Currency Trading: The Fundamental View
By: Ellie Taft
The following is an excerpt from Ellie Taft's Dad’s Legacy-How You Can Support Your American Dream with a Winning FX Trifecta
From a practical standpoint, only the highest rated economic reports draw much attention. The rest of the reports can hold less or greater weight, depending on global circumstances at that time. Let’s take a closer look at a few of the more prominent reports and how they affect the market.
It’s not hard to figure why Employment Reports are among the most important for every country. When more people have jobs, more money is spent in retail sales, which boosts corporate profits, so on and so forth.
In the US, the Employment Reports are prepared by the Bureau of Labor Statistics. And they are released on the first Friday of the month, at exactly 8:30 am EST.
Non-Farm Payroll Up: Stock Market up, Dollar up
Non-Farm Payroll Down: Stock Market down, Dollar down
Unemployment Rate Up: Stock Market down, Dollar down
Unemployment Rate Down: Stock Market up, Dollar up
The quarterly Gross Domestic Product (GDP) provides the best overall view of economic activity. In the US, the GDP covering the previous quarter is released by the Commerce Department at 8:30 am EST, on the last day of the quarter.
GDP Up: Stock Market up, Dollar up
GDP Down: Stock Market down, Dollar down
The Consumer Price Index (CPI) measures the retail price of a basket of goods and services, and indicates inflation. This report is released by the Bureau of Labor Statistics at 8:30 am EST around the 15th of each month.
CPI Up: Stock Market Down, Dollar uncertain
CPI Down: Stock Market Up, Dollar uncertain
Prior to the release of every report, analysts from around the world publish a consensus of what they expect, and the market adjusts accordingly. When the report is actually released, there is an immediate shock factor. And the market tends to go crazy.
Keep in mind, market reaction depends entirely on how the actual number compares with expectations. Even if the current report shows an improvement over the previous month, if it doesn’t meet expectations the market will react negatively. A better than expected number would cause a strengthening of the currency.
If the numbers come out exactly as expected, the market is likely to spike up and down, and then move sideways with a somewhat negative bias… adhering to the “buy the rumor, sell the news” phenomenon.
Monday Morning Blues
As you can see from the table blow, Mondays are relatively quiet in the currency market. And though it doesn’t show up here because morning activity is heavy, but Friday afternoons are usually totally dead.
Trading Activity by Day of Week |
|||||
|
Mon |
Tue |
Wed |
Thu |
Fri |
AUD/USD |
16% |
22% |
19% |
22% |
21% |
EUR/JPY |
15% |
20% |
18% |
25% |
22% |
EUR/USD |
16% |
21% |
20% |
21% |
21% |
GBP/JPY |
16% |
20% |
17% |
25% |
22% |
GBP/USD |
18% |
21% |
19% |
21% |
22% |
NZD/USD |
18% |
21% |
19% |
22% |
21% |
USD/CAD |
17% |
20% |
19% |
22% |
22% |
USD/CHF |
16% |
22% |
20% |
20% |
22% |
USD/JPY |
14% |
18% |
20% |
27% |
21% |
I suspect trading volume is low on Mondays for two reasons. First, there’s not much news on Mondays. And second, after a weekend off, traders need a little time to get back in the groove. If you were day-trading, you might decide Mondays weren’t worth trading. But, for the end-of-day traders, Monday can be an excellent day to enter the market. And the reason is simple.
In an upwardly trending market the low of the week is usually set on Monday. And the high is usually set on Friday. And vice versa for a downward trend… Makes sense, right?