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In this chapter we're going to explore the fundamental news flow that shapes the currency moves we see each and every day. And in particular, to examine how these moves are driven by the constant stream of economic indicators which are derived from the underlying fundamental data.

And in order to do so, we need to understand what we mean by an economic indicator, as well as define the attributes and characteristics of economic indicators in general. The chapter will cover this in three areas as follows.

First, to look at how economic indicators can be grouped into three broad types.

Second, to consider how the importance and relevance of an economic indicator changes, depending on where we are in the economic cycle.

Third and finally to explore their relationship to market expectations, once the data has been released.

First and foremost, an economic indicator is simply an economic statistic based on data which indicates how well or how badly an economy is performing. Based on this release, the market and policy makers then decide how it is likely to perform in the future. And, as we all know there are statistics and there are damn lies. But more on that later.

In terms of the groups into which economic indicators can be classified, these are cyclical, counter cyclical, or pro cyclical.

A counter cyclical economic indicator is one that moves in the opposite direction to the economy, so for example if the economy is doing well, unemployment will be falling.

A pro cyclical indicator is one that moves with the economy, and GDP is an example of a pro cyclical indicator.

Finally, a cyclical indicator is one that may rise or fall as the economy expands and contracts and therefore has no direct correlation.

In terms of timing, economic indicators fall into three broad categories namely leading, lagging and coincident.

Leading indicators are those that signal a change to the economy, before it happens and are therefore the most useful. They give us strong clues as to the future direction for the economy particularly on interest rates and inflation.

Two examples from this group would be building permits and consumer sentiment.

Lagging indicators are those that take time to filter through to the economy, and typically here we would include unemployment or employment data.

Finally, we have coincident indicators. These are indicators which track the economy and would include personal income and retail sales.

In this introduction to fundamental data and economic indicators I also thought it would be appropriate to cover an issue which is rarely explained. Namely, that much like the economic cycle, fundamental news releases also have a cyclical relationship depending on where we are within the cycle.

But let me explain this in more detail, taking interest rates as an example as these are probably the simplest and easiest to understand.

As a general rule of thumb, whenever a piece of fundamental news or data is released the markets will consider it from two perspectives. First, its relevance to the economic cycle and any changes in monetary policy that may follow as a result. Second, how close the numbers are to the market’s expectations.

In the last few years, as the financial crisis has enveloped the globe, interest rates, by and large, have all fallen to ultra low levels and some into negative territory, and as such have become of relatively low interest to the market as a whole. The reason for this is with inflation threatening to roll over into deflation, the prospect of any change to interest rates in the short, or even medium term, is almost nil.

As a result, the monthly interest rate announcements from the various central banks have became an irrelevance as it has been clear to everyone there is little prospect of interest rates changing. These releases are perceived by the markets as unimportant, as there is nothing in either the rate decision or in any accompanying statement to surprise or startle the markets. In other words, the 'no change' decision has already been factored in.

With little prospect of any changes in interest rates for months or even years, the markets have moved their attention to other data, focusing instead on unemployment, followed by manufacturing, housing data, and retail sales figures.

The reason for focusing on those releases is they are the ones which might show the first signs of any recovery, as economies begin their slow journey into an expansion phase. This is yet a further reason why we need to understand where we are in the economic cycle, as the impact of any fundamental news release will vary according to which phase we are going through at any particular time.

For example, as the economy moves from late recession and into early expansion, this is when inflation data begins to take on an increasingly important role, along with the number of jobs created and data concerning output and production.

By contrast, interest rates begin to take on increasing importance as the economy moves from early expansion into late expansion, with inflation related data now dominating the releases as the markets become increasingly concerned over a slow down in the economy and a potential crash landing.

The slowdown arrives in due course with interest rates falling along with inflation. At this point, the markets concentrate on unemployment data and manufacturing output, as well as market sentiment, to try to gauge the depth and length of any recession. Interest rates have fallen in terms of importance.

Finally, the economy enters late recession with interest rates flat and therefore of little interest and market focus is once again on unemployment, and so the cycle comes full circle.

As mentioned earlier, every economic indicator or fundamental data release will have a market expectation number attached. This is generally from a poll of economists, so every release will have an associated forecast. It doesn’t matter whether you believe the forecast or not, the market will consider the release in the context of the forecast and this is one of the reasons why a currency may decline on good news and go up on bad news.

For example, if the news is good, but not as good as the forecast, a currency may decline, and similarly if the news is bad, but not as bad as expected a currency may rise. This is a fact of forex trading and something we all have to accept.

It doesn’t matter if a forecast is right or wrong. Nor does it matter where the forecast came from. All economic releases have a forecast attached, and the market will judge the data against this forecast and react accordingly.

As I wrote at the beginning of this chapter there are ‘lies, damned lies and statistics’ and when it comes to fundamental news and economic indicators, we really do need to keep this quote in mind at all times.

This is one of the reasons I have developed my own three dimensional approach to the market, combining relational, fundamental and technical analysis. It is simply not possible to rely on the fundamental data alone. It may not even be valid as there are so many reasons for it to be 'massaged' or modified so it can be presented in the best possible light to all concerned.

This is an important point and one I want you to remember throughout the remainder of this chapter as we look at the economic numbers in more detail. Just remember who is presenting these numbers and why.

As an example, let’s take unemployment, which is probably one of the most manipulated and misleading group of economic indicators. And here we need look no further than the official US unemployment figures issued by the Department of Labor and, one would imagine, an august and trustworthy body.

However, like most statistical offices who issue economic data, they are part of the government and, as such, run by civil servants. Civil servants who are no doubt keen on developing their careers and therefore likely to do as they are told by their lords and masters, namely the politicians. Politicians who, unsurprisingly, are also only interested in themselves, their re-election or future career in high office.

I make no apology if this sounds a little cynical. I would say it is realistic and a plain fact of life. In some ways it is partly our own fault and our inability to absorb complex data in a fast moving, 24 hour media world where everything is conveyed either in a short headline or is broken into sound bites. Once a number has been released the media circus simply moves onto the next item. Governments are perfectly aware of this and so take full advantage, knowing that by the time any data has been analysed the media’s focus has moved on to the next item of news.

In March 2011 the Department of Labor issued its monthly report, which suggested the headline rate of unemployment had in fact fallen from the previous month’s figure of 8.9%, to record a further fall to 8.8%, thereby suggesting the US economy was starting to pick up.

However, the true figure is actually more than double this figure at almost 20%, but the government figure is intentionally carefully crafted to underestimate the actual unemployment rates, which would shock the public and ensure the politicians of the day were never re-elected.

The unemployment figures are massaged in a very simple way. First, the data is collected by conducting a small survey. It's small because it is simply too expensive to do it in any other way. Second, the survey only includes people who are claiming unemployment benefits, which is only paid for a limited time anyway. Third, the survey does not include anyone out of work and not claiming benefits. It does not include people actively seeking work or those who have simply given up looking. In addition the survey also assumes those claiming unemployment have found a job after six months, and are therefore excluded from the survey result. But it gets worse.

In order to be counted as unemployed, claimants have to confirm they are looking for work, so the unemployment rate didn’t fall because the unemployed had found jobs, it fell because people had simply given up looking for work. Only in Washington could this be hailed as good news.

In reality, instead of there being approximately 14 million unemployed in the US, there are in fact close to 28 million, a truly shocking figure.

The same misleading method is used when presenting data on job creation in the US. In this case the government uses a model known as the birth death model. This model has nothing to do with the births and deaths of actual people. Instead, it is a statistical model for the births and deaths of companies and it has been constructed in such a way as to over estimate the number of jobs created when a new company starts up. Furthermore, the data does not then subtract the number of employees who lose their jobs, when a company ceases trading or goes out of business. It is only the jobs created by new company start ups which form the basis of the ‘monthly jobs created’ release and this number simply gives the number who have entered the jobs market each month.

In one month recently, the government reported a gain of 100,000 jobs, but their own birth death model suggested that 175,000 should have been created. In other words, instead of jobs being created, the true result was a loss of jobs.

This sort of data manipulation which ranges from minor window dressing, to outright fabrication and lies, goes on in every single government department responsible for statistical data around the world.

And here I am not simply attacking the US. This occurs everywhere, with very few exceptions, and across all the economic indicators, with unemployment, inflation and job creation the top three as these are the most politically sensitive. These releases are also highly visible and are a direct measure of a government’s performance in handling the economy.

Inflation data is another classic target. Here you will find the goods and services used to gauge inflation will change all the time, as will the basis of measurement. Economic indicators and indices will come and go as governments find increasingly confusing and elaborate ways to baffle the public, safe in the knowledge the financial markets have little time to absorb or analyse the data in any detail.

Moreover, many of the numbers reported are subsequently revised or corrected and brought up to date with the latest figures, but these are rarely reported and hardly mentioned in the financial press. You will see this pattern a great deal once you begin to follow the economic calendar releases on a daily basis, with reports being updated or released as 'revised'. However, by this time no one really cares, as the markets have moved on and long since forgotten the original release.

The US unemployment data is a classic for this, as is the inflation data, and you will often see an update issued maybe a week later with so called 'corrected figures'.

There we have it. The economic data we are about to consider is all manipulated in some way. It is a fact of life and there is nothing we can do about it. In some ways we could say that since we are all looking at the same data, does it really matter if it is true or not? And the short answer is no. However, it is the market’s perception we need to understand.

It is also important to remember that professional traders, and more importantly the interbank market which controls the market, will certainly be aware of the truth, so to blindly accept the data as fact is dangerous in the extreme.

Your success will depend on independent thinking. Never take anything at face value, particularly if it involves information from a government body where politicians are involved.

The question to ask yourself is this? What is the game plan? For example, why is the US dollar and US economy managed by a banking cartel? And whose interests are being protected and advanced?

Therefore, when you are trading and looking at economic data, as we are going to do in the remainder of this chapter, stop and ask yourself these questions. Does the release make sense? Does the release align with what I am seeing in the real world? Can I cross check the validity of this number or data set? This is how you have to think when faced with the constant stream of fundamental news and economic releases which cross your screens on a daily basis.

However, before moving onto the economic indicators themselves, let me touch on one common aspect which applies to all of them.

All these indicators are imperfect. They are all flawed. I could write a small treatise on each economic indicator and explain these flaws. But, just like data massage, this is a fact of life. Some of these indicators have been around for many years, and in some cases decades. To date, they are the best the markets have of gauging economic health. Some are more representative than others and one thing is for sure, they are ranked by the markets in order of importance.

Some indicators are extremely important whilst others less. Therefore, I have tried to rank them in order of importance as well. As you will appreciate it's very difficult to cover every indicator for every country. Fortunately, some are 'generic', such as GDP which makes things easier.

However, a GDP figure from China, the US, Japan or a top ten country, is always going to carry substantially more weight in the market than the equivalent number from a smaller economic power. In other words, an important number from a heavyweight economy will move the markets dramatically.

Some economic releases are country specific, such as the Tankan survey in Japan, the KOF in Switzerland or the ZEW in Germany, but regardless of how the data is structured or released, the underlying principles will be the same. Economic data is economic data.

The primary economic calendar I use is free and available from www.forexfactory.com as it is reliable, comprehensive, and reflective of how things have changed in terms of the types of data which is now reported.

For example, five years ago, the calendar would not have included any Chinese data. Neither would the calendar have included any releases relating to bond auctions. This is an example of how the markets have changed and shifted their focus and how the importance of economic data changes with the times. China's dominance is now recognised, so their data ranks alongside that of the US.

Bond auctions are now also important as they reveal underlying issues with sovereign debt, particularly in Europe. A further example of the economic cycle changing over time.

Two final points before we move on. First, when considering any release, always check the historical data which appears to the right of the release, using the chart graphic. This will display the last 12 or 18 months of data. This is the trend, which will put the latest release into context for you. This is important. Always view the release in the context of the trend over the previous 12 months.

Second, all releases are colour coded. The red releases are high impact, and will almost certainly move the markets. The orange are medium impact, whilst the yellow are low impact. The releases covered here are all high impact, tier one releases.

Of all the economic indicators we are going to examine in the rest of this chapter, GDP or gross domestic product is perhaps one of the most important, as it tries to provide a snapshot of the economy in one simple number.

GDP is widely used by virtually every bank and government as a key indicator. Governments will base their tax and spending plans on this figure. It is a figure which is closely watched by all the central banks, the IMF and the World Bank.

Central banks and governments also use this data as a benchmark for where the economy is heading.

In order to explain GDP I have taken the UK model, but most economies around the world all use a similar method. It is the number that matters, not its calculation. What is important is its relationship to market expectation, and to the previous number to see if there is a trend developing in the economy. In other words, how the release is likely to affect the currency which I will explain shortly.

GDP tells us whether the economy is growing or shrinking, and is generally based over the previous three months, therefore released quarterly.

If the number is positive the economy is expanding and if it is negative the economy is contracting. It is a complex number to calculate, and is generally measured in one of three ways, namely as output, expenditure or income.

Output measures the total value of goods and services produced across all sectors from agriculture to financial services and everything in between. In simple terms, imagine the country as a company and output is really everything it sells which produces income for the company or country.

Expenditure measures what everyone buys, you, me, the government, business etc., and again covers everything but also includes the value of exports minus imports.

The income method measures and calculates the income generated in terms of profits and wages.

