FUNDAMENTALS 1/2_FUNDAMENTALS 2/2_TECHNICALS 1/2_TECHNICALS 2/2_PSYCHOLOGY_TRADING PLAN


FUNDAMENTALS 2/2

Average Earning Growth: The indicator is calculated by taking into account earnings growth over the past three months (taking into account all payments that were actually made). This is a good indicator of future inflation, as rising wages, if they are not offset by productivity growth, are the cause of rising prices. It is one of the defining indicators, according to which the Bank of England determines interest rates. It has a significant impact on the market.

Balance of Payments: It represents an overall picture of financial flows between the UK and the rest of the world. This parameter consists of a large number of components that take into account all types of cash flows to and from the country. In fact, it is the difference between all cash that entered and left it. Growth of the balance of payments deficits affects the rate of the national currency, because it means the outflow of funds, i.e. reduce of foreign investment, falling confidence in the country, etc.

Bank of England Minutes: The Bank of England Monetary Policy Committee keeps notes from its rate decision meetings. The detailed minutes from these meetings give an insight into the process of monetary policy decision making and the opinion of the Bank of England on economic developments inside and outside the country. The markets tend to focus most of their attention on the key points discussed that can affect future interest rate changes. Because minutes come out two weeks after the Bank of England meets, the market does not take into account some information from the report. Market participants tend to track the overall mood of the Bank of England during the meeting. If the Bank is cautious about the inflationary outlook (the mood is called "Hawkish"), then the market expects future rate increases. If the Bank is optimistic ("Dovish") it suggests to markets that inflation is in check and that future rate increases are less likely.

CBI Industrial Order Expectations: This index characterizes the volume of new orders in the industrial sector. The growth of industrial orders is a sign that the economy expands. Increase in orders leads to higher employment in the industry. Increase in orders will lead to further growth in manufacturing, and hence lead to growth of the national currency and domestic stock market. In the bond market, this leads to an increase in profitability of government securities. The index is certainly important for the market. Sometimes a strong deviation from the forecast values of the index can cause a strong change of the pound sterling rate. Certainly, the indicator is not able to deploy the prevailing trend.

Current Account: This is the most important part of the Balance of Payments. It consists of:

  • trade balance for goods and services (the sum of export and import flows);
  • balance of income of compensatory payments to employees;
  • balance of income from direct investment abroad and investment from abroad;
  • balance of income from portfolio investment in securities and debt obligations;
  • balance of payments of the government for taxes from non-residents operating in England, pension and social benefits to its citizens living abroad, and payments to international organizations.

Changes of this indicator have impact on financial markets. Increase in the deficit on Current Account Balance is negative news for the currency.

Gross Domestic Product (GDP): Gross domestic product (GDP) is the sum of domestically produced goods and services expressed in prices. It is a major indicator reflecting the state of the national economy. GDP is calculated in the following way: GDP = C + I + S + E - M, where C — consumption, I — investment, S — state government expenditures, E — export, M — import. GDP is expressed as an index relative to the previous period, and as an absolute value of the sum of prices for manufactured goods and services. Despite the importance of the indicator, its impact on the market is decreasing, because its value is usually predicted by the market based on other data, and also due to repeated revisions of the value of GDP after its first release.

Industrial Output (Industrial Production): It includes the output of the manufacturing sector (manufacturing output), and also takes into account manufacturing in sectors such like mining and processing of minerals, and utilities. It is an indicator of economic growth. High or rising figures indicate the economic development and strengthening of the Pound. However, the uncontrolled level of production and consumption can lead to inflation. In the case of inflation, the Bank of England can raise interest rates to control growth. The indicator is not decisive for the direction of economic development, as more than 60% of the gross domestic product is currently provided by the service sector. It is taken into account by the market.

Major Banks Mortgage Approvals: Taking into account that the state of the UK property market is always in the focus of traders of British currency, the importance of this index is very high. Amount of mortgage approvals will result in the growth of loans and homes sold. Therefore, the indicator can be regarded as a leading indicator of the housing market, in addition the index also characterizes the lending sector.

Manufacturing Output: This indicator shows the volume of products produced by the manufacturing industry as expressed in prices. It is an indicator of economic growth. The indicator is not very important for the market, because the contribution of manufacturing in gross domestic product is less than 20%. It is released monthly.

Purchasing Managers Index (PMI): The indicator reflects the change in the rate of industrial production. Figures above 50% reflect growth of rates of industrial production, below 50% - slowing down. The indicator is taken into account by the market.

Repo Rate: Repo Rate is the interest rate for short-term loans secured by securities issued by the Bank of England. This is the major rate in the UK. The Bank of England has set an upper threshold of inflation at 2%; if consumer prices are rising faster than 2%, then increase of rates is high probable. High interest rates reduce the growth of consumer lending and stimulate the growth of savings, which leads to slower economic growth. The growth of rates usually leads to an increase in capital inflows and the growth of the national currency in the medium term, however, if growth rates are not based on high rates of economic growth, it could lead to economic stagnation and negative impact on the currency markets in the long term.

