Basic Analysis

Non-agricultural employment data

Every trader knows (or should know) the impact of economic figures on the market. Economists collect and publish their predictions on the figures to the media. If the forecast is consistent with the actual number, the market calls this number "in line with expectations (Pricein)", when the official announcement, usually will not respond too much.

However, if the forecast does not agree with the actual figures, when the market tries to adjust the price by the wrong price and raise it accordingly, extreme market volatility may occur. If the market is reset to achieve consistency with actual figures, it will often cause extreme fluctuations. No economic figures will have a greater impact on the above scenario than the US non-agricultural employment data. First, let us identify what the numbers actually represent.

Non-farm employment data refers to the monthly survey data released by the US Department of Labor Statistics on the first Friday of each month at 8:30 am EDT. The report predicts the total number of paid workers in the United States, excluding those in the following industries:

  • government
  • Private household employees
  • Non-profit organization
  • Farmer

Taken together, "non-agricultural" employees make about 80% of the US GDP (GDP). To obtain the above statistics, the US Bureau of Labor Statistics surveyed about 160,000 business and government agencies (equivalent to about 400,000 individual workplaces) to provide detailed industry data on employment, working hours, and worker income among the number of employees.

Non-agricultural employment data has been confirmed as one of the most important fundamental indicators in modern American history. As a monthly report on the number of new jobs made outside agriculture, positive or negative non-agricultural employment data will prompt traders to take quick action. If the number is better than expected, it will tend to make the dollar stronger. If the number is not satisfactory, traders will generally refer to another employment component announced on the same day: the unemployment rate.

The unemployment rate measures the number of people who are unemployed but actively looking for work. This tendency is a politically important number. If the number is small, it means that people who are looking for work can find a job, which is likely to indicate that the business is booming and the economy is expanding. Non-farm employment data is generally a 5 or 6 digit number, while the unemployment rate is a percentage. If the non-agricultural employment data is better than expected, traders will tend to buy US dollars. However, if the figures are worse than expected, traders will refer to the unemployment rate to check whether the change in unemployment rate is positive, negative, or unchanged. If the unemployment rate rises, the dollar can be determined to weaken. If the unemployment rate falls, buying dollars will often follow. If the unemployment rate remains unchanged, the dollar will weaken slightly because the bears insist on their views. It is more difficult to trade non-agricultural employment data and unemployment rate alone, because many times traders do not pay attention to what is the most important component, but instead focus on the factors that strengthen their deviations. Announcements generally cause large fluctuations in the market. In addition, the figures for the previous month will often be adjusted at the same time, and there may be large differences.

You can interpret from above, trading on this number may be more challenging. Although some traders will wait for the first Friday of each month, other traders will shut down the trading platform at certain times on Thursday evening before the announcement, hoping to draw a line with the volatility.

Non-agricultural employment data is an important economic figure, therefore, among other economic announcements, it has the greatest potential for market changes. Many traders can create or break through the transactions of the month in a short time because of following this announcement. The non-agricultural employment data is divided into two parts. First, employment figures are one of the best ways to assess market growth, and more importantly, future growth potential. The Fed watched this number as the main economic indicator and watched closely. Secondly, many traders will wait until the non-agricultural employment data is released (regardless of the number) to establish a transaction to ensure that their positions will not be affected by unexpected.

It is worth noting that the liquidity during the publication of non-agricultural employment data is generally small, which is due to the fact that there are few large banks on the market that provide liquidity during this time. During the announcement period, the circulation was like a sea suddenly shrinking to the size of a swimming pool. Soon after, circulation will generally return to normal. Many other major news events will produce similar responses, but only a few will produce significant volatility like the non-agricultural employment data.

Geopolitical events

Geopolitical events have a significant impact on the foreign exchange market.

The other fundamental announcements we discussed earlier can all be summarized under the topic of "expected events". They have their own published dates on the calendar, making it easier for traders to follow these events and plan transactions. However, under this category, "unexpected and unexpected events" are also common. Events of a political nature, such as wars, local conflicts, elections, or terrorist activities – and weather-related disasters such as tornadoes, tsunamis, etc., can greatly influence the trading of currency pairs.

When a presidential election is held in the United States, the market may be more "dull" during the election if it shows that the political party may change, because traders do not want to focus on any direction or conduct longer-term transactions. If the new party is in power, in the first few months, until the new president announces his attitude towards the financial market, the market will be a period of many tests. There will be no major changes in the market until investors and traders have a grasp of the longer-term economic situation.