In theory these three approaches should produce more or less the same number, but they rarely do and, in addition, each method of calculation becomes progressively more complicated. The output measure is the least complicated, as it involves surveying around 50,000 companies which is then augmented with additional economic data. Typically, this calculation will only have around 40% of the data required to provide the complete picture, but if the authorities waited until the figure had been calculated using both expenditure and income, the release would be so out of date as to be almost meaningless as an indicator of the economy.

Furthermore, the data is based on the previous three months, and by the time of first release the data is almost four months old, which is why it is considered a lagging indicator, albeit an important one.

There are ways around this problem, and in the UK the issuing authority is the Office of National Statistics, which like many other issuing bodies around the world, take the following approach, issuing the GDP in three phases.

The first phase is often called ‘preliminary’ and based on the simplest approach to calculating GDP, namely using the output data, which is a rough and ready guide. This is the release which generally causes most volatility in the market.

Some weeks later a revised GDP figure is released using a more rigorous approach based on expenditure, before finally a few weeks after, the final GDP figure is released.

This is the approach taken by virtually every other country. First there is the preliminary or flash GDP number, followed by the revised figure before the final GDP number is released. And each time giving the market a different number.

The interim and final release numbers tend to have less impact as the markets will have already factored in the news from the first release, so unless there is a major change, which is very unlikely, the impact of the interim and final numbers will be muted.

GDP numbers are quoted as a simple percentage, such as +1.5% or +3.2% or -0.6%. A positive number suggests the economy is growing while a negative figure tells us the economy is shrinking. Furthermore, whenever a number is released, whether GDP or any other release, there are three things we need to consider.

First, the number itself, is it negative, positive or flat and what is this saying about the economy. Second, how does the number relate to market expectation - is it better than expected, worse then expected or in line with market expectation.

Third, we need to see the trend for the data and consider the following. Is the economy growing steadily or perhaps too fast? Is the economy shrinking? Is the number a blip in a recent trend or could it be the first sign of a change in the economy? Is it much as expected and simply a continuation of the trend?

All these factors are extremely important and we need to check each one as the data is released.

In general terms a positive GDP figure will almost always be good for the currency of the country, as it indicates growth, a strong economy and the prospect of rising interest rates, thereby making the currency more attractive to investors.

But, as always it does depend on the figure. If the figure is good but perhaps not quite as good as expected, the currency may move lower temporarily as the market reacts. Perhaps the figure is good, but not as good as last time, and therefore could be the first signal the economy is slowing down.

The figure could be too good, and suggest an economy that is out of control, and therefore one that could potentially be over heating with a consequent crash landing resulting in a sudden reduction in interest rates. All these factors will play out on any release but particularly one as important as GDP.

If the GPD data is positive, in line with expectation, and generally in line with the current trend for the release, this should not surprise the markets. But, if better than expected, this is normally good news for the currency which should strengthen as a result.

Of the three GDP releases, the one that has the most impact is normally the first as it is 'fresh news' and can therefore surprise the markets, particularly the forex market. The second release is simply a revised version of the first, so is much less of a surprise, and finally the third is simply yet another revision of the first two, so it tends to have the least impact of the three.

As explained earlier, this is a generic indicator with all countries reporting GDP in much the same way. However, there is one country which stands out from the rest in their presentation of GDP which is Canada.

Canada is unique, in that it presents GDP on a monthly basis, instead of quarterly, which is the norm for everyone else. Canada does release a quarterly figure, but this is simply a summary of the previous three months data.

The net result is that for Canada each GDP release has the ability to surprise the markets, an important point to note when trading the Canadian dollar. So whilst GDP is a lagging indicator for most countries, for Canada it could almost be considered to be a leading indicator.

The CPI (Consumer Price Index), is a key economic indicator and measure of inflation and, just like GDP, one that is watched by all central banks and governments for signs as to the level of inflation in the economy, and is therefore a guide to future interest rates.

In simple terms the CPI is an economic indicator which attempts to show the changes in consumer prices over a given period, and all governments measure these in their own idiosyncratic way.

The data is generally based on a 'basket of goods' which are supposed to represent a cross section of goods and services, consumed or used by households in their normal daily lives. This basket of goods is created to signal whether prices are rising, falling or remaining flat and hence to be an indicator of inflation.

In the US, the CPI data is based on a basket of over eighty thousand goods and services which are then divided up into eight broad categories

The above list also includes some taxes, but ignores others. Each item in the basket is then weighted according to its importance and finally prices are averaged, based on this weighting. Just like any other index, such as an equity index, CPI is calculated using a base number, generally 100, fixed at a point back in time, which is then used as the reference point for all future calculations.

For example, if the index was established in 1984 (taking 100 as a base) and the index in 2010 is now at 250, then prices have risen by one hundred and fifty percent in that period.

So how is CPI reported around the world and what do we need to look for in this release?

First, virtually every leading economy in the world publishes their CPI data on a monthly basis. Second, this is generally reported in two ways. The first is called CPI, and the second is usually referred to as 'core CPI'.

Of the two, core CPI is generally considered to be the more important, and is normally shown in red on the economic calendar. The reason for this is the markets consider this number to be a more representative measure of inflation. This version of the CPI data typically ignores items such as food and energy as these prices can be very volatile and so distort the true picture of longer term inflation.

This number is therefore considered to be more accurate and the one policy makers consider more relevant.

So, when the CPI data is released, it normally comes in two versions, CPI and core CPI, of which core CPI is the one to watch.

Third, the CPI number is released as a percentage and not as an index number, so if it appears as 0.5% percent this means prices have risen 0.5% since the last release.

Fourth, some CPI releases are based on a month by month comparison, whilst others, such as China’s are based on a year on year comparison and this will be shown alongside the economic release, where it will say either m/m, meaning month on month, or y/y meaning year on year.

CPI is interpreted in much the same way as GDP and in much the same way as all the other economic indicators we are going to cover.

The first thing to note is whether the number is positive or negative? If it is positive then consumer prices are rising, and if negative then they are falling. If consumer prices are rising this is a good signal, as long as they are not rising too fast, which would suggest an economy running out of control with a possible slowdown and collapse into recession in the future. So a positive number for CPI is generally good for the currency, as long as it’s not too high, with the currency strengthening as a result.

Conversely, if consumer prices are falling, the question is whether we entering a recessionary period with falling interest rates which would be negative for the currency, and generally weaken as a result.

The next step is to check to see how the CPI fits into the overall trend against previous releases and, provided the number is in step, this too is a good sign. Finally, we check the number against market expectation to see whether it is better than, worse than or in line with what the market expected.

Provided it is as expectation or better, then this is usually good news for the currency, as higher interest rates are likely to follow in due course.

But, as always, too much inflationary pressure will be considered as negative by the markets. In addition, market reactions to these numbers, and indeed many others, is based on the market’s perception of how the data will be interpreted by policymakers. In other words, the direction the currency moves, will be partly based on the data, but also partly based on how the markets believe that data will be interpreted.

To complete the picture for CPI, there is one oddity which is the UK, which uses both CPI and RPI (Retail Prices Index) which are reported at the same time.

Of the two, CPI remains the more important and, is considered a better gauge of consumer prices and inflation, as RPI only measures goods and services bought for the purpose of consumption, although it does also includes housing costs, which are excluded from the CPI data.

Therefore, if you are trading the British pound the number to watch is always the CPI release, as the RPI number is always higher.

As you might expect, CPI data is considered a lagging indicator.

On the first Friday of every month in the US, at 8.30 am EST, comes the release of the most anticipated economic indicator. This is the big one, the Non Farm Payroll release or the NFP, issued by the US Department of Labor and gives the markets a snapshot of the jobs market (excluding the agricultural sector) for the biggest economy in the world. Furthermore, it is the one economic release which causes more volatility than any other. And it is the big one for several reasons.

First, it is an economic indicator for the largest employment market in the world.

Second, it is considered to be a leading indicator of the world’s largest economy as it is released monthly and therefore considered to be up to date. For example, the report in the first week in January is reporting the employment market for December and therefore gives a very close view of the current situation.

Third, it comprises four economic indicators in one release, so takes on added significance as a result.

Finally, jobs are the backbone of any economy and being the largest in the world the release takes on an increased significance, affecting as it does not only the US market but also the remainder of the world. As the saying goes, when America sneezes, the rest of the world catches a cold.

In other words, if the largest economy is not creating new jobs, ultimately this will affect the rest of the world, with a global slow down virtually guaranteed in the near future.

The NFP release is therefore extremely important and, as mentioned, comprises four economic indicators in one, with each piece of data related to unemployment or the jobs market in some way.

Of these four elements it is normally only two that are announced in the release as these are easy to absorb for the markets which react immediately.

These are the headline unemployment rate, and the number of jobs created or lost in the month. The headline unemployment rate is reported as a simple percentage, and is the total number of people who are currently deemed unemployed divided by the total workforce in the US. But, as I said earlier, whether this is true or not is questionable.

The first number to watch is the unemployment rate which will be quoted as a percentage and, as always we need to compare this against the forecast. Is it better or worse than expected or in line with expectations? Like all markets, the forex markets does not like surprises, so any dramatic change can create very strong moves in the US dollar.

Then we need to see how the numbers fit with the previous month’s data, whether it is better or worse and also whether it is following the longer term trend over the last six to twelve months. If the headline rate in unemployment is falling, this is signalling an economy that is growing with jobs being created. If it is rising this is bad news for the economy with jobs being lost and a potential slow down in growth.

In the US, consumer spending makes up around 70% of the US economy and therefore the jobs market is central to growth, affecting consumer confidence as a result.

As in any economy, if people feel confident and have security of employment, they will spend and the economy will grow. Conversely, if people feel insecure consumer confidence falls and the economy slows, and indeed consumer confidence surveys are yet another of the key economic indicators we watch.

The second big employment number reported, and probably the most closely watched, is the number of jobs created or lost since the previous month. This is reported as either a negative or positive number. For example, we could see a number of say 128,000 which is the number of new jobs created in the previous month. Alternatively, if the number is reported as -128,000 this would be the number of jobs lost in the previous month.

However, once again these numbers have to be judged against the forecast and the longer term trend so they can be put into context.

These are the two numbers that receive the most attention from the media and which are widely reported. However, beneath these two headline grabbing numbers there is a wealth of other data. This describes in detail how the jobs market has changed over the last month and these details take time to absorb and digest. This is usually the excuse given for the schizophrenic reaction in the forex markets where the US dollar will first move sharply in one direction, before reversing within the first 10 or 15 minutes of the announcement.

At the time of the NFP release, if the longer term trend for the dollar is down, the market is likely to move sharply higher on the news, only to reverse some minutes later. Conversely, if the longer term trend for the dollar is up, the market is likely to move sharply lower on the news, then reverse and resume the original trend once the dust has settled.

This type of reaction does not happen all the time, but once you become familiar with the NFP you will soon see it happens on a very regular basis. For intraday traders it presents plenty of trading opportunities.

The excuse given for the drama, is that the headline numbers causes the knee jerk reaction, while the second and subsequent response follows once the underlying numbers have been considered and digested, which may or may not be true.

The real reason is that this is one of the premier releases the interbank market makers use to trap traders into weak positions. For them it is just too good an opportunity to miss and indulge in a spot of stop hunting.

There are in fact four key pieces of data in this release and the remaining two are average hourly wages or earnings and the average work week. Both of these are extremely important, but receive much less attention as they require some effort to find within the report as they appear in tabular form. Earnings, of course, can be an extremely important indicator as this tells us whether families and households are likely to have more to spend, or less. In addition, it also signals if the economy is in an inflationary cycle with hourly wages rising, or is in a deflationary cycle with hourly wages falling. This information will have a direct impact on the prospects for interest rates since wages are one of the primary drivers of inflation.

The key here is the trend and, whether we are in a rising trend, a falling trend or whether the trend is just flat because it is a stagnant economy.

Finally, we have the average work week, which tells us whether people are working longer or shorter hours. And here, longer hours represent a growing economy with people working overtime whilst shorter hours worked represents a shrinking economy as demand falls.

Within the report there is the option to dig down and look at market sectors. However, for forex traders I would suggest the above numbers are sufficient and my top four within the NFP release. If you do have the time, the overtime hours can be an excellent indicator of future employment and likely GDP trends. Typically, overtime tends to fluctuate between four and five hours a week on average across industry sectors. If this is consistently above above 4.5 to 5.0, this is sending a strong signal of growth, job creation and strength in the economy.

In the last few years employment data, including NFP, has been the indicator most closely watched. Much more so than interest rates as employment (or lack of it) is considered the leading indicator for the health of the US economy. Therefore, with little prospect of interest rates changing, even in the medium term, jobs and unemployment have become the focus of attention for the markets.

As we discovered earlier, the importance and relevance of economic data will tend to ebb and flow. With the world still recovering from the financial crisis of the first decade of the 21st century, interest rate statements and decisions are currently no longer the most important item of fundamental news. Jobs have taken the top spot. Without job creation, nothing moves, and until the trend begins to rise, and rise significantly, interest rates will remain a low priority release.

For the time being NFP is the number one 'jobs' report in the world and its effect on the US dollar is as follows.

Under 'normal' circumstances, a strong report should drive interest rates higher, if part of a longer term trend upwards, which in turn would make the US dollar more attractive to foreign investors. These investors would get a better return on US Treasuries in the future, something China would welcome.

By contrast, a weak NFP release is likely to have the opposite effect, possibly signalling lower rates in the future, and making the US dollar less attractive for longer term investments to overseas holders of bonds and US stocks.