Retail Price Index: The report tracks changes in the price of a basket of goods and services. The measure of inflation is the retail price index excluding interest payments on loans to purchase real estate (RPI-X). The Retail Price Index calculated by a uniform formula for comparison with similar indices in other countries, is called harmonized (HICP). If the index growth exceeded the planned value, the Bank of England usually raises interest rates. It has a significant impact on the market.

Retail Sales: It is an indicator of the level of consumption. If the level of consumption is above the level of production, this usually leads to inflation. It should be noted that the index of Retail Sales for a month is very volatile. The index value averaged for three months describes the situation better. The indicator is taken into account by the market.

Unemployment (Claimant count rate): Unemployment rate is the number of unemployed persons in relation to the working-age population. Claimant count is the most regular unemployment rate, it means the number of applications of unemployed persons in employment centers. The lower unemployment rate is, the greater is the number of people that are paid a salary, this causes inflation. The indicator is taken into account by the market.

 

All Industry Activity Index: The index shows the level of activity in the industrial sector taking into account all areas of this segment of the economy. It is a leading indicator taken into account by bidders, predicting the future dynamics of the production index Tankan.

Balance of Payments: The balance of payments systematically summarizes all economic transactions between residents and non-residents of the country or geographical area. The balance of payments is information on international transactions; it includes the country's or territory's current account balance (goods, services, income, current transfers). It is the difference between the amount of payments received from abroad, and the amount of payments moving abroad.

Consumer Price Index (CPI): Consumer Price Index is the main indicator of inflation in the country. In other words, inflation reflects a decline in purchasing power of the yen, so for every yen you can buy fewer goods and services. In terms of measuring inflation, CPI is the most obvious way to quantify changes in purchasing power. The report tracks changes in the price of a basket of goods and services. An increase in the index indicates that it takes more yen to purchase this same set of basic consumer items.

Gross Domestic Product (GDP): It is the sum of domestically produced goods and services expressed in prices. The indicator value, at the time of its release, is usually well-predicted by the market based on other data, so it rarely affects the market. It is released quarterly. The index value is repeatedly revised. GDP is considered in the three independent components:

  • GDP as the sum in money for all goods and services produced by business entities, plus taxes, minus subsidies on production of certain goods and services.
  • GDP as the amount of funds spent on consumption of goods and services produced, plus export, minus import of goods and services.
  • GDP as the amount of the revenue the economy as a whole (i.e. salaries, taxes, balance profit of businesses, etc.).

The index has a significant impact on the market.

Industrial Production Index: This index shows changes in industrial production in the country. The growth of this index leads to growth of the national currency. It has a significant impact on the market.

Machinery Orders: The indicator reflects the level of business capital spending and business activity. It is calculated based on evaluations of more than 300 industrial manufacturers. It has a significant impact on the market.

Tankan Survey: Tankan is the most important Japanese indicator. It is a quarterly economic review published by the Research and Statistics Department of the Bank of Japan. Review is based on estimates of more than 8000 companies, firms and institutions on the following economic parameters:

  • business conditions
  • production and marketing
  • supply and demand, the price level
  • income
  • direct investment
  • employment
  • tax conditions

The growth of the index indicates improvement in economic conditions and promotes the growth of the Japanese yen.

Tertiary Industry Index: The index shows the level of activity in the service sector taking into account all areas of this segment of the economy. It is a leading indicator taken into account by bidders, predicting the future dynamics of the non-production index Tankan.

Balance of Payments: This is an accounting record of all monetary transactions between a country and the rest world. It's the most common form of balance of international payments. If the proceeds exceed the payments, the balance is active (has a surplus), otherwise it is passive. In the balance of payments all foreign economic operations of a country are reflected in monetary terms. It is the sum of the balance of trade, factor income and cash transfers. Publication of data on balance of payments has a significant impact on the Australian dollar, the market gives high importance to this indicator.

Building Approvals: Indicator showing the total number of Australian homes and apartments approved for construction. The indicator reflects future activity in the construction sector and is an anticipatory indicator of the rise or fall of this segment of the real estate market. It has a moderate impact on the Australian dollar.

Consumer Price Index (CPI): The indicator measures changes in retail prices of goods and services purchased by householders. The Index includes the price level of food, clothing, education expenses, health, transportation, utilities and leisure. The indicator is calculated monthly and is the main indicator of inflation in a country, including in Australia. It is considered the most important indicator of inflation.

Gross Domestic Product (GDP): GDP is a measure of a country's overall economic output. GDP is the aggregate value of all goods and services produced within a year in the country without dividing the resources used for their production into imported and domestic.