In terms of weather-related events, one example is the tornado that struck the Gulf of Mexico and damaged several oil rigs. This obviously reduces the supply of crude oil, and because the Canadian dollar is closely related to oil prices, the Canadian dollar may experience some fluctuations.

One of the key points that traders can draw from is that you must often set protective stops for all trades. Since world events are unpredictable and there is no "timetable" at all compared to other fundamental events, traders will not be quite safe. Now you should have a little more understanding of the impact of geopolitical events on the foreign exchange market.

Inflation and consumer price index

The consumer price index is the most widely used inflation measurement tool and is sometimes regarded as an indicator of the effectiveness of government economic policies. This provides the impact of changes in the price of the national economy on government, business, labor, and private citizens. They will use it as a guide for making economic decisions. In addition, the President, Congress, and the Federal Reserve Board use consumer price index trends to help formulate fiscal and monetary policies.

The consumer price index refers to the average change in the price paid by urban consumers for "market baskets" of consumer goods and services over a period of time. A basket of consumer price indices is a detailed breakdown of what goods households and individuals actually buy. Most specific consumer price indexes in the United States are based on 1982-84. The Bureau of Labor Statistics (BLS) defines a 36-month period covering 1982, 1983 and 1984 as the average index level (representing the average price level)-equal to 100. Thereafter, the Bureau of Labor Statistics will measure the change in this figure. For example, an index of 110 means that the price has increased by 10% since the reference period; similarly, an index of 90 means that the price has fallen by 10%. As far as the current consumer price index is concerned, this data was collected from consumer expenditure surveys in 2005 and 2006. This is not a record of the actual expenditure of individual households, but it can give people an idea of how rising prices affect the expenditure of ordinary households and the change in the "purchasing power" of one dollar due to inflation.

The consumer price index is composed of all goods and services purchased by the reference population for consumption. Examples of main groups and categories are as follows:

  • Food and drinks (cereal breakfast, milk, coffee, chicken, wine, full-service meals, snacks)
  • Housing (rent of main residence, equivalent rent of owner, fuel, bedroom furniture)
  • Clothing (men's shirts, shirts, women's skirts, jewelry)
  • Transportation (new car, airfare, gas, oil, auto insurance)
  • Medical (Department of Drugs and Medical Supplies, Doctors' Diagnosis and Treatment Services, Eyewear and Eye Care, Inpatient Services)
  • Entertainment (TV, toys, pets and pet products, sports equipment, entrance fees)
  • Education and communications (university tuition, postal fees, telephone service, computer software and accessories)
  • Other goods and services (tobacco and tobacco products, hairdressing and other personal services, funeral expenses)

Monthly or yearly changes shown by comparing index numbers are usually expressed as a percentage-for example, "consumer prices have increased by 0.3% since the previous month". This percentage change is often referred to as the inflation rate-for example, "the inflation rate for the past 12 months was 2.5%."

Many investors and the Fed will constantly monitor this number to understand the future interest rate. The interest rate matters because, in addition to having a direct impact on the amount of capital inflows in a country, it can also explain the situation of dollar-denominated arbitrage transactions. If the inflation figure is higher than expected, traders will interpret it as a short-term increase in interest rates, and therefore buy currency, and when the figure is lower than expected, it may cause traders to wait and see until Until the central bank actually makes a decision. Basically, trading when the consumer price index shows a negative change is more difficult than trading when the consumer price index shows a positive change, because there will be different interpretations in this case. A sharp rise in the consumer price index will cause the market to be more prosperous, but a decline in the consumer price index may not cause the market to become quiet. The consumer price index measures inflation at the retail level (consumer), while the producer price index measures inflation at the wholesale level (producer).

In the United States, consumer price figures are published quarterly. When the numbers are published (about the middle of each month), they reflect the data from the previous month. Europe, the United Kingdom, Canada and Japan will also announce the consumer price index every month. Many other countries will only release this data quarterly.

As you continue to study basic analysis, the interrelationships between the various categories become more obvious. Please keep this in mind when you study other classes, then you will have a complete concept.

interest rate
Basic analysis

In addition to technical analysis, basic analysis is an analysis that most traders will pay attention to when conducting transaction analysis.