The second major report on employment in the US is the ADP. This is data collected from the payroll records of a private company called Advanced Data Processing, which is responsible for processing over 500,000 payrolls in the US, covering over 450,000 separate business entities and over twenty three million employees.

The payroll data it collects is used by the US Bureau of Labor to compile an employment report. This report is released monthly, and perhaps more importantly, is released two days before the Non Farm Payroll, so always appears on the Wednesday prior to the NFP data on Friday.

The ADP is therefore watched extremely carefully as it can provide clues to the more significant release two days later, and the reason for this is simple. The data in the ADP is based on actual payroll figures. In other words these numbers should more accurately reflect the state of the employment market, as Advanced Data Processing runs the payroll services for so many large organisations in the USA.

The ADP is just one number and represents the change in the number of employed people during the previous month, excluding farming and public sector jobs. As with all the other employment reports, a positive number indicates an employment market that is increasing with jobs being added thereby suggesting a stronger economy, whilst a negative number indicates jobs lost and a weaker economy.

The question about the ADP is whether it is a reliable predictor for the NFP data two days later and this is always a hotly contested point. My own opinion is as follows.

First, the ADP data is heavily biased towards private sector jobs, which make up just over 80 per cent of the data sample. NFP data on the other hand is based on a survey of business and includes government employees.

Second, the ADP release uses the US Labor Department data as a base line benchmark, who then adjust their numbers accordingly. Estimates are based on a statistical comparison of ADP growth rates to the Bureau of Labor payroll employment growth rates, whilst the Labor Department adjusts its numbers to account for new businesses that are not yet included in the survey, along with businesses that may have gone bust.

So both sets of data are far from perfect, but then we knew that anyway. In addition, both sets of data are then revised, sometimes weeks later.

In general terms, the relationship between the two is rather shaky and, having looked at the data over the last few years there appears to be around a sixty per cent correlation between the two.

As a very rough rule of thumb the NFP data is generally more accurate than the ADP, so if the numbers from the ADP are bad, we might expect the NFP data to be 'less bad'.

Equally if ADP numbers are good, we may expect the NFP numbers to be better.

To summarise. In my opinion, the best way to consider these two economic indicators is to view them in isolation and not to try to use the ADP report as a predictor of the NFP. Instead, consider the ADP indicator as more representative of private sector job creation and therefore a much better predictor of the true state of the economy.

Whilst the NFP release creates huge interest and volatility, it is in fact, more of a mix, a broad brush of the jobs market as it includes both the private and public sectors in equal measure.

To put this into context. In a recent release the ADP data reported gains of 368,000 jobs, whilst two days later, the NFP report came in with only 107,000. And, over the last two years there have been discrepancies of more than 200,000 on seven different occasions.

So ADP may be saying one thing, but it cannot be relied on to be an accurate barometer for the more significant release two days later. Given the discrepancies why is the ADP reported at all? The simple answer is that it was introduced to create an alternative subscription service paid report, which would then be used by professional traders and investors to forecast the NFP. However, to date this has failed to materialise and it remains a rather curious and isolated economic indicator.

Nevertheless, the numbers should still be watched and noted, but we cannot assume they will be an accurate reflection of the NFP two days later and may not even come close.

Next we have the unemployment claims, which is a weekly jobs report, once again in the US. This reports the number of new claimants who registered for unemployment insurance during the previous week, so this number will always be a positive one. The number simply reflects whether the trend in people registering for unemployment is rising or falling.

In general terms if the number is better than expected, in other words, lower than the forecast, this is generally good for the currency so the dollar should strengthen as a result. The reason is this suggests the economy is growing with the number of people registering for unemployment falling. Conversely, if the number is worse than expected this is usually bad for the currency as it suggests the economy may be running into difficulties, with the number of unemployed increasing as a result. As always, the number has to be considered in the context of the trend.

Having mentioned the ADP indicator earlier and its reliability, or otherwise, as a guide to the NFP data, the weekly unemployment claims are my preferred economic indicator to use for an insight into NFP, for several reasons.

First, they are produced by the Department of Labor and therefore use similar statistical methods to the NFP release.

Second, the unemployment claims are produced weekly and therefore prior to the NFP release we have a four week trend to consider in the run up to the release.

Third, and perhaps most importantly, they are seasonally adjusted which means they do provide a more accurate reflection of what is actually happening in the real word of employment in the US.

There is, of course, employment data congestion in the first week of any new month for the dollar, with the ADP release on the Wednesday, followed by the weekly unemployment claims often on Thursday, finally followed by the NFP on the Friday, so a plethora of unemployment news in three days.

To summarise. My advice is to use this report as your guide to the unemployment levels in the economy and to watch in particular, the overall trend.

There are, of course, employment indicators for other countries and currencies which mirror the NFP data. These are usually referred to as 'employment change' and here are the examples for Canada, Australia and New Zealand.

The Canadian equivalent is released early in the month approximately eight working days after month end, so the timing of the release will vary from month to month. Other than this the employment data the report contains is very similar to Non Farm Payroll, and again the two numbers to watch are the unemployment rate and the employment change.

Just as for the US employment data, the unemployment rate will be a percentage and reflect the percentage of the population out of work, and is therefore a key indicator of falling or rising employment. The second is the employment change which will be either positive if the number of jobs created has increased over the month, or negative if the number of jobs has decreased.

This is a big release for the Canadian dollar and, when it coincides with the NFP there is even more volatility for both the US and Canadian dollars. However, other than this, the same analysis applies for this economic indicator.

If jobs are being created at a steady pace and the unemployment rate is falling steadily, the economy is growing and interest rates are likely to rise in due course.

Any shortfall against the forecast or a sudden and dramatic change in the longer term trend may surprise the market and cause a temporary pullback in the trend. However, as a general rule if the data is better then expected this is generally good for the Canadian dollar, all things being equal.

As always with these numbers, job creation is a key indicator of the economic health of a country since consumer spending represents such a large proportion of Gross Domestic Product.

An alternative interpretation of the Canadian data is as an indicator for the US jobs market, given the strong relationship between the two countries in terms of exports. If Canadian growth is strong, this should be reflected in the US market and in the employment data. So always keep an eye on Canadian data as an early warning of changes in the US markets.

The Australian equivalent for unemployment and job creation is exactly the same as the Canadian model, the only difference being it is generally released around ten days after the month end.

Once again it follows the same model with the headline unemployment rate and the jobs created or lost being the two big numbers the markets watch.

Finally, we have New Zealand in this group which uses the same terminology for its release, only in this case New Zealand releases its data on a quarterly basis. Moreover, it does not release this data for a further thirty to forty days after the end of the quarter. So, compared with other countries, the data has to be considered a lagging indicator as it is almost four months old by the time the numbers reach the market.

Generally speaking, employment data is a lagging indicator, although it could be considered to be coincident, where the numbers are reported weekly. However, as always, the key is in the trend. No self respecting policy maker would consider a few weeks of falling employment claims as sufficient evidence of an improvement in the economy. Any falls may simply be for seasonal reasons and temporary, thereby masking the reality of the situation.

The last in this short list of employment relates to the UK, and here it is the National Statistics Office who produce the data and release a report called the Claimant Count Change. This is published on the second Thursday of every month. The data comes from a body known as Job Seekers Allowance, a government agency responsible for managing and paying benefits to people out of work, with the Claimant Count Change simply recording whether the number of people claiming benefits has gone up or down from the previous month.

Whilst this count is a useful economic indicator of one aspect of what is happening in the jobs market, it is far from being a comprehensive employment indicator as it simply measures the change in people claiming unemployment benefit.

Therefore, the data is a simple number, either positive or negative. If it is positive the number of people claiming benefits has gone up on the previous month. This is generally considered bad news for the UK economy and the British pound as it suggests a weak economy, low inflation and low interest rates.

A negative number confirms the number of claimants has fallen, and therefore the economy may be stronger with an increased chance of an interest rate rise in the medium term.

As always, the number has to be considered, not only against the market forecast, but also against the overall trend. So, if the longer term trend is falling and the number is simply following the trend, this is good news for the economy.

Similarly, if the longer term trend is rising and the number adds to the rising trend this is bad news longer term. In addition, there is always the chance the markets will be surprised with a number that is well above or below expectation, or well above or below the previous month’s figures.

A quirk of UK employment data is that details of the headline unemployment rate and the number of jobs created are not released in tandem with the Claimant Count. These numbers can be found, but only by visiting the National Statistics Office website.

This reporting method is odd, to say the least, and can best be described as the government’s attempts to manage market reaction.

This may change in the future, but this is the way it is as the moment. Furthermore, the reporting mechanism is out of step with other countries and currencies.

The Producer Price Index or PPI is another key measure of inflation in the economy, only this time one that is designed to measure from a seller’s perspective, rather than from a consumer perspective.

The CPI (Consumer Prices Index) economic indicator gives us a view of inflation and the economy from the consumer’s point of view in terms of rising prices, whilst the PPI aims to give a view from the manufacturer’s perspective, as it tries to measure the change in the selling prices for finished goods. This is also sometimes referred to as the Wholesale Price Index. In other words, PPI is all about the wholesale price for goods and services. And, whether the cost of raw materials are rising or falling in price which in turn are passed on to the consumer in due course.

The PPI data is usually presented as a simple percentage. For example, if the number is shown as +0.8% then prices of finished goods have risen by this amount over the month, whilst a negative number indicates they have fallen.

This economic indicator is therefore a strong barometer for inflation and deflation, as well as a good indicator for the broader economy. Rising wholesale prices suggest a strong and growing economy, provided rising prices are demand led. Remember they could also be supply driven. Meanwhile, falling prices would suggest a weak economy, with demand and inflation falling as a result leading to lower interest rates in due course.

As always, we need to consider three things. The actual number versus the forecast and whether it is on target, better than expected, or worse than expected. Furthermore, has the number surprised the market either by coming in much higher or much lower than expected. And finally, how does the number fit into the longer term trend.

As a general rule, if the number is better (higher) than expected, we should see the currency strengthen as a result, as this would suggest higher interest rates in due course to keep any inflation under control. A worse (or lower) than expected number is likely to weaken the currency, although if the longer term trend for the currency is higher this could simply result in a short term pull back.

The PPI figure quoted is often referred to as the core number, since food and energy prices are removed from the calculation. This is the same reason they are removed from the CPI release as food and energy prices can be volatile.

The reason the PPI release is considered a 'red flag' release, is that it is an excellent companion to the equally important CPI number. This is watched even more closely than the PPI, because it is assumed any increase in prices within the PPI index will automatically be passed on to the consumer and eventually be reflected in the consumer price index. Therefore, if the PPI in any country is announced in advance of the CPI data, this can offer an excellent opportunity to prepare a trading position based on the PPI data. So, a release to watch very carefully.

In the US and Australia, this economic indicator is simply called PPI, whilst in New Zealand and the UK it’s called PPI Input, and the only other thing to be aware of is the frequency of these releases.

In the US and UK the releases are monthly, whilst in New Zealand and Australia they are quarterly.

The major economic indicators examined so far are all based on simple numbers and percentages, so therefore easy to understand in the context of the release. However, I now want to turn to those indicators which are referred to as a diffusion index.

The PMI (Purchasing Managers Index) release is the first example of a diffusion index. A diffusion index is generally based on a survey, and in simple terms it measures the degree to which a change is 'spread out or diffused' in a particular group or sample.

The survey sample is asked if something has changed and, if so in which direction, allowing the survey group to answer in one of three ways. Things have got better, have got worse or have stayed the same.

In other words, the survey tries to establish if business conditions in a certain market have improved, declined or stayed the same over the previous month. The survey only ever has three possible answers which are, better, worse or the same.

A diffusion index is calculated by taking the percentage of respondents who reported better conditions than the previous month. To this is added 50% of the respondents who reported ‘no change’, and adding this number to the total. This is reported as an index figure between zero and one hundred. An index result which reports as fifty is saying an equal number of the survey said better, and an equal number said worse. The respondents who reported worse are not included in the equation.

Here is the formula used to calculate the index.

The magic number for a diffusion index is 50 which is seen as the fulcrum. At this number the survey is balanced with no bias either way. If it were at say, 75, this indicates a strong bias of the sample with a 'better' response. Conversely, if it were at 40 (as in our example above) the index is indicating the survey has largely replied with a 'worse' response.

If the index is looking at economic growth, any number above fifty would indicate an economy in expansion and below fifty an economy in contraction. 50 is therefore considered the tipping point.

A diffusion index will always register a number between zero and 100 and, just as with other releases, the trend is important. If the trend has been below the tipping point of 50, and starts to climb above this number, the index has changed from one reporting negative sentiment to one reporting positive sentiment (or whatever the index may be measuring). In general, diffusion indices are set up in this way, with above the line suggesting positive responses, and below the line suggesting negative responses.

In summary, those economic indicators which are classified as a diffusion index are used to determine the turning points in an economic or business cycle. The tipping point is the fulcrum which is the median point, reflecting changes in survey responses from positive to negative and back again.

Moving back to the PMI this is a barometer of the manufacturing sector of the economy.

The PMI or Purchasing Manager's Index is another key economic indicator, which in this case gives us clues as to the broader economy. The index is focused on the manufacturing sector of the economy, and is constructed from a large survey of purchasing managers working in manufacturing companies.

In the US, the PMI is released by the Institute of Supply Management, and every month the ISM polls approximately 400 of its members and covers a variety of industries. The purchasing managers are asked for their opinion on whether activity in their industry is unchanged, rising or falling. The assessment is based on a number of questions covering all aspects of manufacturing.