Retail Sales: Measures the total monthly sales of goods and services by retail stores in Australia. Retail Sales is an important measure of consumer spending and inflationary pressures in Australia. Steady increases in retail sales apply significant inflationary pressures to consumer prices.

Service PMI: The indicator is determined based on monthly surveys of executives in the services sector. The purpose of the survey is to assess changes in the industry: Figures of the index below 50 basis points are a signal to a slowing economy in Australia. The formation of the final indicator is influenced not only by objective factors but also by psychological ones (subjective assessment of respondents). This adds weight to Service PMI, and therefore bidders pay attention to this indicator.

Westpac Consumer Confidence: This indicator measures the level of consumer confidence in the current economic conditions. The indicator is calculated on the basis of monthly survey in which respondents assess the prospects of the economy. It has a moderate impact on the financial market, since it may not reflect the real economic situation in the country. Nevertheless, the consumer confidence index has traditionally been used for the prediction on trends of employment and the general state of the economy. The growth of the indicator is a positive factor for the currency. Its decline, in contrast, leads to a fall of the Australian dollar.

BOC Interest Rate Decision: This is the rate set by the Bank of Canada, based on which other financial institutions (commercial banks) set their interest rates on loans and deposits. A decision to lower interest rates can spur economic growth while increasing the inflationary pressure, whereas the increase in rates leads to lower inflation but also slows down the economy growth. The Bank of Canada's rate decision has significant influence on financial markets. Changes in rates have a direct impact on interest rates for consumer loans, mortgages, and bond rates.

Building Permits: The indicator reflects the number of new building projects authorized for construction. The indicator is widely used to assess real estate market, since receiving a building permit is the first step in the building process. Thus, the growth of the indicator reflects the growth in the construction sector. Also, due to the high outlays needed for construction projects, the indicator reflects the corporate and consumer optimism. Additionally it can act as a leading indicator for the economy as a whole.

Consumer Price Index (CPI): The indicator measures changes in retail prices of goods and services purchased by householders. The Index includes the price level of food, clothing, education expenses, health, transportation, utilities and leisure. The indicator is calculated monthly and is the main indicator of inflation in the country. It is considered the most important indicator of inflation.

Gross Domestic Product (GDP): It is the sum of domestically produced goods and services expressed in prices. It is a major indicator reflecting the state of the national economy. GDP is the main characteristic of the economic success of countries that measures its economic growth or recovery. GDP growth is an important indicator for the Canadian dollar.

Housing Starts: Indicator showing the number of buildings that appear each month. The start of construction is considered to be laying the foundation for future building. The index is a leading indicator of economic activity in the construction sector.

Ivey Purchasing Managers Index: The indicator reflects the level of business activity of the industrial sector. More than one and a half hundred managers from different regions and sectors are asked to assess the level of their purchases as compared to the previous month (higher, lower or the same). The value above 50 indicates an increase in purchases, a value below 50 indicates a decrease. This indicator can be used to measure business optimism and forecast economic growth. Companies increase purchases and spending in response to growing demand for their goods and services.

New Housing Price Index: The index reflects changes in prices for new housing and is part of CPI. Increase in housing prices suggests an increase in consumer demand and growth of the real estate market. At the same time, high real estate prices that accompany economic expansion often lead to inflationary pressures.

Retail Sales: This is the index of change in retail sales. This is an important indicator of consumer spending, and is used for calculating the consumer price index. An increasing number of sales can signal consumer confidence and growth to come, but higher consumption can also lead to inflationary pressures.

Retail Sales Excluding Motor Vehicles: The indicator shows the volume of retail sales excluding car sales, which amounts to about 25% of the total retail sales in the country. This is an important indicator of consumer spending, and is used for calculating the consumer price index.

Unemployment Rate: The percentage of people in the total - labor force without jobs but willing to work and are actively seeking employment. Low unemployment rate indicates good economic state, leading to greater personal income and greater consumption. However, such increased expenditure with economic growth may increase inflationary pressures. On the other hand, higher unemployment leads to lower consumption and lower economic growth. The unemployment rate is one of the most watched indicators in the Canada's labor market.

Building Permits: The indicator reflects the number of new building projects authorized for construction. The indicator is widely used to assess real estate market, since receiving a building permit is the first step in the building process. Thus, the growth of the indicator reflects the growth in the construction sector. Also, due to the high outlays needed for construction projects, the indicator reflects the corporate and consumer optimism. Additionally it can act as a leading indicator for the economy as a whole.

Consumer Price Index (CPI): The indicator measures changes in retail prices of goods and services purchased by householders. The Index includes the price level of food, clothing, education expenses, health, transportation, utilities and leisure. The indicator is calculated monthly and is the main indicator of inflation in the country. It is considered the most important indicator of inflation.

