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Home  >  Fundamental analysis  >  Macroeconomic indicators  >  Forex fundamental indicators glossary

Forex fundamental indicators glossary

Gross Domestic Product (GDP)

The GDP is considered the broadest measure of a country's economy, and it represents the total market value of all goods and services produced in a country during a given year. Since the GDP figure itself is often considered a lagging indicator, most traders focus on the two reports that are issued in the months before the final GDP figures: the advance report and the preliminary report. Significant revisions between these reports can cause considerable volatility. The GDP is somewhat analogous to the gross profit margin of a publicly traded company in that they are both measures of internal growth.

Retail Sales

The retail-sales report measures the total receipts of all retail stores in a given country. This measurement is derived from a diverse sample of retail stores throughout a nation. The report is particularly useful because it is a timely indicator of broad consumer spending patterns that is adjusted for seasonal variables. It can be used to predict the performance of more important lagging indicators, and to assess the immediate direction of an economy. Revisions to advanced reports of retail sales can cause significant volatility. The retail sales report can be compared to the sales activity of a publicly traded company.

Industrial Production

This report shows the change in the production of factories, mines and utilities within a nation. It also reports their 'capacity utilizations', the degree to which the capacity of each of these factories is being used. It is ideal for a nation to see an increase of production while being at its maximum or near maximum capacity utilization. Traders using this indicator are usually concerned with utility production, which can be extremely volatile since the utilities industry, and in turn the trading of and demand for energy, is heavily affected by changes in weather. Significant revisions between reports can be caused by weather changes, which in turn, can cause volatility in the nation's currency.

Consumer Price Index (CPI)

The CPI is a measure of the change in the prices of consumer goods across over 200 different categories. This report, when compared to a nation's exports, can be used to see if a country is making or losing money on its products and services. Be careful, however, to monitor the exports - it is a focus that is popular with many traders because the prices of exports often change relative to a currency's strength or weakness.

Some of the other major indicators include the purchasing managers index (PMI), producer price index (PPI), durable goods report, employment cost index (ECI), and housing starts. And don't forget the many privately issued reports, the most famous of which is the Michigan Consumer Confidence Survey. All of these provide a valuable resource to traders, if used properly.

Balance of payments

This analysis is based on the balance of payments 1) of a given country. The internal situation determines the volume of imports and the economic situation abroad determines that of exports. To this is added capital movements which depend on the difference between interest rates. Overseas trade and capital movements together determine the supply and demand for currencies on the market and therefore their price (exchange rate).

1) The balance of payments is made up of the value of all economic transactions (trade balance, services, capital yield) undertaken in one year between a given country and overseas.

In contrast to fundamental analysis, technical analysis only takes into consideration rate trends of the past. The predictions are based solely on historic rates. Its aim is to collect information relating to supply and demand conditions on the foreign exchange markets by means of an appropriate chart or calculation. Technical analysis is carried out by means of a graphic representation of indicators in chronological order. It can also be used for exchange rates, interest and share prices. It provides important indicators for the study of a market. Past price trends and the extrapolation of certain historic rates enable forecasts to be made.

The presentation of a rate trend starts with the selection of data. On the foreign exchange market, the rates change several times a minute, so that you are faced with a considerable flow of data. The selection of data is determined by the objective analysis of charts. The forex trader must be able to obtain a sound appreciation of rate trends in the space of one day. In addition, entering rates within a few minutes may take on great importance for him. On the other hand, it is the responsibility of the head of the financial department of a company to study the long-term trend; it is generally sufficient for him to know the prices at the end of the day or even at the end of the week.

Interest Rates

Can have either a strengthening or weakening effect on a particular currency. On the one hand, high interest rates attract foreign investment which will strengthen the local currency. On the other hand, stock market investors often react to interest rate increases by selling off their holdings in the belief that higher borrowing costs will adversely affect many companies.

Stock investors may sell off their holdings causing a downturn in the stock market and the national economy. Determining which of these two effects will predominate depends on many complex factors, but there is usually a consensus amongst economic observers of how particular interest rate changes will affect the economy and the price of a currency.

International Trade

Trade balance which shows a deficit (more imports than exports) is usually an unfavourable indicator. Deficit trade balances means that money is flowing out of the country to purchase foreign-made goods and this may have a devaluing effect on the currency. Usually, however, market expectations dictate whether a deficit trade balance is unfavourable or not. If a county habitually operates with a deficit trade balance this has already been factored into the price of its currency. Trade deficits will only affect currency prices when they are more than market expectations.