For example, the questionnaire asks the purchasing managers about new orders, output, hiring levels, exports and imports, prices for raw materials and supplies, supplier performance, and backlog of orders yet to be completed. In other words, all aspects of manufacturing from supplies and raw materials in, to finished goods out of the factory gate and on to customers. The index is then compiled from these responses and, of course, weighted. New orders carry the most weighting at 30%, down to inventories at 10%.

All the responses are then compiled to produce the PMI report and the level above or below 50 is the the key.

One of the many reasons this report is so closely watched is that the Federal Reserve is given access to the data, prior to its release. This tells us just how seriously this data is taken, although some traders consider it a low level release. It most certainly is not.

Second, the PMI in the US is released on the first business day of each month, so it sets the tone on how the manufacturing sector has performed over the previous month.

For major exporters and manufactures such as the US, China, Japan, Germany and many other countries in South East Asia and Latin America, this is a very important release, since exports are the building blocks of their economies.

In the US, a second and associated release comes two days later with the equivalent for the services sector which is the ISM's non manufacturing report. However, it is the manufacturing report which is the focus, for policy makers, traders and investors.

The next question is what are the levels that are considered to be 'defining' as far as the markets are concerned. And in essence there are three.

The first is any number above 50. Here we have evidence of manufacturing and the economy expanding, so anything above the fulcrum is all good news. The further we move away from 50 the stronger this sentiment becomes. Above 60 and the economy is expanding fast, but also in danger of running out of control.

It is at this point the Federal Reverse in the US would consider raising interest rates.

Below 50, the key number is around 42. If the release is between 42 and 50 we can assume whilst manufacturing may be weakening, the broader economy may still be growing, but perhaps not quite as fast as before. It could also be a possible signal of a slow down in due course. Remember the economy is like the oil tanker – it takes time to slow down and speed up. The monthly PMI will reflect the more subtle changes much more quickly as it based on 'the shop floor' – real numbers from real people.

Once we move below 42, it is likely that both manufacturing and the economy are contracting with a possible move deeper into recession. It is at this point the Federal Reserve would need to take action and reduce interest rates in an attempt to stimulate the economy once again.

The key point, as always, is that 'one swallow does not make a summer'. The release has to be seen in the context of the trend of the previous 6 to 9 months. A sudden surge above 60 is not necessarily going to trigger action by the Federal Reserve. However, if the index stayed above this level for an extended period, and the more sustained the trend, the more likely the FED will take action. The same philosophy applies when the index falls to 42 and below.

To put this report in context and its significance, the Federal Reserve always reference this release in their reports and updates on the state of the economy, as the effects and changes in this sector will ultimately filter through into all parts of the economy.

The central banks of Japan, China and other leading manufacturing countries also use this data as a key plank of their monetary policy decision making. Therefore, it is a very important number, and one which most countries release monthly. It is also closely watched by the bond markets for signs of inflation or deflation and associated changes in interest rates.

To recap, the non-manufacturing PMI which is released two days later, does not carry the same weight, but nevertheless is still one to watch and to take note of.

China, the world’s second largest economy, releases its PMI report on the same day as the US, and on the first working day of the month. So, this can be a volatile phase for currency markets.

Canada releases its PMI report around five days after month end and is known as the IVEY PMI as the data is compiled by the Richard Ivey School of Business.

Meanwhile, in the UK, the PMI report is released in three versions, often over three consecutive days, with manufacturing PMI coming out first, followed by construction PMI, and finally services PMI.

With regard to the UK it could be argued, that with a manufacturing industry in decline, construction PMI and services PMI might be more important. This may be the case for the UK, but elsewhere in the world the PMI data is a crucial number as it leads the way to GDP. So, please watch this report carefully and always check the longer term trend.

For the US any reaction in the US dollar depends on the trend. For example, any number over 50 should see the US dollar move higher, but only if it is part of a consistent trend. Any number below 50 and moving towards 42 should see the currency weaken as this may be signalling a possible slow down with traders and investors selling the dollar on the prospect of lower interest rates in the medium term.

Naturally, much will depend on where the economy is in terms of the broader cycle. An early expansion phase, coupled with a series of strong PMI releases, will simply reinforce the view the economy is picking up and expanding fast. Equally, if the market is moving into recession, and the PMI is moving to 42 and below, again on a consistent basis, the prospect of interest rate changes are greatly increased, and the reaction in the currency markets will be proportionately more volatile.

Japan varies from the rest of the world, as here the PMI data is released in a report called the Tankan survey, which is slightly different, so let me explain it in more detail.

The Tankan economic indicator is released by the Bank of Japan on a quarterly basis and is the equivalent of the PMI, but is reported in a slightly different way. For yen traders the Tankan is the indicator to watch for three reasons.

First, it is produced by the BOJ and therefore carries additional weight as it underpins the BOJ’s thinking on the economy.

Second, as Japan is such a dominant global force in manufacturing, this is a core release.

Third, it will indicate whether the BOJ is likely to intervene in the forex market to weaken the Japanese yen in order to protect their export market should the report suggest a weak, or weakening economy.

In addition, this report is also watched closely by businesses considering investing in Japan requiring yen investments, adding more reasons to buy yen, thereby pushing the currency higher as a result.

The Tankan report, now referred to as the Tankan Manufacturing Index and, prior to that as the Tankan Survey, reports both the manufacturing and non-manufacturing sectors. However, the one that is always watched is the manufacturing sector which is further sub divided into small, medium and large companies. However, the headline number is for large manufacturing enterprises which covers the conglomerate companies that make up the core of Japan's economy.

The report is constructed in much the same way as for PMI data in other parts of the world. In the report a large number of manufacturing and non manufacturing companies are surveyed and asked to rate the economy as better than, the same as, or worse than, over the preceding quarter to produce the diffusion index.

However, in this case the fulcrum point is zero, and we therefore have both negative and positive numbers. So above zero is positive for the economy with a positive number, whilst below zero and a negative number, is not good news for the economy and longer term outlook.

Although the Tankan is a quarterly report and not monthly, it is hugely influential, not only on the yen, but also on the global economy. In addition, it guides BOJ economic policy and potential interventions.

One final point. If the BOJ is responsible for preparing the report, is it possible companies complete their returns in such a way as to influence the bank and its monetary policy, for their own advantage? An interesting question, and one which is open to debate.

The Tankan has the highest return rate of all the diffusion indices at an amazing 98%. Is it fear of upsetting the Bank of Japan, or eagerness to ensure monetary policy is in line with what the companies themselves want?

Continuing with the manufacturing theme I now want to take a brief look at two other economic indicators, namely the 'Philly Fed' and the Core Durable Goods, both released in the US.

The 'Philly FED' manufacturing index, is another diffusion index which is released monthly, and compiled from a survey of purchasing managers from manufacturing companies in the Philadelphia region of the United States. However, unlike the other diffusion indices we looked at earlier, this one is reported in a ‘Tankan style’ index. There are both positive and negative numbers, with the tipping point being zero. Anything above zero is positive suggestive of an expanding economy, whilst below zero and a negative number is a contracting or stagnant economy.

As with many other of these types of indicators, if the data is better than expected and the trend is positive, this is likely to be positive for the currency, which in this case is the US dollar. Higher interest rates are also likely in the near future. Conversely, a poor release is likely to have the opposite effect on the currency with interest rates potentially falling in the future as the economy stalls.

Whilst the Philly Fed release is unique to the US market, it nevertheless carries a surprising amount of weight in the markets, despite representing a relatively small sample of the US manufacturing market. In addition, some of the sub indices within the report can also provide some insight into commodity prices, as do many of the other manufacturing reports giving us further clues to inflation and therefore interest rates.

The bond markets are also highly sensitive to both the PMI and the Philly Fed which is usually released in the middle of the month, so can either be seen as confirming the earlier PMI release or forecasting the next.

The last economic indicator on the manufacturing theme is another index, Core Durable Goods. This release tries to measure the change in the total value of new orders placed with manufacturers for 'durable goods'. These are generally considered to be those goods expected to last at least three years or more. The index excludes the transportation sector as this tends to distort the results.

This index is therefore looking at relatively high capital value items which is significant, since high value purchases are often the first items to be cut from budgets in any economic slow down. Therefore, this index is not just an economic indicator, but also gives us a feel for the strength of the economy based on these high value ticket items.

The data is reported as a simple percentage and therefore indicates whether orders have risen or fallen over the period of one month. A rising index indicates strength in the US economy with growing demand and increasing employment and with it the prospect of a rise in interest rates. Any positive number in a rising trend is generally dollar positive. Equally, if the index is falling with a negative number this is normally bad news for the dollar which may weaken on the news.

The Trade Balance economic indicator is another of those economic releases which can have a significant impact on a country’s currency. Furthermore, it is also a universal indicator which you will find reported around the globe, generally on a monthly or quarterly basis. And, it is one of those big numbers in every sense of the word.

However, what is a Trade Balance and what is the likely impact of such a release on the home currency? In simple terms, the Trade Balance is the difference between the value of goods a country exports, and the value of the goods it imports. If a country exports more than it imports it has a trade surplus, which is positive. But if a country imports more than it exports it has a trade deficit, which is negative. This is how the figures are reported when the data is released.

The release is presented either as a negative number to indicate a trade deficit or a positive number to indicate a trade surplus. And again there are three questions we need to consider.

The trade balance is important because when the economy is in recession exports are likely to be down so countries will try to export more in order to try to reduce the deficit. More exports generally means lower unemployment. In theory, when a country is importing heavily it is not creating employment, so changes in the trade deficit can reveal what is going on in the economy. In particular, if the country in question moves from being a net exporter to a net importer.

This is an issue that has come to the fore during this financial crisis and is the prime feature in competitive devaluation. Or, what the press call ‘currency wars’ or ‘the race to the bottom’.

While writing this book this is still ongoing, and shows no sign of abating. This is one of the ongoing features of the US and Chinese relationship with China refusing to strengthen the yuan, and the US authorities in return weakening the US dollar via quantitative easing. Therefore, the trade balance figures have a direct relationship to an individual currency’s strength or weakness.

There is also a further reason. If there is a trade surplus, or at least a trend to a decreasing trade deficit from the previous month, those countries buying products must convert their own currency to that of the exporter. This increases the demand for the exporter currency, thereby increasing its value. In other words the currency of the exporter country will strengthen in the currency markets.

Conversely, where there is an trade deficit or a trend to a decreasing trade surplus from the previous month, there is an increased supply of the domestic currency, which could in turn cause the currency to weaken.

Therefore, the Trade Balance Figures can give us an insight into the potential demand for the domestic currency, particularly where we see longer term trends changing from positive to negative, or vice versa.

In summary, the Trade Balance Figures can also give traders a valuable view on the economy of a particular country. Many countries with strong export markets, such as Japan, Germany, and China will always have a trade surplus.

However, this in itself is not necessarily a sign of a strong economy, as it is all relative to the trend. Moreover, the Trade Balance Figures can also be misleading, since it is the difference between exports and imports, so if both are rising the deficit or surplus will remain the same and the same would apply if both are falling. In either case we would see no change.

The key is to look at the trends and to try to draw conclusions based on the data in the following way. First, does the number reveal anything about the economy which might suggest a change? This could be signalled by a change from a surplus to a deficit, or from deficit to a surplus. Such a change would almost certainly surprise the currency markets, particularly if that country was normally a strong exporter. For example, Australia where the export market dominates and underpins the economy, which is relatively small. Therefore, a trade surplus is expected and is the norm. It does vary, but is generally positive.

However, if a trade deficit were to be reported for Australia, this would have a significant impact on the Australian dollar, since this would not only be a shock, but also signal an economy in trouble, with reduced demand for the currency as a result. This has occurred several times in recent years and in 2015 hit a record low of - 4214AUD million, before recovering into positive territory with a record high in 2016 of 4510 AUD million. Huge swings and reflected in the Australian dollar as you might expect.

The same effect would be seen in New Zealand for the same reasons. Another economy supported by a strong export market, so any trend of declining trade surplus, would start to send alarm signals to the markets.

However, any sudden shock may only be a temporary blip and, as always we have to view the data against both the forecast, the previous month’s figure and the longer term trend. Nevertheless, the Trade Balance Figure is one traders simply cannot ignore as its sends out so many signals regarding the health of the economy.

Virtually every major country releases their Trade Balance Figures on a monthly basis, with strong exporters such as China, Australia, Canada and Japan all running consistent and strong trade surpluses. As a general rule, countries with a strong trade surplus tend to have lower unemployment as export demand creates jobs and employment opportunities. By contrast, countries with a large trade deficit such as the United States and the United Kingdom, tend to have higher rates of unemployment.

Furthermore, countries with a consistently strong trade surplus will usually see their currencies strengthen as the currency is in demand by overseas buyers of their exports. Conversely, countries who run a trade deficit which may be increasing, are likely to see their currency weaken, relative to other currencies, since it will not be in such great demand.

This is the problem that faces the central banks of major exporting nations. This constant battle to maintain a weak or competitive currency which is driven higher by the natural flows of currency from overseas buyers. For some countries, such as Japan, intervention remains one of the key tools of currency management. For others, such as China, it is in maintaining a weak currency through the peg.

I now want to move away from the 'big' economic numbers and look at those which look more closely at specific sectors of the market, which provide more of a 'macro economic' view of the economy as a whole.

