcement.
Wednesday August 4
USA ADP National Employment Report
I wrote an article a while ago on Non Farm Payrolls, which represents the change in employment across the US. Increased employment is good news for an economy, as it represents improved business health and economic activity and subsewuently an influx of the money into the country, raising the value of a currency. An important caveat when studying these releases however, is to compare the figure released vs the forecast. In order to match an employment release against the forex charts, the comparison between actual and forecast is usually the preferred metric, because this indicated performance relative to what was expected by market experts.
The USA ADP National Employment Report came in at 330K vs 695K forecast and down from 680K from the previous month.
Thursday August 5
Canada Balance of Trade
The Balance of Trade represents the difference between imported and exported goods and services for a single country. The calculation is *exports - imports* and a positive number represents a trade surplus, whereas a negative number represents a trade deficit.
It’s important to note a trade deficit isn’t necessarily a bad thing, as the sign in front of the balance of trade figure is determined by the nature of the economy. The UK, for example, has posted a trade deficit for every month since August 1985 and the reason for that is that the UK doesn’t have the resources within the country to produce goods and services to outweigh their requirements.
Similar to the National Employment Report, a key observation to make here therefore, is the comparison of the actual figure to its forecast. This is usually a good indicator to how an economy is trading and particularly in its translation to the currency markets, as investors will react to an economic release based on how it compares to the expected figure.
The Canada Balance of Trade, a country that has seen a trade deficit for most months since 2009, came in at +3.23B vs -0.68B forecast and up from -1.68B from the previous month.
Friday August 6
At the time of writing, these announcements have not yet been released, but they are some key economic developments that investors will have their eyes on. The US has a Non Farm Payrolls release coming up today at 13:30 BST (GMT+1) and the Canada release is their manufacturing PMI figure, at 15:00 BST.
USA Average Hourly Earnings
USA Unemployment Rate
USA Non Farm Payrolls
Canada Ivey PMI
I will look to incorporate more discussions around economic releases in future articles. The goal will be to take a deeper dive into individual releases, discussing their impact on both economy and currency and using our findings to formulate some clearer and more sophisticated pictures of how different economies are set up.