IFM-Economic Indicators

• Employment Situation

• What is it:

– The most eagerly awaited news on the economy.

– Are jobs being created?.

– It has great economic and political significance.

• Employment news can greatly influence the dollar's value in currency markets. A vigorous jobs report could drive interest rates higher, which makes the dollar more attractive to foreign investors. They can now earn more interest income by owning U.S. Treasury securities. On the other hand, an anemic job report softens demand for U.S. currency because it spells trouble for American stocks and puts downward pressure on rates, both of which make the dollar less appealing to foreigners.

• Personal Income and Spending

• What is it:

– Records the income Americans receive, how much they spend and what they save.

 

• Foreign exchange investors are likely to respond to the personal income and spending numbers. A healthy increase in both bodes well for the U.S. dollar. High consumer demand encourages more growth and puts upward pressure on interest rates. That makes the dollar more attractive to foreign investors, particularly if it results in a greater return on investment than other currencies. A weaker-than-expected report on consumer spending presages lower interest rates, and that's often bearish for the dollar.

• Retail Sales

• What is it:

– First report of the month on consumer spending: capable of big surprises

• Players in the currency markets find the retail sales report a tricky indicator to analyze. While foreigners prefer to see American consumers in a shopping mood because that would firm up interest rates (which is bullish for the dollar), an overly strong retail sales number can also spell trouble for the greenback because many of these goods are imported. Given the already massive U.S. trade deficit, a jump in imports also increases demand for non-dollar currencies to pay for all these foreign products- and that can potentially hurt the dollar.

• Consumer Confidence Index

• What is it:– Examines how consumers feel about jobs,

the economy, and spending 

• A depressed consumer makes foreign investors with exposure in the U.S. markets a bit nervous. It raises the prospects of falling interest rates and a weakening business climate, both of which bode ill for the dollar's value. Foreign investors might sell the U.S. currency in search of higher yields and a stronger economy elsewhere. On the other hand, an upbeat consumer can lift U.S. interest rates and stock market returns to levels that promise a higher return relative to other regions in the world, and this normally has the effect of increasing demand for dollars.

• Gross Domestic Product (GDP)

• What is it:• The foremost report on the health of the

economy, GDP measures how fast or slow the economy is growing 

• To foreign investors, a strong American economy is viewed more favorably than a weak one. Robust economic activity in the U.S. spurs corporate profits and firms up interest rates; thus, foreign investors see opportunities to make money in the stock market and from higher-yielding Treasury bills and bonds. All this will increase the demand for dollars. If the Federal Reserve moves quickly to preempt inflation by driving up short-term rates, odds are it would also lead to an appreciation of the dollar because of the perception that the U.S. central bank is ahead of the curve in containing price pressures.

•

• However, if inflation accelerates and stays at a high level, it would lower U.S. competitiveness in the world and worsen the country's foreign trade deficit, a scenario that can make U.S. currency far less appealing.

• Durable Goods Orders

• What is it:– A key indicator of future manufacturing

activity. 

• The dollar frequently rallies on evidence of a strengthening U.S. economy, especially if it exceeds that of other industrialized countries. However, even currency traders might balk if the durable goods report adds to a growing body of evidence that the economy is overheating.

• Business Inventories

• What is it: Tracks total US business sales and inventories.

• The main question for foreign exchange traders is how the news on retail inventories will influence interest rates in the U.S. For them, a jump in the I/S ratio (with inventories rising at a faster pace than sales) is symptomatic of an economy in the process of slowing. That eventually portends lower interest rates, which translates into a smaller payback for international investors. Currency traders generally look at the dollar more favorably if both sales and inventories are rising at the retail, wholesale, and manufacturing level.

• Index Of Leading Economic Indicators LEI)

• What is it:

– An index designed to predict the direction of the economy.

• Assuming that the dollar is not being influenced by other factors, it will likely follow the same path as the stock market. Consecutive monthly rises in the LEI will encourage foreign investors to buy dollar-based securities. Stronger U.S. economic growth brings with it higher interest rates and greater profits, all positive influences for the dollar. A series of falling LEI indexes would make the greenback less attractive to hold.

• The Federal Reserve Board’s Beige Book

• What is it:

– A summary of economic conditions around the country compiled for the Federal Reserve Board

• The dollar might rise in value if the Beige Book agrees with other evidence that economic activity is robust. It portends firmer interest rates in the U.S., which makes the dollar more attractive to hold. In contrast, foreign investors are leery of reports depicting a fragile economy since the Fed might be inclined to lower interest rates and that might undermine the dollar's value, especially if U.S. rates end up below those of other major industrialized countries.