As I mentioned earlier, in the US economy consumer spending constitutes somewhere between 70% and 80% of GDP and, in simple terms if the consumer stops spending the economy goes into reverse.

This is what has happened during this financial crisis, so any economic indicator which measures consumer spending is a key measure. As the names suggests Core Retail Sales and Retail Sales measure the spending of consumers at the retail level and the difference between the two is quite simple. Retail sales includes all consumer spending, whilst Core Retail Sales excludes the sales of cars, since this can represent a large percentage of consumer spending and, being a volatile sector, can also distort the numbers.

As a general rule, Core Retail Sales will tend to have a greater impact on the currency markets, as it reveals in one number how consumers are feeling about the economy as reflected in their spending habits. This is then reported as a percentage increase or percentage decrease.

For example, we might see the number reported as 0.8% which shows consumer spending having risen by this amount over the period. Conversely, a negative figure indicates a drop in consumer spending. Naturally, a positive number is usually good news for the economy and for the currency it represents which should strengthen, as a result. A negative number is usually bad news for the currency, as it suggests a slow down in spending which is likely to be reflected in the GDP figures.

This is why these numbers are so important and considered to be leading indicators of the economy. These numbers can also be an excellent guide to the big GDP release which usually follows this economic release.

A further reason this release is significant, particularly the core figure, is that once again, like many of these economic indicators, it is one of the numbers used by governments and central banks to formulate both economic and fiscal policy, revealing as its does consumer spending patterns and therefore the health of the economy.

The US and Canada for example present the release as Retail and Core Retail Sales. Others simply release their retail sales without this refinement.

This doesn’t really matter in terms of the numbers but, where the release is not split out this way, the numbers tend to have a lower impact. Also Core Retail Sales are usually given a red flag. In other words, they are likely to have a high impact on the markets.

However, as always, the devil is in the detail, the trend, and the market's expectation. Once again, I cannot emphasize enough the importance of this release. Many currency traders simply ignore it, failing to recognise its significance.

It is only when traders begin to appreciate the extent to which consumer spending dominates the economy and ultimately GDP data do they begin to realise the significance of this release.

Once consumers stop spending, for whatever reason, the economy will grind to a halt, stop and fall into recession, with all the implications on interest rates, money flow and currencies as a result. Please watch these numbers carefully. They are not just another number. They are the key numbers for consumer spending in every country around the world.

Again many traders and investors ignore housing data, deeming it boring, dull, and generally of little use to the markets. This is wrong. If I were asked which numbers had the most relevance in forecasting the future for the economy I would say housing data. It is the one group of indicators which have the power to provide an insight into the broader economy and the reasons are as follows.

The housing market is crucial to every aspect of our lives and the economy. If house prices are rising, consumers feel confident. They spend more and they are also more likely to move, adding some churn to the housing market.

This activity is reflected throughout the economy. It is reflected in every sector and every area of the economy, from commodities, to jobs, to services, and to goods. If the economy is growing and healthy, the construction industry will be creating jobs to meet demand for new homes. Basic materials will be in demand, skilled labour will be required, and the pull through effect is seen rippling across all the other sectors of the market, as consumers spend with every sector from financial services to white goods feeling the effect.

So, the housing sector is a strong sentiment indicator. But, what really keeps housing and housing data so far ahead of the economy is the sensitivity of the market to changes in interest rates. After all, this is the first pinch point that hits consumers first. When interest rates rise or fall, this is normally reflected very quickly as residential mortgage rates change fast, either increasing or decreasing within weeks of any changes from the central banks.

If rates rise consumers start to feel this directly in higher monthly outgoings and sentiment can change very quickly. Equally, falling interest rates stimulate demand and sentiment changes and this is when the house builders start to return, releasing land and funding construction with cheap loans as interest in the housing market returns.

In many ways housing is similar and, indeed reflects the economic cycles we considered earlier in the book. Most housing markets around the world will go from 'boom to bust' and back again, generally leading the economy owing to their sensitivity to interest rates. Whilst some of the following releases are more significant than others, I hope I have made the point that housing and housing data is pivotal. NFP does grab all the headlines, but trends in housing can reveal just as much, if not more about the economy, and will also reveal changes in trend earlier and in many different ways.

The first indicator in our tranche of housing data is the New Home Sales, released monthly in the US market. It is generally considered to be a leading indicator of the housing sector, providing as it does, information on new homes sold in the period.

However, before considering this release in detail I just want to explain a little about housing data in general terms, because it is so influential and can have a dramatic effect on a currency when released.

The impact of housing data, when house prices are rising in a strong housing market, results in consumers feeling better off. They are likely to spend more, not only on the necessities of life, but also on discretionary goods and luxury items. This is all good news for the economy provided it isn’t being fuelled on a credit bubble.

Second, if the housing market is strong, this will create a pull through effect in other market sectors, not least in construction, but also in the financial services sector with lending increasing. This then filters through into the home renovation and DIY markets, and on into white goods, furniture and furnishings.

These sectors all help to create a strong demand for goods and services which all underpin the economy, supported by consumer confidence and spending, and jobs.

A strong housing market also tells us about consumer confidence, which in turn is all about jobs. If people feel secure in their job, demand for houses will increase with a consequent increase in house prices which continues to fuel spending, so is a cyclical event.

However, problems start when it all comes to a shuddering halt, as witnessed with the sub prime mortgage débâcle which was the catalyst for the current global recession, from which we are only just emerging.

Moreover, economic indicators in the housing sector can reveal both longer term problems in the economy as well as pick up signs of growth, as demand picks up on the back of increased demand for houses or mortgages.

The first housing indicator I would like to consider is the New Home Sales, which is collected by the US Census Bureau and, as the name suggests, is based on the sale of new homes. However, what is interesting about this data is the criteria for what constitutes the sale of a new home.

In this case it is when the sales contract has been signed or a deposit accepted whilst the house itself can be at any stage of construction, from being off plan (not yet started) to complete and ready to move in. However, for the purposes of the report it is generally agreed around 25% are complete and ready to move in whilst the other 75% in the report are in various stages of completion. In simple terms this indicator is one of 'intent to buy' a new house, with the sales contract used as the determinant.

If the above figures are correct, New Home Sales should be a good indicator of economic growth in the future, and an equally good indicator of any slow down in the economy since the basis of the data is on the sales contract not on the construction itself.

When consumers are confident, the trend will be rising along with the economy, and when consumers are worried the trend will be falling. In simple terms, we don’t need to see house prices necessarily rising to have a strong economy. However, we do need to have activity in the market and this is what the data is telling us, with this activity being converted into sales and increasing demand moving forward across sectors, from construction to finance and furnishings.

Although the number released is a monthly one, it is then annualised. This is a common practice with many economic releases, and simply means it is multiplied by twelve. So the number released for the US market is anywhere between 200,000 as a low, to 1.5 million at a peak but, as always it is the trend that matters as well as the number itself and its relation to the previous month.

Furthermore, this indicator is all about the trend, as the longer term trend more closely mirrors the longer term ups and downs of the economy. As a result, once the trend starts picking up, with any number coming in better than expected, this will be seen as positive for the US dollar. Equally, a poor number will tend to be bad news for the currency which may weaken as a result.

In a nutshell, a strong number gives the markets and administrators many clues about consumer spending, consumer confidence, and the longer term outlook for the broader economy.

The second of our housing economic indicators in the US is Pending Home Sales, which in this case is prepared and released by the National Association of Realtors, and is published on a monthly basis for the US market. This release generally appears towards the end of each month.

Once again it is the longer term trend here that is important as this release is also a leading indicator of activity in the housing market. This in turn is likely to translate into economic growth as the ripples from activity in housing move out into a wide number of market sectors.

This release measures contract activity in the existing home sales market, as opposed to new home sales. Therefore, these are sales of existing, preowned homes. The data here is reported as the change in the number of pending home sales and appears as a percentage change, so we may see a figure of –2.2% with sales falling during the month, or +3.1% representing an increase in sales during the month. As always, it is the trend that matters and the question is which of these two reports carries more weight.

This is a difficult question to answer since both New Home Sales and Pending Home Sales are leading indicators of the economy.

However, of the two I would suggest New Home Sales is probably more important since this encompasses the construction industry and all the ancillary services that are part and parcel of house building.

After all, activity in the existing home market can often be stimulated by cheap money. Furthermore, activity in the new homes market also reflects corporate activity from major house builders and developers and these companies are unlikely to be building new homes for speculation.

Therefore, construction in new homes carries more corporate significance than in pending home sales, which may be based on pure speculation and not economic growth. This, in my view, is an important distinction.

However, the important point to note about all housing data, wherever it is reported around the world and in whatever format, is this. Housing data is really a production figure and, by that I mean it tells us more about business confidence and how the house building sector is viewing the future. Existing home sales are more a measure of sentiment. If consumers are happy to move home, generally this is due to a rising market, with security of employment, and rising house prices driving the desire to move. However, the impact of these moves is relatively limited on the overall economy. What the data reveals is sentiment.

On the other hand, New Home Sales are more a measure of confidence by the major house builders, who never build speculatively. This release could be viewed as a 'manufacturing index' for houses, which will ultimately have greater significance and impact on the economy. After all, they also generate jobs,

The effects of housing data on any currency are relatively muted and, as a general rule, should be viewed as longer term indicators of changes in underlying economic trends, and signs of potential reversals from boom to bust and back again.

The next indicator in this section is Building Permits which is released both in the US and Canada on a monthly basis, although the data formats are slightly different.

Building Permits is an important release as regardless of where we are in the world no building can be constructed, legally at any rate, without formal approval from the regulatory planning authorities. In the US and Canada these are referred to as Building Permits, and the data released relates to residential permits only, so excludes commercial data.

A Building Permit is the first step in any construction process before the first trench can be dug or brick laid on site. In the context of the economy, if New Home Sales was an important indicator, Building Permits is even more significant as nothing can start without one.

If the number of Building Permits are rising month on month this is a clear signal the first stage in an economic recovery is under way, or simply a confirmation of a strong economy with a boom in house construction.

Therefore, a great leading indicator of the longer term economic outlook. If this number is falling or is weak, clearly the economic outlook is weak and it is not good news for the currency, as a result. If the number is strong with a positive trend upwards this is an excellent signal and on release, the currency should strengthen as a result.

As I mentioned, these indicators are released in both the US and Canada. In Canada they are released in terms of the value of Building Permits issued during the month which are then converted to a percentage. For example, the Canadian authorities might issue permits with a value of 5.8 billion Canadian dollars which is converted to a percentage change, so a simple positive or negative percentage change will be reported.

In the US the equivalent indicator is released as a number which is annualised in much the same way as for New Home Sales. In other words, multiplied by twelve, Here we will see a number from 200,000 up to 2 million and beyond, when construction and the economy are booming.

As always, it is the trend that matters here and, if we have a nicely rising trend with good figures, the currency should strengthen as a result. Conversely, a falling trend with poor figures indicates a weak economy and weak corporate picture which is generally negative for the currency.

A sudden change can also surprise the markets although they will generally revert back to the trend once the news release is over.

In Canada the Housing Starts are the equivalent to the US New Homes Sales. This figure represents the number of new residential houses started in the previous month. Once again this figure is reported in an annualised format. A single figure is therefore reported and confirms the number of new houses under construction. Just like the US data it is extremely important to the Canadian economy and, of course the Canadian dollar.

If the economy is doing well the trend in Housing Starts is likely to be rising and, provided the release is in line with the trend, the Canadian dollar should strengthen, particularly if the number is better than expected. Equally if the number is bad and continues a trend lower this is signalling a weak economy and therefore is not such good news for the Canadian dollar.

The Housing Starts is considered a leading indicator of the Canadian economy. It is an indicator which is carefully watched by both the central bank and the government and is widely used in both fiscal and monetary policy decision making as a result.

Moving to Australia it is the Building Approvals which gives us an excellent guide to the Australian economy. This data provides us with another leading indicator for residential housing construction with the planning application and approval, the first step in any new house building projects.

Strong growth in new approvals is an excellent guide to both the current and future economic outlook. Construction in housing leads the way and ripples through into many other sectors of the economy, from construction to home furnishings, as well as financial services, which in turn leads to strong consumer spending.

The Australian data is presented as a percentage change of total approvals given for the month, so we get both positive and negative numbers depending on whether the trend is rising or falling. A positive and rising trend is always a good signal to the longer term economy and if the number is better than expected the Australian dollar should strengthen on the prospect of rising consumer spending and an increase in interest rates in due course.

Conversely, if the trend is falling this could be indicative of a weakening economy. An economy which is likely to slow resulting in lower consumer spending, falling inflation and lower interest rates as a result.

The headline number which is reported for Building Approvals is the seasonally adjusted percentage change in new building approvals from the previous month. It is usually released around 40 days after month end by the Australian Bureau of Statistics so always runs a little behind the others, but nevertheless is one to check and monitor.

The equivalent in New Zealand is called Building Consents, and this is another great economic indicator of strength or weakness in the economy with construction leading the way as new building consents are approved for new build projects.

Like the Australian data, the New Zealand number is released monthly, after month end, but takes between thirty and thirty five days to be appear. Nevertheless it is another excellent guide to the underlying economy and future outlook for growth and consumer spending.

Once again the trend is everything, so provided the number is good and the trend is rising, the New Zealand dollar should strengthen on the release.

Equally, a weak number or shock in a falling trend is likely to weaken the New Zealand dollar on the prospect of a slowing economy and falling interest rates in due course.

