Economic indicators relevant for the movements of FX markets in the world

 

Author: Vesna Trajkovska

Volatility of the financial markets, except by supply and demand, is also caused by everyday events, published data, and decisions by significant institutions around the world (central banks, organizations) and a number of economic indicators. Traders and investors at the world markets monitor the changes in the economic calendars and react timely aimed at higher profit realization, while the analysts and the experts are using these in interpretation of the current and future investment possibilities, or shortly, the economic indicators are presenting the health of an economy.

Most frequently monitored and essential for the development of a country are the deposit interest rates, unemployment rate, GDP, price indices, current account balance and other, which have different impact on the foreign markets and decisions by investors.

Currency trading indicates monitoring of the situation in economies where these are domicile. First indicator, which mostly impacts the movement of the financial markets in general around the world, is the federal funds rates published by the central banks by each of the countries, although they are moving at very low level (almost zero) for a longer period of time. Latest information by the US Federal Reserve’s is that two increases of these is planned (current level 0,25%) until the end of year 2023, which caused small increase of USD relative to other currencies, because the signals for increase or decline of interest rates have influence on appreciation or depreciation of the domestic currency. The European Central Bank, following the reduction of the Main Refinancing Rate to 0% in 2016, does not give signals that it would change it in near future, until certain conditions in the economy are not met (growth of inflation and employment). Swiss Central Bank has the lowest interest rate in the world (-0,75%), which has not been changed since 2015, but has intervened on the appreciated Swiss Franc by purchase of foreign currencies, whereby the Bank in year 2020 purchased 110 billion Francs, and 296 million franks were purchased in the first quarter of year 2021.

Unemployment rate, which is published monthly by the statistical agencies in each country, is an indicator that may largely move up the currencies, especially of the larger economies as are USA, Australia, and China. US data for the employee number, with exception of farmer industry (Non-Farm Employment Change), is a vital signal for the entire economic activity of the county, while in the Australian, Chinese and other economies, the change of the employee number relates to all sectors. Thus, for example, since the highest unemployment rate was registered in USA in May 2020 (14,7%), for the last 80 years the USD notes continuous trend of decline, which is not the case with the other currencies, as are the AUD, GBP, Swiss Franc, but also the Scandinavian Norwegian, Swedish and Danish Crones, which, after reaching high depreciated exchange rate in March 2020, note tendency of growth. Purchase power of the consumers is closely correlated with conditions at the labor market and is a significant factor for the monetary policy. Theoretically, lower unemployment rate assumes appreciated exchange rate and vice versa, the higher rate leads to currency depreciation.

World major economies are trying to reach annual inflation rate from 2% to 3% for a longer period of time, by applying different measures, before all cutting of interest rates.  Each change in upward line to the target of 2-3% is a positive signal for the foreign markets. Pandemic period caused correction of the rate, which, in small part is due to the increased prices of energy and food within global framework. For example, latest monthly data shows that the inflation in USA is 0,6%, in Australia 0,9%, Switzerland 0,6%, China 1,3%, and in Eurozone is 1,90% and each one of them is trying to reach the target.

GDP data of each country cause positive signals at the foreign market if it grows or may lead to movement of the currency in downward line if the result is less than the one projected by the economists. The positive data in the trade balance of a country indicates that more goods and services were exported than imported, which directly influences the demand for foreign currencies. During the pandemic, most demanded was the Swiss Franc, which was purchased as spare currency, whose value (relative to other currencies) remained high in spite of the interventions by the Swiss Central Bank to depreciate it, because of which it was placed at the list of currency manipulators by the USA in the previous year.

Retail Sales indicator is the first signal for consumption ability of the population in one country, i.e. if it is on the way to expansion or contraction. Therefore, it turns out that the higher retail sales have good impact on the foreign currencies because the currency is more demanded and thus stimulates the exchange rate to go upward.

Currencies which fluctuate are determined not only by the abovementioned, but also by a line of other economic indicators, as are for example, construction licenses, production activities, inventory quantity, immovable market, but also by the oil price, gold, and other noble metals. In agreement with the trading and need for certain currencies, exchange rates are constantly moving and precise prediction of the future trends often does not come to realization because unpredicted situtations might cause shocks at the financial markets in very short time.

 

 

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