Food Price Index: The indicator reflects changes in food prices. Higher food prices can result in economic slowdown because less disposable income will be used for non-food expenditures. Higher food prices can also result in inflation and signal future monetary action. The indicator has little influence on the New Zealand dollar and is only important from the perspective of the fact that New Zealand is an agricultural country, and a substantial part of its GDP is export of agricultural products. Thus, the indicator reflects the needs of products of New Zealand and its national currency.

Gross Domestic Product (GDP): Gross domestic product (GDP) is the sum of domestically produced goods and services expressed in prices. It is a major indicator reflecting the state of the national economy. GDP is calculated in the following way: GDP = C + I + S + E - M, where C — consumption, I — investment, S — state government expenditures, E — export, M — import. GDP is expressed as an index relative to the previous period, and as an absolute value of the sum of prices for manufactured goods and services. GDP is the main characteristic of the economic success of countries that measures its economic growth or recovery. GDP growth is an important indicator for the New Zealand dollar.

Manufacturing Activity / index of business activity in industry: A report released by Business New Zealand commenting on the PMI, the New Zealand manufacturing sector, and noteworthy trends. Increased activity in the manufacturing sector is usually a precursor to economic expansion and inflationary pressures. This index summarizes key points regarding the data gathered by the monthly business surveys sent to manufacturers and gives a concise breakdown of how optimistic manufacturers feel in the short-term.

NBNZ Business Confidence: This is a monthly measure of New Zealand business confidence. Representatives of New Zealand's businesses are surveyed about their outlook for the next 12 months. Positive sentiment bodes well for the economy, usually associated with higher employment, rising income, and increased investment due to expectations of economic expansion. The index is a good leading indicator of the direction of the economy.

Purchasing Managers Index (PMI): The indicator reflects the level of business activity of the industrial sector. PMI is calculated based on the monthly survey conducted in the manufacturing sector and is divided into five sub-indexes: production, employment, new orders, stocks of finished products and delivery. The basic value for the index calculation is 50. Figures above this level indicate expansion of economy. Higher activity in the manufacturing sector generally anticipates economic growth and inflationary pressures.

RBNZ Meeting Announcement: This is the rate set by the Central Bank of New Zealand, based on which other financial institutions (commercial banks) set their interest rates on loans and deposits. The interest rates are one of the most important mechanisms through which the country's economy is regulated. In particular, issues of economic growth and inflationary pressure are regulated through the rates. The market reaction to the interest rates is one of the strongest.

Retail Sales: This is the index of change in retail sales. Since consumption makes a large contribution to the GDP of New Zealand, a rising Retail Sales figure can be indicative of rising demand and subsequent inflation. Uncontrolled growth and rising inflation may lead to instability and corrective action from the country's central bank. It has a significant influence on the markets.

Unemployment Rate: The percentage of people in the total - labor force without jobs but willing to work and are actively seeking employment. Low unemployment rate indicates good economic state, leading to greater personal income and greater consumption. However, such increased expenditure with economic growth may increase inflationary pressures. On the other hand, higher unemployment leads to lower consumption and lower economic growth.

 


Many times the above-mentioned major news will play a minor role in the market, and the investors will realise a significant move in a specific currency due to the comments of a central banker. Why should watch what the big bankers have to say?

Simply stated, investors are not looking for what is already priced in the movement of an asset but they are trying to predict what will happen next. In essence, any hint from a banker for a change in monetary policy could cause an abrupt move in the fx market. By studying the major banks like Fed, ECB and BoE in depth, we can understand the important speakers apart from the central bankers.

In recent times, we are closely monitoring central bankers of Switzerland, Australia, Russia and New Zealand because of the latest monetary interventions. 

Let us look at the government and their role. Governments want to achieve ‘sustainable growth’, which is basically growth without inflation. They go about this by controlling the level of activity in the economy and measure this activity in terms of the level of ‘nominal’ GNP (gross national product). The financial markets pay close attention to this too, as there is a well-established relationship between this and ‘monetary aggregates’, which is basically the spending power in the economy.

A government will use interest rates to try and control growth and inflation. If there is low growth, they will try and reduce interest rates in an attempt to decrease the cost of credit and stimulate upward pressure on spending and economic activity. Some may argue this is inflationary, but as spending in the economy is low, they are just simply increasing it to normal levels. The opposite is true when there is high growth and interest rates are increased to any inflationary pressures.

The government may also use fiscal policy, whereby they increase/decrease public spending and taxation. This is a way of adjusting individuals and household’s disposable incomes as well as the amount of money circulating in the economy.

Generally, when the economy is in a growth cycle, it is met with higher interest rates, higher taxes, and lower public spending. When we are in a recessionary cycle, there are lower interest rates, lower taxation and higher public spending. This should help to avoid volatile economic cycles.

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