Economic Influences On The Market

As mentioned previously, currency forecasters traditionally look at the economic factors of a country to help them to determine the direction of a country's currency. Below is a more in-depth analysis of the more important economic factors that have to be taken into consideration and cannot be ignored when announced.

25.5.1 Consumer Price Index

CPI is a measure of the average level of prices of a fixed market basket of goods and services purchased by consumers. The monthly reported changes in CPI are widely followed as an inflation indicator. The CPI often excluds the price of food and energy, as these items are generally much more volatile than the rest of the CPI and can obscure the more important underlying trend. Rising consumer price inflation is normally associated with the expectation of higher short-term interest rates and may therefore be supportive for a currency in the short term. However, a longer term inflation problem will eventually undermine confidence in the currency and weakness will follow.

25.5.2 Durable Goods Orders

This is a measure of the new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. Monthly percent changes reflect the rate of change of such orders. The levels of, and changes in, durable goods orders are widely followed as an indicator of factory sector momentum. More often than not, the indicator excludes defence and transport orders because these are generally much more volatile than the rest of the orders and can obscure the more important underlying trend. Rising orders are normally associated with stronger economic activity and can therefore lead to higher short-term interest rates, which are often supportive of the currency, at least in the short term.

25.5.3 Gross Domestic Product

GDP is the broadest measure of aggregate economic activity available. Reported quarterly, GDP growth is widely followed as the primary indicator of the strength of economic activity. It represents the total value of a country's production during the period and consists of the purchases of domestically produced goods and services by individuals, businesses, other countries and the government. A high GDP figure is often associated with the expectations of higher interest rates, which is frequently positive for the currency, at least in the short term, unless expectations of increased inflation pressure is undermining confidence in the currency at the same time.

25.5.4 Housing Starts

This is a measure of the number of residential units on which construction has begun each month and is widely followed in order to assess the commitment of builders to new construction activity. High construction activity is usually associated with increased economic activity and confidence. It is therefore considered a harbinger of higher short-term interest rates and can be supportive of the currency in the short term.

25.5.5 Payroll/employment

This is a measure of the number of people being paid as employees by non-farm business establishments and units of government. A monthly change in payroll/employment reflects the number of net new jobs created or lost during the month and changes are widely followed as an important indicator of the economic activity. Large increases in payroll/employment are seen as signs of strong economic activity. This could eventually lead to higher interest rates, which would be supportive of the currency, at least in the short term. If however, inflationary pressures are seen to be building, this may undermine the longer term confidence in the currency.

25.5.6 Producer Price Index

Producer Price Index (PPI) is a measure of the average level of prices of a fixed basket of goods received in primary markets by producers. The monthly reports are widely followed as an indication of commodity inflation. The PPI often excludes the food and energy components as these items are normally much more volatile than the rest of the PPI and can thus obscure the more important underlying trend. A rising PPI is normally expected to lead to higher consumer price inflation and thereby to potentially higher short-term interest rates, which in effect will have a short-term positive impact on the currency. However, significant inflationary pressure will often lead to an undermining of the confidence in the currency involved.

25.5.7 Retail sales

These are a measure of the total receipts of retail stores. Monthly percentage changes reflect the rate of change of such sales and are widely followed as an indicator of consumer spending. They are generally followed less auto sales, because they are generally more volatile and can hence obscure the more important underlying trend. They are measured in nominal terms and include the effects of inflation. Rising retail sales are often associated with a strong economy and therefore an expectation of higher short-term interest rates is often supportive for the currency, at least in the short term.

25.5.8 Trade balance

The trade balance is a measure of the difference between imports and exports of tangible goods and services, and is a major indicator of foreign exchange trends. Seen in isolation, measures of imports and exports are important indicators of overall economic activity in the economy. Typically, a nation that runs a substantial trade balance deficit has a weak currency due to the continued commercial selling of the currency. This can, however, be offset by financial investment flows for extended periods of time.

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