Once again the Building Consents number is reported as a simple percentage change and is therefore either positive or negative.

Finally in this section on housing indicators I would like to mention data which is related to the housing sector, namely some of the economic indicators related to loans and mortgages.

This associated housing data in the form of loans and mortgages is where the current financial crisis first started. It was the problems in the US sub prime market (high risk loans) which was the trigger. It is the fallout from these instruments which is still causing so many problems to the global economy.

Credit bubbles and defaults are nothing new. Japan’s problems all stemmed from cheap money fuelling a debt and housing bubble. These same problems are appearing in some of the powerhouse economies with China a classic example. Here too low cost loans are fuelling a property bubble.

The easy availability of relatively cheap loans and mortgages can be a double edged sword. On the one hand they will help to drive a positive trend in economic prosperity, consumer confidence and activity in the housing market, which filters through into all other sectors. However, this can create a bubble and what is never known is when this bubble will burst.

In the UK one of the economic indicators to watch is the Nationwide HPI release. This is a monthly report which looks at the change in house prices, but which is based on mortgages provided by one of the largest providers, the Nationwide Building Society, and is referred to as the House Price Index or HPI.

In general terms, rising house prices suggest a strong economy with consumers feeling better off and therefore prepared to spend more to keep the economy moving. However, falling or stagnant house prices will indicate the reverse and, as such, any movement in house prices is generally considered to be a leading indicator of the broader economy.

Higher house prices nearly always suggest an expanding economy, while falling house prices are suggestive of an economy in contraction. House prices can therefore be a good early indicator of inflationary pressure which could lead the Bank of England to raise interest rates in order to ensure inflation is kept in check.

The headline number reported is a simple percentage increase or decrease in the monthly house price index and, if the number is better than expected and is in a rising trend, this is generally good for the British pound which should strengthen. Conversely, if the number is worse than expected and in a falling trend, this is likely to be seen as bad news for the economy and inflation, with a consequent weakening of sterling.

In the last few years in the UK, house prices have been stagnant or falling with the monthly report coming in with numbers both above and below the median level at zero and therefore this indicator has tended to have little impact recently. This is a perfect example of how the weight of an economic indicator can change depending on the economic cycle.

The reason is simple enough. We are in a recessionary period so no one expects house prices to rise and, certainly not develop a trend in the short term, and coupled with uncertainty over Brexit. Therefore, the impact of this indicator will be muted as the market’s focus is on shorter term leading indicators such as the jobs market and any agreement with the EU.

However, once a recovery gets under way this report and others reporting house prices and lending will increase in importance, in much the same way as interest rates themselves which increase and decrease in importance within the economic cycle.

So the Nationwide HPI report is one to watch when trading the UK pound, but it can have a reduced impact depending on where we are in the economic cycle.

The Halifax HPI is another house price for the UK housing market, only this time released by the Halifax Building Society.

Like the Nationwide it is based on house price data from their own lending over the last month and in many ways confirms the Nationwide HPI index.

The two reports are both released monthly and generally appear within a few days of one another so whichever comes second is likely to have less impact than the first as they are both essentially reporting the same economic news i.e. house prices, but just using different sources of data.

Therefore, unless there is a huge discrepancy the markets will generally not react strongly to the second release as both companies are large lenders and therefore their statistics and results should be similar. Once again this is considered to be a leading indicator and is reported as a monthly percentage change which will be either a negative or positive figure. As always with house prices and housing data it is the trend which is important and the best way to view this release is merely as a confirmation of the Nationwide HPI, or vice versa whichever comes first.

The Home Loans Report from Australia is another key economic indicator for the housing market and the release reports the change in the number of new loans for residential properties during the month. Once again it is considered to be a leading indicator of the Australian economy and is released by the Australian Bureau of Statistics. It is an extremely important release since it is closely watched by the central bank, the RBA, for signals on the economy and therefore future decisions on monetary policy and interest rates. As a result this release always produces a strong move in the Australian dollar.

The number released is once again the change in the number of new loans issued for owner occupiers in Australia and is therefore reported as a simple percentage either as a negative or positive number every month.

Therefore, a positive number indicates a rise in the number of loans approved and a negative number indicates a fall in the number of loans approved. As always, it is the trend which is important, and this is what the RBA will also be watching to guide their decisions on any future interest rate decisions.

If the number is better than expected and is in a rising trend, this will generally be positive for the Australian dollar. Conversely, a poor number or, a worse than expected number, will tend to weaken the home currency, as this is suggesting a slowing economy and the likelihood of falling interest rates.

I would now like to move on and explain a type of index known as a composite index. Earlier in this chapter we looked at data based on a diffusion index, those types of economic indicators which have been designed to show us potential turning points in the economy moving above and below a tipping point at fifty.

By contrast, a composite index is a release which provides a quantitative measurement of economic strength or weakness and, as such a composite index differentiates between small and large overall movements. They are often referred to as volume indicators in terms of economic activity as the data is presented in a bar chart format so we see both volume by the highs and lows on the chart, as well as the trends in economic cycles with peaks and troughs as these highs and lows form. Therefore, in a composite index the data is presented from a baseline of zero with a bar, unlike the diffusion index which oscillates around the tipping point of fifty. In other words a composite index is presented as an histogram.

The main aim of a composite index is to measure the tempo and magnitude of economic fluctuations, and here are some of the more important composite economic indicators starting with the CB Consumer Confidence Index which appears on the US economic calendar.

This is the first of our composite economic indicators and the reason I have chosen this one is that it is simply one of the most important. Having said that, like all economic releases their impact will vary according to where we are in the broad economic cycle.

The CB Consumer Confidence Index is released by a private non profit making company called the Conference Board on a monthly basis in the US. This is a company that specialises in a range of business data for members and, with almost half the fortune 500 companies now subscribing to their services, this is a highly respected and regarded economic release for three reasons.

First it is released monthly, so is considered to be a leading indicator of the economy. Second it is based on real responses by real people and is all about consumer confidence. Put simply, if consumers aren’t confident, they won’t spend and if they won’t spend the economy eventually slows and grinds to a halt. So once again the trend is important with this indicator.

Finally, this indicator is also closely watched by the Federal Reserve. It is an indicator which they use to formulate monetary policy so is hugely important and demands close attention.

The CB Consumer Confidence report is released monthly in the US on the last Tuesday of each month. It is one of the most watched indicators of this type, as it provides a clear view of the US citizens’ attitudes to current and future economic conditions. But, what does it measure and how is it constructed?

The survey is derived from a survey of over five thousand households and is designed to determine the financial health, spending power and confidence of the average American consumer. In essence, the survey aims to discover how consumers feel about jobs, the economy and spending.

These responses are compiled and translated into a single figure which is released as the index figure of the month. When the American consumer is feeling ultra confident about the future and happy to spend, the index is likely to rise well above 100. For example in early 2000 the index reached a high of 144, before falling to a low of 25 in 2009 with confidence and spending at an all time low as the US economy ground to a halt.

The strength of this type of index is that, not only do we get a headline number to compare to the forecast and previous month figure, but there is also a trend which is seen on the histogram. The histogram gives us the economic highs and lows in a vivid and visual way.

To summarise. The CB Consumer Confidence report is a very important leading indicator of what the average Joe in the US is thinking and doing with their money. It reveals confidence (or lack of) in the future and therefore future spending plans.

Whilst the headline number is important, it must be considered in the context of what has gone before and where it is in the cycle. Consequently, if the index is giving a reading in the mid fifties or low sixties but trending up, and in the past we have seen highs of well over a hundred, we can assume the economy is recovering, but has a long way to go. In this scenario, interest rates are unlikely to rise in the short term.

Conversely, once the index reaches an extreme this can signal the end of a growth phase in the economy with interest rates high and likely to fall as the economy and consumer spending slowing, as a result. An economy in boom, but now preparing to burst.

However, as the economy strengthens, with the index moving higher, expectation of an interest rate rise will also increase. In addition, if the trend on the index is also rising and a good number is released, which is better than forecast or even surprises the market, this should be good news for the dollar with strength in the currency as a result.

Equally if the trend is rising and a poor number is released this is likely to be seen as bad news deferring any interest rate increases and sending the dollar lower as a result.

However, this release has many detractors and reasons include that the response rate is thought to be poor, with on average around only half of the survey responding within the required time. Indeed, a month or so later, a revision is published which includes those respondents who failed to meet the deadline, but there is rarely any significant difference between the two.

Second, and perhaps more importantly, there is always an ongoing debate about the accuracy and relevancy of such indices. Indeed, when two similar reports are released, they often vary enormously. The reason for this is survey respondents vary in lifestyle and income, so surveys place different emphasis on certain questions. Finally, survey groups are often quite small, which also begs the question of why anyone would want to be in a survey anyway? Do surveys attract a certain type of person with a certain type of character? This leads to the issue of bias, so these types of releases are far from perfect.

Notwithstanding, the CB Conference Board is one of the more respected, having been issuing this data since 1967.

Our second example in this category is the UoM (University of Michigan) consumer sentiment report, another of our composite economic indicators which ranks alongside the CB index. It is another of the economic indicators which gives us a view on how consumers in the US are feeling with regard to their future spending plans and their outlook on the economy in general.

Once again this report is produced monthly but, in this case we get two bites at the cherry, with a preliminary number which is released around the middle of the month, followed by a revision which comes out two weeks later. However, as you would expect it is the preliminary number that carries more weight and has more impact.

The report is prepared by the University of Michigan and has been around since 1946. This survey is based on a much smaller sample of consumers, generally around five hundred, so is a tenth the size of the more significant CB Consumer Index which is based on around five thousand. However, many market experts believe the UoM is a more accurate predictor of sentiment than the CB index. The reason for this is the sampling method used by the index which is based on a rotating system whereby every month 60% of survey respondents are new, whilst only 40% are included twice. The UoM also carries the label of being provided by an academic and august organisation.

Whatever the views, the UoM is an important release, and the data is presented in the same way with a headline number which reflects the level of the sentiment and presented as a bar chart. This gives us a view on the economic trend and where we are in the cycle as viewed by consumers and their willingness to spend, or otherwise.

As always, it is the trend that matters and the CB index coupled with the UoM index, should correlate positively. However, there can be a variation between the two. So if the CB comes out first with a good number that sends the US dollar higher, then the UoM should confirm this view and reinforce this dollar strength provided there are no shocks or surprises. Once again, the index is viewed as a leading indicator of consumer sentiment, and therefore a guide to future interest rates, inflation and the broader economy as a result.

If the number is better than expected we should see the dollar strengthen on the news, provided this is in a rising trend and in line with the trend. Conversely, if the index comes in worse than expected the dollar should fall, particularly if the trend is lower.

Moving to Europe and here the most important economic indicators are those which relate to Germany. Not only does Germany sit at the heart of Europe, but its industrial strength and strong export driven economy is currently propping up the euro and the entire Eurozone.

As far as key economic indicators for Germany it is the IFO Business Climate Index which is the one to watch as it carries considerable weight, for a number of reasons.

First, it is produced by the Institute for Economic Research and therefore carries the stamp of authority from a learned body.

Second, as an indicator for German business if the economy in Germany begins to struggle, the rest of Europe will be in recession. It's that simple.

Third, the index is based on a large sample size of over seven thousand businesses and is therefore a comprehensive survey.

Finally, this is one of the economic indicators most closely watched by the ECB and used by them as part of their decision making process for monetary policy in Europe. So, a key number which always moves the euro.

The IFO indicator is released monthly and the survey encompasses businesses across the entire market and business sector, including manufacturers, wholesalers and retailers, so is thoroughly representative.

In the survey, respondents are asked to rate the outlook for their businesses over the next six months, so is an excellent guide to the future of the economy. This is the reason why it is considered to be a leading indicator and therefore carefully watched by the ECB.

However, we need to be careful in making comparisons over the longer term historical trend, because the base year for the index, which was originally 2000, was changed in 2011 to a base year of 2005.

In other words, instead of the year 2000 being the base index of 100, 2005 is now the base index year. The consequence of this change is the headline number for the index has increased by around five points on a monthly basis. This has to be kept in mind when making comparisons.

The IFO is normally released around three weeks after the month end and, as mentioned earlier, is the one indicator that will always have a big impact on the euro. If the number is good and confirms a rising trend this is signalling positive confidence in the business sector. The market can expect increasing consumer demand, with the possibility of rising inflation and consequently the prospect of higher interest rates in the future.

However, one of the main problems for the ECB is in trying to keep inflation under control by raising interest rates, they do not strengthen the euro as a result and choke off the German export machine. An export machine which is so critical to the European project, and to the survival of the euro, overall.

This factor is always an ongoing problem for the ECB. However, it should also be noted Germany is one of the few countries in the world which has always welcomed a strong currency.

If the IFO number is worse than expected, or surprises the market by coming in weak, expect to see the euro fall, as a result. However, if this is just a blip in an otherwise strong trend higher, this may simply cause a short term reaction in the euro before the trend is re-established once again.

As an aside, you may find it strange that in all the red flag economic indicators we have covered so far in this chapter, this is the first one for the euro. In many ways, this is symptomatic of the euro and the Eurozone, which in reality is no more than a loose collective of nations with no unified approach other than in a variety of treaties and agreements. It is therefore no surprise none of the many country specific economic indicators are considered important enough to warrant a red notification in the calendar. This is why there are so few economic indicators considered important enough to have a direct impact on the euro. However, the section on second tier indicators (coded orange on the Forex Factory website), is where we find a whole clutch for the EU and covering all aspects of the European economy.

