with Vicki Schmelzer
It is easier to discuss how macroeconomic data affects the currency market than “news,” which casts a wide net. First, traders must distinguish between what is “macroeconomic” and what is “microeconomic” data.
Macroeconomics is concerned with trends in the economy as a whole, while microeconomics is concerned with the individual decisions of companies and individuals. In most instances, Forex traders concentrate on macro and ignore micro, except when the micro event has special significance.
For example, in March 2014 the very first Chinese industrial company defaulted on its bonds. The Chinese government had been inching toward a free-market economy for over a decade, but to date no company had ever defaulted. Traders in various markets were stunned, since up to that time, the “macro” expectation would be for a government bailout. Now the risk of investing in China was perceived as higher, and from there the risk of investing in all emerging markets was higher, and as a direct consequence, there was safe haven buying of the Japanese yen. We can say the micro event (default) caused the macro event, so it is still a Forex market focus on macro, but we need to acknowledge that the two “systems” are interactive and often influence one another.
FX traders tend to concern themselves with big picture data sets that will shape a central bank’s monetary policy and move interest rates and therefore currencies. Nearly all of the macro data Forex traders care about pertains to how monetary policy will shape up.
Employment and inflation reports often are market drivers, although viewed as “rear view.” Purchasing managers and consumer confidence reports are deemed more forward looking and these data sets are also closely eyed. GDP, while important, rarely drives a larger trend in currencies because this indicator also is viewed as more backward than forward-looking.
United States: Monthly data such as non-farm payrolls, consumer price index, producer price index, retail sales, University of Michigan consumer sentiment, Conference Board consumer confidence, ISM manufacturing and non-manufacturing indexes, durable goods, various housing data (existing home sales, new home sales, etc.).
Eurozone: Monthly data HICP inflation (EMU-wide and individual countries), purchasing managers indexes (manufacturing and non-manufacturing), retail sales, economic, industry and consumer morale, and employment. Because Germany is the engine of growth in the region, the IFO and ZEW surveys are also eyed.
In other countries, the market looks at specific data sets, and to trade these currencies successfully you need to familiarize yourself with this releases. In Australia, it is employment data and the quarterly inflation reports, while in China, the market looks at the purchasing managers indexes (Caixin and official) as well as key trade data (trade balance, imports/exports) and GDP.
Did you know? Trading the release of key data requires that a trader knows several things. Which currency will the data affect the most? It is not necessarily restricted to the country of origin of the data. What are market expectations (median estimates, consensus figures available on most financial newswires/websites)? How is the market positioned ahead of the report? Remember the adage: “Buy on the rumor, sell on the news.”
Example: A euro trader knows that the German IFO business morale index is due out the next day. The IFO has been steadily rising, say, from 107.5 to 111.0 in recent months. Median estimates for the next release are at 113.5, and CFTC data shows that speculative accounts have a large (+100,000 contract) long position. In this case, risk/reward would skew towards a euro short position or at least looking to sell into any rally after the release. The thinking would be that the market is long euros and that the positive effect of a correct reading would not be long-lasting while the negative effect of a weaker-than-expected reading would have more pull to drag the euro lower.
Trading “news” is much more difficult than trading data releases because data releases are regularly scheduled while estimates and forecasts are widely available — but you do not know when an unexpected headline will pop up.
Speeches by heads of state, central bankers, and finance ministry officials have the power to move markets, but usually these are announced well ahead of time, so the market can prepare for them. It is the “off the cuff” or non-text comments that can rattle currencies. A Q&A session where a central banker says a rising currency is “too high” or a finance minister announces capital controls can catch the market off guard. Former ECB chief Jean-Claude Trichet once moved the EUR/USD market several hundred points with a single word — “brutal” (referring to the too-strong euro).
News events may move markets. Budget negotiations and trade talks may make short-term waves and support or weigh on a specific currency or currencies. US budget discussions in early October 2013 weighed on stocks and prompted unwinds of carry trades, with the yen strengthening substantially on unwinds of yen short positions. USD/JPY fell below 97.00 on fears that the USA would default on its debt. The pair was back over 100.00 by mid-November.
Misleading headlines are another danger. News agencies will use a sexy headline to make a trader read the story. Traders often do not bother to read it and react to the headline alone, causing short-term swings in a currency. Sometimes, the headline truly represents what the body of the story later says and sometimes it does not. It is always better to read the full story. It is also better to apply some common sense and check out whether the story lives up to the headline. One newspaper (e.g., the Wall Street Journal) will trumpet that “officials say xyz” when it is one guy from a small country that nobody ever heard of and was probably misquoted, to boot.
Then, there are big news events that have the power to shift market sentiment markedly and in a big-picture way. The 9/11 attacks on the World Trade Center quickly had traders thinking less about fundamental indicators and what the Federal Reserve was doing and more about what the US response would be to the attacks. For many years afterwards, military undertakings and terrorism would be a part of the financial market psyche. Similarly, the earthquake and tsunami that took place in Japan in March 2011 had widespread financial market ramifications for many months afterwards.
The topic is discussed further in the lesson on news trading.