利率

One of the most important factors in the foreign exchange market is the interest rate. The central bank or economic organization of a country will set the interest rate of its currency. They adjust interest rates to encourage trade and maintain inflation control. Low interest rates encourage economic expansion because loans become cheaper. High interest rates hinder economic expansion because the "cost of capital" has become even higher. Changes in interest rates will also greatly affect the value of currency, and we will discuss this topic in detail later.

When buying and selling dollars, the most important thing is to pay attention to the Federal Reserve ’s Open Market Committee (FOMC) interest rate decision, which is responsible for determining the overnight federal funds rate. When the Federal Reserve raises interest rates, the dollar-denominated assets will provide a higher rate of return. This generally attracts more traders and investors. If the interest rate is lowered, this means that the dollar-denominated assets will provide a lower rate of return, making investors less willing to invest in the dollar. However, it is not just the interest rate itself that matters. The Fed ’s Open Market Committee ’s decision on another important issue is the language of the statement issued following the Fed ’s Open Market Committee decision. In fact, many times when the decision is announced, the market has already digested the news; if the news is as expected, the market will only show a slight volatility. On the other hand, the accompanying statement will be analyzed verbatim to find out what the Fed will do at the next meeting. Remember, interest rate decisions themselves tend to be less important than expectations for future interest rates.

The following table is the interest rates of major currencies, not real-time interest rates.

纽元 英镑 加元 澳元 美元 欧元 日元
             
2.25% 0.50% 0.50% 2.00% 0.50% 0.00% -0.1%

Each currency has an interest rate attached. This is almost the barometer of the economic system. When a country ’s economic system strengthens over time, prices will tend to rise because consumers have the ability to allocate more income for consumption. The more income we have, the better we will enjoy during the holidays and be able to consume a greater amount of goods and services. In other words, there will be more funds competing to chase the same item, and this will cause the price of the item concerned to increase. The price increase is called inflation, and this will be closely watched by the central bank. If inflation is allowed to soar, our money will greatly lose its purchasing power, and the price of general goods, such as a piece of bread, may soar to an incredible level within a day, such as a hundred dollars. This may seem like an out-of-reach scenario, but it is what happens in countries with very high inflation rates, such as Zimbabwe. In order to prevent this crisis from happening, the central bank will intervene and raise interest rates to curb inflationary pressures before inflation is out of control. Once inflation begins to occur, it is difficult to prevent it, so the Fed often fights inflation and is somewhat paranoid about preventing it. High interest rates make borrowing money even more expensive, and therefore consumers do not want to buy a new house, use a credit card and bear any additional debt. The capital becomes more expensive and the company does not want to expand, because many businesses are carried out in the form of credit, so interest is often charged. Ultimately, the price of high interest rates will be the economic slowdown until the central bank starts to lower interest rates again, this time to encourage economic growth and expansion-and this cycle will continue. Attempting to maintain low inflation while strengthening growth is a matter that the Fed must carefully balance each time the Fed holds an open market committee meeting. Other central banks will also discuss the same matters at regular meetings.

By raising interest rates, a country can also increase the desire of overseas investors to invest in the country. The logic in this regard is the same as the logic behind any investment: investors will try to find the highest possible return. By borrowing high interest rates, the returns of those who invest in the country will increase. Eventually, the demand for the currency will increase because investors will invest in higher interest rates. Countries that provide the highest return on investment through high interest rates, economic growth, and domestic financial market growth tend to attract the most overseas funds. If a country ’s stock market is well established and offers high interest rates, overseas investors are likely to remit funds to that country. This will increase the demand for this currency, causing it to appreciate.

Funds often follow the rate of return. If a country raises its interest rate, the overall international interest in the currency will increase. Recently, the Reserve Bank of Australia (RBA) raised the interest rate of the Australian dollar by 25 basis points to 3.25%. The Australian dollar has strengthened against other currencies and this move will make it stronger. Therefore, AUD / USD, AUD / JPY, GBP / AUD and other currency pairs have reflected this strong situation. Conversely, if the central bank of a country lowers interest rates, funds will flow out of that particular currency.

Some of the central bank's characteristics are:

  • They can use huge capital reserves.
  • They have specific economic goals.
  • They regulate capital supply and interest rates.
  • They set overnight lending rates to change the interest rates paid to local currencies.
  • They buy and sell government securities to increase or decrease the money supply.
  • They sometimes buy and sell local currencies in the open market to influence exchange rates.

Obviously, interest rates and changes in interest rates can have a strong impact on the flow of capital embodied in a country. Now let me briefly explain the concept of capital flow and some differences between positive and negative capital flows.