France is the only other country with sufficient mass of both population and economy to have an effect on the euro or ECB economic policy.

The German IFO release is one of the most anticipated pieces of economic data to be released in Europe, as the German economy is seen as the bellwether for the rest of the EU. One of the reasons this release is so keenly awaited is the speed with which the data is collected and reported. The data is released in the same month the survey is conducted. Therefore, a true leading indicator in every sense of the word.

What is also interesting about this indicator is that over the years it has shown a close correlation with the equivalent ISM report from the US, with the two generally reporting similar trends and numbers.

As a speculative trader it is always worth bearing this in mind, as one report is likely to give you a 'heads up' on the associated release later in the month. The German IFO release generally appears around 3 weeks into the month.

Moving to Switzerland and the Swiss franc where, once again, there is an important composite index which is a hybrid indicator. It is a composite of various economic indicators, but one which is based on an amalgam of data from both business and the consumer. This is then combined into a single headline number which is reported in a diffusion format, with the indicator reporting either a positive or negative number.

In the case of this indicator the tipping point is zero (not 50), and the reason this economic indicator is so important for the Swiss franc is twofold.

First, it is prepared and released by the KOF, an economic research establishment in Switzerland and, second it is used by the Swiss National Bank in decisions on economic policy, so it is an important indicator.

The KOF has been designed to forecast economic growth over the next six to nine months with the index created from surveys across all business sectors, and it also includes consumer confidence and housing data.

In many ways the KOF is an odd index, but in terms of its relationship to the currency the reaction is as expected. If the number is better than expected and in a rising trend of optimism, this is likely to be bullish for the Swiss franc but if the number is worse than expected and in a pessimistic trend, this is likely to be bearish for the Swiss franc.

The second German indicator to consider is the ZEW economic sentiment indicator which delivers another key number for the euro.

The ZEW provides further data on the German economy and is released monthly. This economic indicator is another from the diffusion index stable, and is based on a survey of both institutional investors and analysts. The survey covers all areas of the economy including exchange rates, stock markets and inflation.

Like the IFO, this is a highly respected indicator, as the index is prepared and released by the centre for European Economic Research and is based on a large sample of over three hundred and fifty respondents. The respondents are asked to rate the economy and their outlook for the next six months.

It is considered to be a leading indicator for the Germany economy, the most important in Europe. The survey data is converted into a diffusion index which, in this case, has a tipping point of zero, with above the line representing optimism and below the line representing pessimism.

The index is reported as a single headline number which is either positive or negative and which can be anywhere between minus fifty or sixty to plus seventy to eighty depending on the economic outlook of the analysts.

The investors and analysts may of course be wrong in their view, but they are given credence by virtue of their experience and knowledge of the markets. Therefore, the sentiment for the economy expressed in this index carries a lot of weight in the market.

In general, if the number is better than expected and in a rising trend above the zero line the euro is likely to strengthen, and if the number is weak and falling or even below the zero line the euro is likely to weaken. However, as always with the euro, traders are at the mercy of the ECB and its political masters.

Moving back to the US and to a curious economic indicator known as the TIC long term purchases. The relationship this economic indicator has with the US dollar is not straightforward. At times, it can spark a strong reaction in the dollar, while at other times the release passes by unnoticed by the markets as they wait for the next item of news. Despite this behaviour it is still considered a tier one or red flag item of news on the economic calendar.

TIC stands for Treasury International Capital and this indicator measures whether there has been a net outflow of US dollars, or net inflow into the country. As result, it should logically affect the strength or weakness of the US dollar. Moreover, the indicator is also making a statement about overseas confidence in the US dollar as well as giving information about longer term investment returns.

Here is an example of the data which is incorporated into the TIC. When a non US citizen wants to buy US shares or bonds, the home currency has to be converted and US dollars bought. Conversely, when a US citizen wants to buy foreign securities US dollars have to be sold and converted.

It is these transactions which the TIC is measuring on a monthly basis and presenting the difference between the two. In effect, if more dollars are bought than sold, this is bullish. Whereas, if more dollars are sold then this is bearish for the currency.

The headline figure which is reported can be either positive or negative, depending on whether there has been more overseas buying from US investors, or from overseas investors buying in the US. Generally however, this number is positive as there are usually more investors buying US dollars than selling, but negative numbers have been recorded from time to time.

Therefore, the headline number presented in the release, such as +140.5 billion is the value of US dollar assets bought by overseas investors during the month. A positive number, signals more capital is coming into the country than is flowing out. In other words, demand for US assets from overseas buyers was strong, and outweighed the counterbalance effect of US buying in overseas markets. This sends several signals to the market, not least of which is the fact that confidence in the US dollar remains strong and returns on these investments are seen as positive in the longer term. This, in turn, is seen as dollar positive and the currency should strengthen as a result.

If the number is negative, which has happened from time to time, this is signalling a lack of demand for US dollar assets, with US buying overseas outweighing overseas buyers of US assets.

This is likely to see the US dollar weaken as it is suggesting a lack of interest in these assets and consequently weaker demand for the currency.

The report is published by the US Department of the Treasury and, as mentioned earlier, this release can have a mixed reaction in the dollar. Normally, if the figure is positive and high this should see the dollar strengthen, whilst a weaker figure may see the dollar decline. However, this is a difficult indicator to read as it lacks any consistent and logical market reaction. Part of the reason for this lies in the balance and make up of the various overseas investors.

The report actually distinguishes between the various types of buyers of US assets and whether they are governments and financial organisations, or private investors. Of course, some of the largest overseas investors are The People's Bank of China and the Bank of Japan, to name just two.

China on its own could move the market in US Treasuries as its holdings are so large. This is one of the reasons it is so difficult to forecast and interpret the monthly release, since a small change by the Chinese, either buying or selling, would have an enormous impact on the data and send it rocketing one way or the other.

As a general rule, the markets like to see a strongly positive figure, which is signalling confidence in the US dollar, particularly where the bulk of the investment has come from central banks and governments. In addition, this is also a measure of the US’s ability to cover the monthly trade deficit and the logic here is that if this is the case, there is no need to weaken the dollar on the release.

So far in this chapter I have concentrated on those releases which are considered to be tier one or 'red flag' announcements. In other words, those which are likely to have a significant impact on the market. However, at this point I would like to stress the following.

First, although I have concentrated on the US markets, every country around the world will have its own releases, which will follow the same principles and have the same reaction in the market, and my purpose here has been to give you the insights into the various types of releases, and their associated market reaction.

Although this can then be applied to other regions around the world, do bear in mind when considering the release for a particular country it may have more or less relevance depending on the economic characteristics of the country in question.

Second, as I have already mentioned, economic indicators are cyclical, and therefore their relevance and impact will change as the economic cycle changes. In addition, during extreme periods, other economic data may be introduced to try to provide an enhanced view of the economy, and a classic example here is the release of bond auction data, a relatively new phenomenon.

The result of a country’s bond auctions have only recently started to appear in the economic calendar as a consequence of the economic crisis of the last few years. The focus of the auctions is usually with the struggling economies of the PIGS (Portugal, Italy, Greece and Spain). But France too has now been added to this list, given the parlous state of its economy.

For the time being, these releases are considered a 'red flag' release. However, in the next few years, as the recovery begins in ernest, interest in the bond auctions will wane with market focus moving away from sovereign debt and back to interest rates and more 'mainstream' economic data. Data which has been the mainstay in the past few decades.

In this section I want to mention some of the more important economic indicators for New Zealand and the New Zealand dollar. The reason for devoting a section to the New Zealand is the unique role it plays in the carry trade strategy.

This is all the more reason to focus on those indicators which will signal the start of any possible rise in interest rates.

The first of these indicators is the NZIER Business Confidence economic indicator, a quarterly index prepared and released by the New Zealand Institute of Economic Research. This is a highly respected index which is based on a large sample of over three and a half thousand so an important release and one to watch carefully when trading the kiwi currency.

It is a diffusion index and the respondents are from all sectors of business including manufacturing, wholesalers and retailers, so represents a good balance of economic opinion. In this case, the index is based around zero as the tipping point with optimism moving the index above and pessimism below. A single headline number is reported quarterly and generally moves within a range of approximately minus 60 and plus 60, above and below the fulcrum.

As a highly respected release it is therefore considered to be a leading indicator of the New Zealand economy and also a release closely watched by the Reserve Bank of New Zealand as part of their decision making process for monetary policy.

Once again it is the trend that matters. A rising trend with a good number which is better than the forecast is likely to see the New Zealand dollar strengthen, and conversely a falling trend with a bad number is likely to see it fall.

But, and it is a big but, when trading in these high yielding currencies we always have to bear in mind the effect of the carry trade, not always an easy reaction to forecast, so avoid jumping to any quick conclusions.

The second of our New Zealand economic indicators is almost identical to the previous one, and really only differs in the timing and the sample size. Like the NZIER release, the ANZ Business Confidence (sometimes referred to as the NBNZ Business Confidence) too is highly respected and, perhaps even more so as it comes from the National Bank of New Zealand. It's released monthly and based on a survey size of fifteen hundred businesses across all the sectors, which is consolidated into a diffusion index.

The tipping point is zero and the index is considered to be a leading indicator of the economy and of future interest rates. Strangely this indicator only appears eleven times a year as it is not released in January. As always, it is the trend that matters, with a better then expected number helping to lift the New Zealand dollar in an up trend and to weaken it if the number is bad and in a down trend.

The Labor Cost Index is another from New Zealand, released quarterly by Statistics New Zealand, a government body. This index is designed to measure changes in the cost of labor and is therefore a key measure of inflation in the New Zealand economy. The cost of labour is one of the largest contributors to inflationary pressure, as they are always ultimately passed on to consumers in the form of higher prices.

The index is usually released around one month after the end of the quarter, so it can be a little out of date. Nevertheless, it is still considered a leading indicator of the economy and an excellent guide to inflation and the prospects for an increase or decrease in interest rates. The indicator is released as a simple percentage increase or decrease and, if the number is better than expected and in a rising trend, this is generally good news for the New Zealand Dollar which should strengthen on the news. Conversely, if the number is lower than expected this reduces the prospects for the economy and there is less chance of a short term rise in interest rates.

As always, any conclusions must be drawn against the ever present influence and effect of the carry trade.

The Inflation Expectation economic indicator is a relatively new addition to indicators for the New Zealand economy, and important for two reasons. First, it is a survey conducted and released by the central bank, the Reserve Bank of New Zealand so carries a great deal of weight in the market. Second, it is a key measure of inflation, which the bank itself uses as part of its own monetary policy decision making.

This indicator too is released quarterly and is based on a survey of managers across a wide range of business sectors. The managers are asked to provide forecasts as to the likely changes in the price of goods and services annually over the next two years. This is released as the headline figure for the indicator. Despite being relatively new, this is a release which is growing in importance as the data builds into meaningful trends.

If a better than expected figure is posted in a rising trend this should be good for the kiwi, as it is signalling the possibility of rising inflation and therefore an increase in interest rates. Equally, a poor number in a falling trend signals a weak economy with rising unemployment and falling inflation with the prospect of lower interest rates to come

So, between these indicators we have some excellent leading information on future interest rates for the New Zealand economy, vital to all forex traders, but particularly so for traders of the carry trade strategy.

So far in this chapter I have focused primarily on tier one or ‘red flag’ economic indicators, but there are also many second tier releases which can and do move markets. These too can be useful to us as forex traders and here the one I want to start with is from Canada and is the BOC (Bank of Canada) Business Outlook Survey.

The BOC Business Outlook Survey is unusual in that it is conducted and released by the Bank of Canada on a quarterly basis. It therefore carries a significant amount of weight in the market as it is coming directly from the central bank itself.

However, sadly for us as traders this report is not converted to a simple index with a headline number. Instead, it is uploaded in great detail to the Bank of Canada website and it can take time to absorb and evaluate.

Nevertheless, the markets take this report very seriously, and an interesting aspect of this indicator is that since it does not have a simple headline number the Canadian dollar may be slow to react to the release. Perhaps this is a deliberate policy by the BOC?

The survey itself is actually quite small scale and restricted to around one hundred or so companies who are asked to rate economic conditions, the outlook for sales growth, spending on plant and equipment. They are also asked whether the company plans to increase or decrease staff numbers, along with their views on likely changes in both input and output prices as well as inflation. The information is then displayed on the BOC web site as soon as the report is compiled.

The results are displayed either in the diffusion index format with zero representing the change from positive to negative sentiment, or as simple histograms or bar charts as in the composite index format.

For traders of the Canadian dollar this release is important, and worth studying. It only takes a few minutes to check each chart and see the trends for the indicator. It's not complicated and although a relatively small sample, the data comes from a highly respected source, the central Bank of Canada which has a good reputation in the markets.

An interesting second tier economic indicator I would like to mention here is in Australia and is the ANZ Job Advertisements Report from the Australian and New Zealand Banking Group in Australia. This tracks the change in the number of advertised jobs, both in the newspapers and also online, which is reported as the percentage change on a monthly basis. It is considered to be a leading indicator of the economy, and I’ve included it for two reasons.

First, it is an example of how diverse the field of economic indicators can be, and second to demonstrate how simple second tier indicators can be highly predictive and effective. In many ways it it often the simple signs that are overlooked in the tidal wave of economic data and releases which arrive each day.

This is why housing is so important because it represents what is going on in everyday life and can therefore tell us more about the economy than complicated dry statistics.