• International Trade in Goods and Services

• What is it:

– Monthly report on US exports and imports of Goods and services

• While investors in the bond and stock markets agonize over how to respond to the latest international trade figures, currency traders stake a more direct approach. Unless caused by a deep recession in the U.S., any improvement in the trade balance is viewed favorable for the dollar. The more goods and services foreigners buy from the U.S; the more dollars they'll. need to pay for these American products.

•

• In contrast, a worsening trade deficit can undermine the dollar. To purchase foreign goods and services. Americans have to sell dollars so they can pay for these products in local currencies. The problem is that foreign exchange traders are already swimming in a sea of surplus dollar. Flooding the market with even more dollars can only further depress the greenback's value.

• Current Account Balance

• What is it:

– The broadest accounting of America’s trade and investment relationship with the rest of the world

• Traders in the foreign exchange markets do look over the report. Deterioration in the U.S. current account balance will over time erode the value of the dollar. However, no one knows with any certainty when these burgeoning deficits will tip the greenback over the cliff. Conversely, if America's trade balance reverses course and begins to move closer to purples, it would be considered highly bullish for the U.S., currency, though much depends on what's behind this improvement.

• If it's the result of a deep recession in the U.S., with import demand plummeting, foreigners will likely shy away from the dollar. If current account deficits were to narrow as a result of greater international demand for U.S. goods and services, the dollar should appreciate in the currency markets.

• Consumer Price Index ( CPI)

• What is it:

– Most popular measure of price inflation in retail goods and services.

• The effect inflation has on the dollar is less clear. As is often the case in a healthy economic expansion, rising U.S. interest rates can make the dollar attractive. But if rates surge primarily on account of growing inflation concerns, it can hurt the U.S. currency. Higher U.S. inflation erodes the value of dollar-based investments held by foreigners, so a sustained increase in the CPI can have a negative influence on the greenback.

• Having said that, bear in mind that currency traders are also sensitive to other nuances. For instance, if players in the foreign exchange markets believe the Federal Reserve has moved quickly and deftly to smother inflation pressures, it's likely the dollar will hold its ground or even appreciate in value.

• Producer Price Index (PPI)

• What is it:

– Measures the change in prices paid by businesses

• A rise in the PPI is a tough call for participants in the foreign exchange market. Normally, the dollar benefits from a little pickup up in inflation since this propels. U.S. short-term interest rates higher. A fast rising inflation report, however, can hurt the dollar because the Federal Reserve can respond so aggressively as to jeopardize U.S. economic growth altogether. By and large, a gradual rise in inflation that is accompanied by a well-timed tightening of monetary policy is likely to lead to an appreciation of U.S. currency.

• Import and Export Prices

• What is it:

– Records price changes of goods bought and sold by the US in foreign markets.

• The foreign exchange market normally does not spring into action as a result of this report. For these traders, much of the news on how exchange rate movements influence import and export prices has already been discounted. What alarms foreign investors is a situation in which the dollar's weakness or strength becomes so detrimental to the U.S. economy that it impels Washington to intervene in the currency market. Such actions are rare but they cannot be totally dismissed among investors.

• What might trigger such a step? Several events can. Sharply higher import inflation, a significant deterioration in competitiveness, or an unacceptable widening in America's foreign trade deficit could at some point trigger remedial action by U.S policymakers. That action can range from delicately crafted expressions of concern by administration official on the dollar's value to direct intervention by the government in the currency markets.

• Yield Curve

• What is it:– Yields on Treasury securities from short

to long term maturities

• Foreign investor’s reaction to a flat or inverted yield curve is difficult to predict. Much depends on the magnitude of the inverted yield curve, which is how much higher short-term rates are above long-term rates, and how U.S. short-term rates stack up against those of other countries. It is possible that international investors might choose to avoid investing in the U.S. because a flat or inverted yield curve is a harbinger of anemic growth, if not recession.

• That will cause the dollar to depreciate in foreign exchange markets. However, if the yield curve is so inverted that U.S. short-term rates are markedly higher than those of other nations, it may attract an influx of "hot money" from overseas as foreign investors seek to take advantage of the greater returns they can receive here. What do we mean by "hot money?"

• It's fast moving money from investors around the world who are constantly on the hunt for the highest possible short-term gains. The instant an investment losses its appeal (for example, when U.S. yields fall relative to their foreign counterparts), that "hot" money quickly leaves the border of one country for another lucrative region of the world. Thus, the dollar might bounce up in value when there is an inverted yield curve, but its strength would be very tenuous.

• A steep yield curves suggests stronger economic growth and rising short- term rates in the months ahead. This will likely attract foreign investors to purchase and hold dollar based financial assets.