As discussed in the previous section, capital flows represent funds mobilized overseas to invest in a country ’s market. They can significantly affect the price of a country ’s currency, because positive capital flows indicate the need to invest in the country ’s currency, while negative capital flows indicate that currency demand is weaker than supply. Based on the importance of this topic, you can notice that discussions on the central bank ’s possible changes in interest rates are closely watched, and the discussions themselves will also affect the movement of the relevant currency pairs. Obviously, the announcement of the change in real interest rates will be highly watched on the international economic stage and may become an event that changes currency trends. The main central banks involved in this process include the Bank of Canada, the Bank of England, the Central Bank of Japan, the European Central Bank, the Federal Reserve (United States), the Swiss Central Bank, the Reserve Bank of Australia and the Reserve Bank of New Zealand. Individual banks hold regular meetings with a period of 4 to 6 weeks, depending on the bank concerned.

Transaction flow and capital flow
Trade balance

The trade balance figures are net exports minus net imports. The trade balance figures of the United States in recent years have tended to be negative, because the United States has always been a "consumer" country. The trade balance tends to be unbalanced, which can show a lot of information about current accounts and whether the United States has "excessively consumed" overseas goods and services. Traders can learn from the decline in trade balance figures that the dollar is stronger, and tending to an imbalance generally causes the dollar to fall.

Trade balance is one of the most misleading indicators of the US economy. For example, many people think that the trade deficit is a bad thing. However, whether the trade deficit is good or not is relative to the business cycle and the economy. When the economy is in recession, the country tends to increase exports to create employment and demand. When the economy expands significantly, the country tends to increase imports and promote price competition, which limits inflation and provides more goods than the economy needs without causing prices to rise. Therefore, in a recession, the trade deficit is not a good thing, but it may help when the economy expands.

The US trade balance refers to the difference between goods and services exported by the US and goods and services imported by the US. Trade balance is one of the largest components of the U.S. balance of payments, and it can provide valuable insights and put great pressure on the value of the US dollar.

Trade balance is very important for foreign exchange traders, because export demand is closely related to foreign exchange demand. Overseas people must purchase domestic currency to pay for a country ’s exports. Therefore, the more exports in a given month, the greater the demand for the country ’s currency. Export demand will also affect the production and prices of domestic manufacturers, because they must strive to increase production to meet rising demand.

In addition, another factor that affects the balance of payments is the investment reflected in the Ministry of Finance ’s International Capital Flow (TIC) data, which is prepared monthly by the Ministry of Finance.

TIC data shows the value difference between the amount of overseas long-term securities purchased by US citizens and the amount of US long-term securities purchased by overseas individuals during the reporting period. The results will show the balance of domestic and overseas investment. For example, if an overseas person buys US $ 60 billion in US dollar stocks and bonds, and the US buys US $ 30 billion in overseas stocks and bonds, the figure (reading) will be US $ 30 billion.

The importance of this data can be comparable to the trade balance for traders: when overseas people buy domestic securities, they must pay in domestic currency, so greater overseas demand causes the domestic currency to appreciate.

Related to the two are the concepts of trade flow and capital flow.

Capital flows

The capital flow represents funds mobilized from overseas to invest in overseas markets.

The capital flow vector is the net monetary amount used to buy or sell capital investments. The key concept behind the flow of funds is balance. For example, a country can generate positive or negative capital flows. A positive balance of capital flows means that investment flowing into a country from overseas exceeds investment flowing out of that country to overseas. Negative capital flows indicate that the outflow of investment from a country to overseas exceeds that from overseas. When there is a negative flow of funds, the demand for the country ’s currency will decrease, resulting in a depreciation of the currency. This is because the investor must sell his local currency in order to buy the domestic currency that he will deposit.

Countries that provide the highest return on investment with high interest rates, economic growth, and domestic financial market growth tend to attract the most overseas funds. These countries maintain positive capital flows. If a country ’s stock market is well established and provides high interest rates, overseas sources are likely to remit funds to that country. This will increase the demand for this currency, causing it to appreciate. Take for example the booming economy of the United Kingdom and the weak economy of the United States. In the UK, the stock market is well established, while in the US there is a lack of investment opportunities. In this scenario:

American residents will sell their dollars and buy British pounds to take advantage of the booming British economy. Funds flowed from the United States to the United Kingdom. Demand for the pound has increased, while demand for the dollar has fallen. The value of the dollar has fallen relative to the value of the pound.