Nothing charges the volatility of the currency markets like an unexpected result for a well watched economic statistic.
A decade ago the United States International Trade Balance caused violent gyrations in the Forex market, so much so that traders referred to those Friday morning sessions as New York Fridays naming and fearing the dangerous market after the trade balance release. Only a few other American statistics, unemployment, GNP (as GDP was then called) and CPI could, on occasion, provide a similar charge. For most traders the US statistical regime was limited to these major national statistics collected by the US government.
Then as now these statistics were released and dominated trading once a month. For the rest of the time markets were moved by trading flows and speculative interest. Second and third tier economic statistics did not draw market attention. Ten years ago no one was betting their P/L on the Chicago Purchasers Index or Housing Starts; the Institute of Supply Management (ISM)) Non-Manufacturing Index was wholly unnoticed.
Over the past several years market participants and the financial media have substantially widened their statistical focus. Many second and third tier measures now garner the type of interest and comment that used to be reserved for GDP or Non Farm Payrolls. The US economy has over 50 (or 60, or 1000, I am not sure anyone has counted) publicly reported economic statistics. There are easily enough PPI, Industrial Production, Consumer Sentiment, Durable Goods, Retail Sales, ISM, NAPM, TICS, NAHB and Redbook numbers reported each month to keep an army of analysts busy. How can traders judge which statistics deserve attention and which are of cursory or cumulative interest?
Aside from the few well know economy wide measures already mentioned most statistics record activity in a specific industry or economic sector or for a limited time period. The usefulness and predictive ability of the majority of these indicators is strongest when they are combined with other measures or when part of a trend.
As a general guide to trading value I have divided indicators into three groups: trend, situational and headline, distinguished by the quality of their information and the type of influence they exert over the current market.
Trend statistics, not surprisingly, are most valuable when they are trending. Because these indicators depict conditions in a relatively restricted area of the economy or for a short amount of time individual releases can be misleading or simply outliers. It is risky to base an economic assessment or trade on the return of a single trend statistic.
Different indicators from the same sector can give an accurate glimpse of that particular economic sector but not necessarily of the economy as a whole. Even when different monthly statistics point in a similar direction only several months of releases can establish a trend.
A drop in the monthly capacity utilization figure or a rise in the Conference Board Consumer Sentiment measure by itself provides limited information for the trader. But if in the space of a week Consumer Sentiment, Factory Orders and ISM all gain you have the makings of a tradable move. When properly utilized these trend or secondary statistics, can supply invaluable clues to economic strength and to the timing and direction of currency moves but their greatest value lies in combination with other similar indicators
Situational statistics are indicators elevated in importance by particular circumstances. One could also call these central bank or crisis indicators. These numbers are important because they are used by central banks in their own economic analysis or because they depict conditions in a crucial economic sector. These statistics can change over time. As bankers change and crises come and go, newly favored or newly crucial measures will replace the ones currently popular.
Chairman Bernanke has been particularly frank about using the PCE Deflator for measuring inflation. The ECB's favored inflation statistics are the Harmonized Index of Consumer Prices (HICP), and the M3 Money Supply. Earlier leaders of these institutions preferred different measures or refused to say what measures they considered important.
The collapse of the American housing market has given all statistics associated with housing and home construction substantial import. But the housing crisis will not last forever and as it ebbs so will the importance and influence of its indicators.
Headline statistics are economy wide numbers that give the broadest picture of economic conditions. Non Farm Payrolls and GDP are the best current American examples.
These statistics have a history of volatility and of defying market predictions but they also carry pertinent information about the overall economy. The NFP number in particular relates directly to the dominate percentage of the American economy derived from consumer spending and thus to overall economic health.
There is however, another reason for the volatility that often accompanies the release of these figures. These statistics are the basis for large amounts of speculative positioning, both prior to release and immediately after.
The larger the difference between the expected number and the actual statistic the greater the volatility as traders adjust their position to the new parameter. Even when a headline number is as predicted it can produce violent reactions as those positions based on the expected number take profit.
Headline numbers go in and out of fashion. Ten years ago the trade balance produced volatility even greater than NFP does today. But twenty years of ever worsening numbers have drained the suspense and traders have noted that the dire predictions for the American economy from permanent trade deficits have amounted to very little
Today's global economy is an entirely different creature than it was twenty years ago. Instantaneous global financial flows, international manufacture and trade and a 24 hour media have spread the potential and danger of trading markets to every corner of the world economy. The speed with which the bankruptcy of Lehman Brothers undermined financial markets around the world was simply unprecedented but should not have been unexpected
Are there indicators that better reflect the new global economy and that could become the new trading instigators? Prediction is hazardous but my nominee for the US is the Treasury International Capital System Report (TICS) of the Treasury Department. This statistic tracks foreign investment in the American economy, the purchases of American stocks bonds and Treasuries. With the Federal deficit largely funded by foreign capital what could be more important?