The 4Xlounge.com Market Insights discusses a number of the most significant economic numbers released throughout the week as we strive to better understand the fundamental forces, which help to create the strongest trends in the Forex market. Here we will take a look back to the most significant numbers reported this week as we hope to anticipate what trends are most likely to persist as well as the those trends that are most likely to emerge in the near-term future.
On Tuesday the Reserve Bank of Australia (RBA) met during their regularly scheduled meeting as it was announced their key benchmark interest rate would remain unchanged at its current 3.5% level. Over the long run the RBA’s historic interest rates tend to move in the same direction as the AUD currency, and furthermore as equity markets continue to rise traders may also expect a stronger AUD in the near-term future. Perhaps this can help explain the moderate amount of divergence on the chart below, as it ‘appears’ the AUD/USD has recently and relatively out-performed the RBA’s historic interest rates.
We now turn our attention to Switzerland where the Consumer Price Index (CPI) calculated on a month-over-month basis was reported to have declined at a rate of –0.5% following the previous month’s –0.3% level. With that said as the CHF represents the second currency within the USD/CHF pair, we might logically expect a negative (opposite) correlation. In other words, if the Swiss CPI begins to improve we might expect a weaker USD/CHF pair.
Just as the declining CPI data in Switzerland was released, the Unemployment Rate was also released where it was reported to have remained near quite significant lows of 2.7%, matching the previous month’s estimate. In this case traders may expect a positive correlation between the Unemployment Rate and the USD/CHF pair. Simply put, if the Unemployment Rate continues to decline, we may also expect a weaker USD/CHF pair in light of the stronger CHF currency.
On Thursday in New Zealand the Unemployment Rate reported on a quarterly basis was reported to have increased to a current 6.8% following the previous estimate of 6.7%. The employment decline of 0.1% represented 2,000 jobs. Over the long run the Unemployment Rate in New Zealand tends to move in the opposite direction as the NZD currency.
New Zealand’s relatively poor employment figures stand in contrast to the positive development in Australia, as their local Unemployment Rate declined to a current 5.2% from the previously upward revised 5.3% level. Traders may use this divergence to position their accounts in favor of the AUD currency as opposed to the NZD, which many may anticipate further selling pressure in the near-term future, with the possibility of lower interest rates, perhaps as soon as during the next central bank meeting.
We now turn their attention to the Bank of Japan where interest rates were left unchanged at record lows during their regularly scheduled meeting. In addition the central bank abstained from adjusting their current asset-purchase program of 45-trillion yen and a lending facility of 25-trillon yen.
On Friday the sentiment turned negative in part due to the disappointment in the UK’s inflation data. Specifically the Producer Price Index (PPI) on a year-over-year basis increased at a rate of only 1.7% following the previous month’s estimate of 2.0%. This continued slide to the downside may help to reinforce traders in their opinion that the Bank of England is even less likely to increase their benchmark interest rate in the near-term future, and perhaps may be a little closer to further reducing borrowing costs.
A few hours later in Canada the Unemployment Rate was reported to have risen to a current 7.3% following the previous month’s 7.2% report. This occurred as a loss of 30,400 jobs reported for the month. Today’s disappointment may have come as a surprise to many as until now, a good deal of the economic data in Canada has been quite positive. Today’s negative development may have helped push traders back from the anticipation of higher rates, at least in the near-term future.
This week’s economic calendar provided us with additional evidence of what many had suspected for quite some time. A good deal of the economic data released this week was on the negative side including the inflationary data such as Swiss CPI and UK PPI, both failing to register an improvement. In addition the commodity-based economies reported their respective Employment data also to the downside in New Zealand and Canada. In fact the one positive report turned out to be Australia’s Employment data, as traders may have pared their bets of any further interest rate reductions in the near-term future. One tremendous benefit in trading the Forex market can be found in the economic calendar, which provides us a new piece to the puzzle nearly every trading day, that helps us better understand the fundamental forces, which create the long-term directional trends. By simply making note of these incremental fundamental developments can help give our trades the best probabilities of success over the long-run.
We wish you the best of luck in all your trading endeavors.