Durable Goods Orders

Durable Goods Orders are 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. Levels of, and changes in, durable goods order are widely followed as an indicator of factory sector momentum. Durable Goods Orders are a major indicator of manufacturing sector trends because most industrial production is done to order.

Often, the indicator is followed but excludes Defence and Transportation orders because these are generally much more volatile than the rest of the orders and can obscure the more important underlying trend. Durable Goods Orders are measured in nominal terms and therefore include the effects of inflation. Therefore the Durable Goods Orders should be compared to the trend growth rate in PPI to arrive at the real, inflation-adjusted Durable Goods Orders. Rising Durable Goods Orders are normally associated with stronger economic activity and can therefore lead to higher short-term interest rates that are often supportive to a currency at least in the short term.

Current Account Balance

The current account figures are released quarterly and are a wider measure of the balance of payments than the trade balance. The figures include elements such as trade in services and investment income as well as the trade in goods. Also included, are direct investment inflows. A widening deficit illustrates the trade problems and increases the dependency on capital inflows to the US. Wider deficits will increase the dollars risk profile. A high deficit will tend to weaken the dollar. Usually, a sustained annual deficit above 5.0% of GDP is a serious warning sign for a currency.

Employment Cost Index (ECI)

Payroll employment is a measure of the number of jobs in more than 500 industries in all states and 255 metropolitan areas. The employment estimates are based on a survey of larger businesses and counts the number of paid employees working part-time or full-time in the nation's business and government establishments.

Jobless Claims

Definition: This report indicates how many new claims for jobless benefits were filed by unemployed workers in the latest week. The figures are prepared on a state-by-state basis by government agencies and are then aggregated. The number of continuing claims are also released. There are problems with seasonal adjustments and the 4-week moving average is normally the more important figure in determining the underlying trend.

Non-farm Payrolls

Each month the Bureau of Labour Statistics estimates the number of people employed in the US through a sample of companies. As the name suggests, the agricultural sector is excluded. Replies from companies are taken and the non-farm payroll figure is the difference in total compared with the previous month. The report is normally released on the first Friday of the month.

The report is seasonally adjusted to smooth out to produce a smooth series. There is a breakdown of employment in different sectors of the economy. Also included, are figures on weekly hours and earnings. An average or neutral monthly employment increase is in the region of +200,000 given that the US working population is consistently rising by around 150,000 a month. Payroll growth of 150,000 is, therefore, needed just to keep pace with higher number of workers. A negative figure, i.e. lower employment, suggests that the US economy is in recession. A figure above 400,000 indicates a very strong economy.

Source:Bureau of Labor Statistics

Availability: First Friday of the month at 8:30 am EST. Data for prior month.

Frequency: Monthly

PMI Index

The PMI report is equivalent to the ISM reports in the US.

Producer Price Index (PPI)

The Producer Price Index (PPI) measures the average price of a fixed basket of capital and consumer goods at the wholesale level. There are three primary publication structures for the PPI: industry, commodity, and stage-of-processing. Its important to monitor the PPI excluding food and energy prices for its monthly stability. This is referred as the core PPI and gives a clearer picture of the underlying inflation trend. Changes in the core PPI are considered a precursor of consumer price inflation. Inflationary pressure is generated when the core PPI posts larger-than-expected gains.

Source: Bureau of Labor Statistics, U.S. Department of Labor

Availability: Around the 11th of each month at 8:30am EST. Data for month prior.

Frequency: Monthly

Payroll Employment

Payroll employment is a measure of the number of people being paid as employees by non-farm business establishments and units of government. Monthly changes in payroll employment reflect the net number of new jobs created or lost during the month and changes are widely followed as an important indicator of economic activity. Payroll employment is one of the primary monthly indicators of aggregate economic activity because it encompasses every major sector of the economy.

It is also useful to examine trends in job creation in several industry categories because the aggregate data can mask significant deviations in underlying industry trends. Large increases in payroll employment are seen as signs of strong economic activity that could eventually lead to higher interest rates that are supportive of the currency at least in the short term. If, however, inflationary pressures are seen as building, this may undermine the longer term confidence in the currency.

Housing Starts and Building Permits

A measure of the number of residential units on which construction is begun each month. Importance: Its used to predict the changes of gross domestic product. While residential investments represents just four percent of the level of GDP, due to its volatility, it frequently represents a much higher portion of changes in GDP over relatively short periods of time.

Source: The Census Bureau of the Department of Commerce

Availability: Around the 16th of the month at 8:30 am EST. Data for month prior.

Frequency: Monthly

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