Things that Move the Currency Markets
Any seasoned stock trader knows that news is one of the primary drivers of equities. This can be through earnings reports, new product announcements, write downs, acquisitions or economic data. However just as news moves the stock market, it also moves the currency market, particularly when it comes to economic reports.
On an intra-day, short-term basis, price action in the forex markets tends to be wild and choppy. While this can appear to be daunting, it actually allows traders to buy and sell currencies profitably over the period of a full day, a few hours, or even a couple of minutes. While technical analysis can be helpful in determining where to enter and exit currency positions, it is absolutely crucial that traders watch out for news that can move the markets.
However, news can hit the wires at any time, as the forex markets are open and actively trading 24 hours a day. As a result, traders can enter and exit currency positions in the morning before heading to work, during the afternoon, in the evening before bed, or if one feels so inclined, in the middle of the night. In fact, one of the most profitable traders in the currency portion of the contest has consistently made money by trading EUR/USD at all hours of the day…2AM, 10AM, 5PM, 9PM…you name the time, and most likely, this contestant has been executing positions. While this particular trader prefers to scalp, trading over 100 times a day and taking profits as small as 2-8 pips, contestants that like to trade off of event risk can also do so at almost any given time. Indeed, during the US session, US and Canadian economic data is usually released. Later on, the Asian session begins and Japanese, Australian, and New Zealand indicators will hit the wires. Finally, the European session kicks off with news out of the Euro-zone, UK, and Switzerland. As you can see, in forex, opportunities abound at all hours of the day.
US Trading Session
Time: 8:00 – 17:00 EDT
Top 3 Most Active Pairs: GBP/USD, EUR/USD, USD/CAD
Economic Data Released: US, Canada
Asian Trading Session
Time: 19:00 – 4:00 EDT
Top 3 Most Active Pairs: GBP/USD, USD/JPY, NZD/USD
Economic Data Released: Japan, Australia, NZ
European Trading Session
Time: 2:00 – 12:00 EDT
Top 3 Most Active Pairs: GBP/USD, EUR/USD, USD/CHF
Economic Data Released: Euro-zone, UK, Switzerland
Which economic reports does a trader need to look out for? Fortunately, the indicators that matter the most are consistent across the board, whether you are trading the US dollar, the British pound, the euro, or the New Zealand dollar.
Interest Rates – Yield is arguably the biggest driver of price action in the forex markets. Every currency's country has a central bank that sets the interest rate on the currency. For example, the US has the Federal Reserve, the Euro-zone has the European Central Bank, and Japan has the Bank of Japan. What this means is that when the central bank of a specific country moves the interest rate either up or down, it affects the movement of the currency substantially. Typically, we see that the higher the yield a particular currency offers, the stronger the currency will be. However, it's not just interest rate decisions that impact a currency, but also indications of how a central bank may vote when it comes to the next rate decision.
Commentary by Central Bank Members – Biased rhetoric, particularly by the Chairman/Governor and voting members tends to be extremely market-moving. Of course, the higher up in the ranks the speaking member is, the greater the impact on the nation’s currency. For example, hawkish commentary by Federal Reserve Chairman Ben Bernanke will carry much more weight with US dollar traders than a non-voting member like San Francisco Fed President Janet Yellen. This is one of the most dangerous types of event risk for forex traders, as the news may be completely unexpected.
Consumer Price Index (CPI) – Increases in CPI are viewed as signaling rising inflation in the economy, while decreases in CPI indicate lessening price pressures. Typically, a central bank will want to raise rates when CPI increases, and will want to cut rates when CPI growth slows. Thus, higher CPI tends to be bullish for a currency while lower CPI is usually bearish for a currency.
Gross Domestic Product (GDP), Retail Sales –While some central banks, like the European Central Bank, only have to focus on maintaining price stability, most central banks, including the Federal Reserve and Bank of England, have mandates that focus on maintaining both growth and price stability. As a result, the status of the economy is a crucial component to the decisions that central banks make on rates. Two of the best gauges of the health of the economy are GDP and retail sales, as consumption accounts for approximately 70% of GDP in the US and is the primary driver of expansion in most other developed countries. Since GDP is usually released only on a quarterly basis, this tends to be very market-moving in the forex markets, with strong GDP figures leading a currency higher and weak GDP weighing a currency down. However, GDP is also a very lagging indicator of growth, so more timely monthly releases of retail sales tend to be important as well.
There are some event risks that just cannot be planned for, as they are inherently surprising. As a result, these types of news releases are incredibly market-moving, simply because the implications of the news have not been priced into a nation’s currency yet.
Politics Trump Fundamentals – In the forex markets, we consistently find that politics trump fundamentals. Typically, this has more to do with some sort of negative, geopolitical event such as the London terror attacks in July 2005. When the attacks occurred, the British pound fell to nearly 18-month lows against the US dollar. The currency subsequently rebounded in following days, highlighting that geopolitical news that rocks the forex markets tends to have only short-term implications.
Just The Word “Intervention” Has An Impact – These days, intervention in the currency markets by a country’s government is not considered completely acceptable and, thus, rarely occurs. Furthermore, intervention does not always work unless it is a coordinated effort amongst various central banks, and as result can end up being a costly endeavor that simply wastes foreign currency reserves. However, a fiscal official or central bank leader only has to utter the word “intervention”, and the nation’s currency is likely to skyrocket. For example, on June 9, 2008, US Treasury Secretary Henry Paulson said, “I would never take intervention off the table or any policy tool off the table. I just can't speculate about what we will or won't do.” The result? The US dollar rocketed nearly 400 points higher against the euro over the course of the follow 24 hours. Mr. Paulson’s comments highlight that a little jawboning by a government official can go a long way in moving a currency.
Why Commodities Matter In The Forex Markets – Some countries depend on exports of raw materials for economic growth. Canada, for example, is a huge exporter of oil and oil products, while Australia heavily trades in metals such as gold. When these commodity prices rise, these exporting countries find that they are getting more bang for their buck, as other countries have to pay more for these products. This will also help to give a boost to the exporting country’s trade balance. Indeed, if the export balance is high enough, it could be enough to bring a country out of trade deficit to a trade surplus. This is why we tend to see a correlation between commodity prices and “commodity currencies” like the Canadian dollar and Australian dollar, as the former moves in line with crude oil and the latter moves with gold prices. While the correlation does not necessarily hold on an intraday basis, as other factors may come into play, significant moves in oil or gold can send the commodity dollar reeling.
Terri Belkas, Currency Analyst for DailyFX.com