Trading the News


Theory: Trading The News

… to ignore major economic news releases is asking for a slap in the face with a dead fish, quite unpleasant …


News, most people watch it, many want to be in it, but how many trade it? I am writing this a day after some poor housing data in the US saw the USD get kicked, mashed, belly flopped, chinese burned (the most painful) and jumped on to the tune of 200 or more pips against the majors within a couple of hours, bringing many to wonder just what in the world happened!


While I consider myself a technical trader, it is became apparent very early in the piece, that to ignore major economic news releases is asking for a slap in the face with a dead fish, quite unpleasant. The problem is, if you are like me and read the newspaper back to front (i.e. Sport, Comics, News), then you don’t really want to read the latest financial news to keep up with things. Well instead of doing that, I will run you through the main fundementals, what they typically mean for a currency, and where you can get the results.


It is essentially a pretty bland subject, but here we go in real simple terms:

  • Unemployment figures
    What: Measure of unemployed people in the country looking for work.
    Better than expected: Currency may strengthen
    Worse than expected: Currency may weakenE.G. Japanese unemployement figures worse than expected, JPY to weaken against other currencies, so the USD/JPY would go up (USD strengthening against the Yen/Yen weakening agains the Dollar).
  • GDP
    What: Gross Domestic Product, a broad measure of economic growth of a country.
    Better than expected: Currency may strengthen
    Worse than expected: Currency may weakenE.G. US GDP figures show the economy is growing, investors take this as a positive sign for the country as well as a hint that interest rate rises may be needed at some point, investment in the US dollar follows, pushing up pairs such as USD/JPY, USD/CHF and bring down EUR/USD and GBP/USD.
  • CPI
    What: Consumer Price Index, derived from comparing a set basket of goods over a period of time to see if prices have increased, resulting in increased inflation for consumers.
    Increases: Currency may strengthen
    Decreases: Currency may weakenE.G. Australian CPI figures come in lower than previous, this indicates that the economy is slowing by itself, meaning the Central Bank will not need to increase interest rates to slow it artificially. Would result in the Aussie dollar losing some of its value as funds are moved elsewhere, resulting in the AUD/USD dropping.
  • Consumer Confidence
    What: A measure of near term spending habits of a countries consumers.
    Up: Currency may strengthen
    Down: Currency may weakenE.G. German Consumer Confidence shows an increase from previous, this is a sign that the people of that country feel positive about the economy and their financial situation, indicating that there will be increased spending, which would strengthen the economy and push something like the EUR/USD up.
  • Retail Sales
    What: As the name suggests, measures the retail activity, ties in with Consumer confidence somewhat.
    Up: Currency may strengthen
    Down: Currency may weakenE.G. Japanese Retails Sales are up, showing that their is increased spending, showing the economy is in good shape, consumer confidence must be good, and so the currency will strengthen, so USD/JPY would go down (USD weaker against a strengthening JPY).
  • Trade Balance
    What: It measures the difference between total imports and total exports of goods in a country.
    Up: Currency may strengthen
    Down: Currency may weakenE.G. US shows a positive Trade Balance reading, this means that more goods were exported from the US, which is a good thing for the economy, therefor strengthening the USD, so EUR/USD would go down, the USD/CHF would go up.
  • Interest Rates
    What: A tool to slow an economy or encourage spending.
    Up: Currency may strengthen
    Down: Currency may weakenE.G. Like all of us, we want to invest cash into high interest earning areas, so if a countries interest rates are increased, money is moved to that country, resulting in it’s currency strengthening substantially usually. So if US interest rates are increased, then the USD/CHF for example would rise.

So there are some basics, there are so many data releases, barometers and speaches it is not funny, and quite frankly, I couldn’t be bother keeping up with what they all actually are, as I have better things to do than listen to some old bugger spitting figures at me, but I do take note, and tend to think of data releases in terms of interest rates. If the data release is indicating the economy is speeding up, it hints that there will be a need to increase interest rates to slow it down before inflation takes hold. Of course the opposite applies as well.

Ok finally, here is yesterday’s chart to demonstrate what I am talking about:


Here you can see the effect of another data release not listed above, US House Sales. The release was much worse than expected, with US House Sales dropping considerably, this mean to some that it is a sign people don’t have as much money to spend, hence a slowing economy and less chances of interest rate hikes in the near future. This meant a sharp reversal of the short term trend, and, coupled with a positive speach in Europe of possible interest rate increases there, the EUR/USD moved over 200 pips in a couple of hours!


This movement was spread across the board across all pairs with the USD, and was really a “no brainer” trade for those awake to see it.


So you can see that there is value in keeping one eye on upcoming releases, one to cash in on the moves if you are experienced with money management and the fundamentals, and two to tighten stops on any open trades that are in the perceived wrong direction to the data release. Be sure to check that your broker has a guarenteed stop policy otherwise this will not work.


One final and very important note, remember that figures are always compared to the “expected” figures, so while a release might come in below the previous, if this was expected anyway, it may already be figured into the price and the movement may be small or non existant. In some case, price can move in the opposite direction if an underlying fundamental is stronger than the data released. Confused? .. if so … then you probably shouldn’t trade the news just yet.

Happy trading!

 

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