The ANZ Job Advertisement report is another such indicator and it's very straightforward. It is premised on the fact if the number of jobs advertised is rising the economy is in a growth phase. Conversely, if the number of jobs advertised is falling the economy may be weakening.

A rise in adverts suggests a likely rise in interest rates with a consequent strengthening of the Australian dollar. Whereas a fall in adverts suggests a likely fall in interest rates with the Australian dollar likely to weaken, as a result. A simple and uncomplicated way of gauging whether the economy is strong or weak.

Another second tier indicator which can also move the Australian dollar is the Private Capital Expenditure release which is a quarterly measure of economic activity for the country. It is published by the Australian Bureau of Statistics and measures the alteration in the overall inflation amended values. In other words, the real value of new capital investments from private companies. It is considered a leading indicator for the economy because it is measuring the confidence of business by the amount of capital they are prepared to invest in their own companies.

This is really a confidence indicator but in a different guise. Private sector investments are a key measure of economic confidence and activity, and the indicator is reported as a simple percentage change on a quarterly basis. So a strong number in a rising trend, which comes in better than expected is likely to be good news for the Australian dollar which should strengthen as a result. A strong number is suggesting economic activity and therefore higher interest rates in due course.

A poor number, which is below the forecast will have the opposite effect with the Australian dollar weakening on the news.

An important second tier release for the UK and sterling, is the Public Sector Net Borrowing release which too can affect the British pound.

This release tells us the financial health of the UK and how much the government needs to borrow in order to meet its spending requirements. In other words, how much the government needs to borrow from international investors to fill any shortfall from tax revenues. Therefore, if tax revenues are low the government has to borrow more, or cut its spending which is what has been happening in the last few years in an attempt to cut the UK deficit.

This is no different to you or I balancing our income and spending and perhaps using our credit card when we are short of cash while we wait for our next pay check or salary. The UK government (and many others) are no different, the numbers are just bigger. This economic indicator simply tells us how much the UK government is borrowing.

This report is released by the National Statistics Office on a monthly basis, around twenty days after the month end and is delivered as a headline figure of how much has been borrowed. A positive number indicates a budget deficit, whilst a negative number indicates a budget surplus. Since the start of the financial crisis borrowing for the UK government and other governments has been rising at an alarming rate, forcing spending cuts on public services in order to keep borrowing under control.

However, borrowing looks set to continue rising for several years as the UK government pays for the bank bail outs which almost bankrupted the country. As a consequence, this is an indicator where bad news is expected by the markets so any figure which is slightly better than expected and lower than the previous month will be considered as good news and should be positive for the British pound. Any figure which comes in worse than expected, reporting higher borrowings will not generally surprise the markets.

Under normal circumstances this would be a 'red flag' release, but in the current economic environment its importance has slipped down to the lower levels of news. However, once markets return to something approaching normality, this economic indicator will once again rise up the rankings to the 'red flag' list. It is an important number, but one the forex market tends to take in its stride and is likely to do so for some time to come.

As we start to come to the end of this chapter I want to round off by covering some of the statements, comments and news flow that comes from the central banks, week in and week out.

Virtually all of this news is classified as 'red flag'. In other words any statement, comment or release from a central bank is considered important enough to move the markets.

The problem, however, is that some comments are made 'off the cuff' and are not necessarily intentional. Most of the time comments and statements are well rehearsed and prepared in advance. Furthermore, senior bank officials will often test the market with some well chosen words in order to gain some insight into the likely reaction to a proposed change in policy.

Alternatively, comments may be deliberately made in order to signal a change in policy and to prepare the markets accordingly. It is often difficult to distinguish the two, but generally prepared releases are easier to interpret, it is the unprompted remarks made during press conferences following interest rate statements that are harder to predict.

The good news with this information is that all the central banks use the same coded language and most of the time seem to follow the same script. The reason is because, as guardians and custodians of their home economy and currency, they all face the same challenges and problems.

There have even been press reports that maybe the traditional role of the central banks may now be coming to an end. And that as an institution they may not even be around in a few years time. Given their track record in the run up to the financial crisis this may not be so far fetched.

The best way to approach these comments, statements and releases is in the context of the economic indicators and the politics and how these affect the home currency.

For central banks the most important economic indicator is the interest rate decision. All the banks have their own name for this indicator. In the US it is the Fed Funds Rate. In Canada it is the Overnight Rate. In Australia it is the Cash Rate. In New Zealand it is the Official Cash Rate.

Meanwhile in Europe it is the Minimum Bid Rate. In Japan it's known as the Overnight Call Rate and in the UK it's The Official Bank Rate.

Once an interest rate decision has been made most of the central banks, but not all, will also release a statement to support and explain their decision. And, in some cases the accompanying statement may, in fact, be more important than the rate decision itself. The reason is that it is a simple way for the bank to communicate to the markets. Therefore, the language used is important and significant.

A word or phrase here or there can send a message about monetary policy in the future so it pays to read these statements for any clues as to the future. As most are now streamed live I would urge you to watch one, and note the spikes in price action on a fast chart as words or phrases are used. You will be amazed.

In Australia, New Zealand and Canada these statements are released immediately, whereas the Federal Reserve and the Bank of England release theirs a few days later, thereby creating another 'red flag' item of news as the content of these statements will be scoured for meaning by the markets.

The ECB have no statement but instead hold a press conference shortly after the release. The Bank of Japan also holds a press conference and, more recently even the Federal Reserve, in a PR effort to improve their battered image has taken to airways and held a press conference. This was the first time in their 100 year history.

Although, the pattern for interest rate decisions and subsequent statements is very regular and easy to follow, what is perhaps more difficult to follow are the speeches and comments from key central bank figures. These can happen in a variety of ways. These can occur when senior figures are called upon to report or testify before their political masters. This is a frequent occurrence in both the US and the UK. It is at these events many unscripted and ‘off the cuff’ comments are made.

Other speeches are usually well prepared and given at a variety of functions, whilst other comments may appear in newspaper and magazine articles, and are usually carefully crafted to communicate particular messages to the markets.

If I were asked to bracket the central banks in order of transparency, ambiguity or self interest I would suggest the following.

The most straightforward of the central banks are Canada, Australia, New Zealand and the UK. Next would come Japan who can be misleading given their self interest in the yen, followed by the US Federal Reserve who are highly self interested. As ex Chairman Alan Greenspan once said:

“I guess I should warn you if I turn out to be particularly clear then you’ve probably misunderstood what I’ve said.”

Last, but not least, the ECB and the euro, of whom Greenspan also famously said:

“I’ve consistently said the Euro should die, but [it] will be saved by a bunch of ego-maniacal politicians” which really sums up the ECB in one statement.

Finally, of course we have the Jackson Hole symposium. For symposium read 'junket', where the central banks have their annual 'love in' in the shadows of the Teton mountain range.

In addition to central banks muddying the waters, we also have the politicians and in particular the finance ministers, who meet at both scheduled and unscheduled meetings to discuss world financial affairs and generally in two forms. Namely the G7 and the G20.

The G7 was the first to be formed and meets several times a year and includes France, Germany, Italy, Japan, the UK, the US and Canada. More recently, this was expanded to the G20 to include several of the tiger economies from the emerging markets.

Both G7 and G20 meetings are scheduled well in advance so you will find them in the economic calendar and they are important as they do issue press statements and releases both during and after the event. These often come on a Sunday night as many of these events run from a Friday to a Sunday.

For traders who keep overnight or weekend positions, it is imperative to keep a note of these events as their statements can cause volatility when the forex market re-opens.

The G7 meetings are regular and frequent whilst the G20 tend to be twice a year and have less impact. The G20 meetings generally focus on third world issues, whereas the G7 meetings tend to focus on trade and economic matters and are likely to be of more interest to the currency markets.

Finance ministers, particularly in Europe, are also not averse to commenting on monetary policy when it suits them, so once again comments in print or on the TV are always of interest and the euro will react accordingly. Comments which allude to the ECB will always cause a reaction.

In the last few years we have also seen a plethora of bi-lateral meetings between finance ministers, particularly in Europe and, often at short notice. These meetings are usually convened to deal with the latest crisis to befall the Eurozone. To date they involved most of the Club Med countries and usually revolve around the issue of debt and the need for another bail out. Markets always react nervously but generally subside after a couple of days.

At the time of writing this book the latest crisis involves Cyprus and its banks which are, once again, teetering on the point of bankruptcy. More recently Italy is now presenting yet another threat to the Eurozone.

So far we've looked at many of the factors which influence price, from external forces to internal forces, and to market manipulation, both overt and covert. However, there is one group which has the potential to move the markets more significantly, and more dramatically than all of these forces combined, and that's the ratings agencies. Universally loathed and despised by most in the financial world, they sit in judgement as the ultimate arbiters of risk, handing out their judgements with reference to no-one. They have the power to create, and the power to destroy which they use with equal measure. They are judge, jury and executioner rolled into one. Their power is unlimited and frightening, and with a single release, they can wreak havoc in the market.

Yet, all of these companies are privately owned, and worse still, paid for by the very banks and organisations which they are supposed to rate on an objective basis.

So, who are the major credit ratings agencies, what do they do, how do they operate, and why do the markets react in the way they do when a statement is made by one of the 'so called' big three?

There are three major ratings agencies the market watch above all others, and these are Standard and Poors, Moody and finally Fitch. Of these, Standard and Poors is the oldest by some distance and originally founded in 1860 by Henry Poor, with the 'Standard' added in 1940 when Poors and the Standards Statistics Bureau were merged into one company. Moody began life in 1909 and was founded by John Moody whilst the last of the big three, Fitch, was formed four years after Moody by another John, John Fitch, in 1913. There are of course, many others, but these are the three that dominate the markets and their purpose is two fold.

First, to offer an assessment of risk by those organisations, financial institutions banks and companies offering bonds, a rating, which is supposed to give lenders a standard or benchmark against which to judge the bond issuer. And secondly, to make as much money for themselves in providing these ratings.

Does this sound like a conflict of interest? The simple answer, of course, is that it is, but as always in the financial markets, when there are huge sums involved no one is going to kill the goose that lays the golden egg. Each of these companies makes several hundred million dollars a year in fees for their services, and their power and influence extends to the very top of governments, central banks and beyond.

However, whilst traders investors and speculators around the world have had to tolerate the existence of these self appointed dictators, in the last few years their influence and power has finally started to wane. And the catalyst for this turnaround in their fortunes, was ironically the financial crisis of 2007, which all of these agencies somehow managed to fail to forecast. Here was a situation where the markets were awash with securities backed by worthless mortgages never likely to be repaid, and yet the so called 'experts' failed to raise a signal or warning of any kind. Of course no one else did any better, but then these companies were supposed to know what they were doing, unlike the Federal regulators who just pretend to know what they are doing. Indeed Lehman Brothers was given a AAA rating, just before it went bust.

Not only did this raise questions about the value of such agencies, it also had much deeper ramifications.

In Europe, for example, the Parliament was so concerned at the prospect of a possible downgrade from one of the big three that laws were passed restricting the number of releases from these agencies to a maximum of three a year, and only after the close of the main financial markets. Other countries have followed suit and many advised their major banks and commercial organisations to do their own ratings assessments.

More recently some of these agencies are now facing lengthy legal proceedings as ex employees are increasingly speaking out, about the culture of intimidation and harassment which existed in these companies in order to ensure the companies' clients would be given favourable ratings.

Had I been writing this book ten years ago, I would have been explaining the power of the ratings agencies, and how a downgrade or an upgrade could affect a country's economy and its currency overnight. After all a rating from one of these company's was seen as a seal of approval from a respected source. In the normal course of events a downgrade to a country would have meant the cost of borrowing went up. This has all changed since 2007, and the reason is simple. The power of these companies is waning and waning fast. The SEC (Securities and Exchange Commission in the US) is taking its usual approach, which is to say much and do nothing, whilst the markets have delivered their own verdict, which was exemplified when the US received it's own downgrade in 2011. The cost of borrowing actually went down on the news and not up.

This is how life is changing and has changed forever with the ratings agencies. Yes, it is true to say they still have the power to move the markets, but that power has been dramatically reduced in the last few years. Their credibility was blown apart as the sub prime saga exploded onto the markets. Since then, their importance has declined. This is not to say they can be ignored, they cannot, and for many countries, particularly those in the Far East and Asia, they represent a key catalyst for growth, but for those developed economies, their power has been dramatically reduced, and for that we can all be eternally grateful. It is one less thing we have to worry about from a fundamental perspective.

Having examined the most important economic indicators and how they impact the currency market, I would now like to consider some currency specific economic indicators. In other words, those releases which can move a currency and currency pair. Whilst most of these will also be ‘red flag’ or tier one releases, I have also included a number of tier two news items which can also have an effect. These latter releases are usually coloured orange on the forex factory calendar.

Although the euro has the least number of tier one (red flag) indicators it does have a very long list of orange (tier 2) indicators which are primarily country specific. Often, the same release appears twice, one for the Eurozone followed by the country specific version. In most cases the country will be Germany and, on occasions France.

The reason Germany’s data is treated as a separate entry is simply a reflection of the power and importance of the German economy in the Eurozone. The tier 2 economic indicators which relate directly to Germany include the monthly Preliminary CPI numbers; the month on month unemployment changes; month on month factory orders; the monthly production figures; German consumer sentiment along with German retail sales, and flash manufacturing PPI. ‘Flash’ simply means ‘a quick overview’, a snapshot or the latest news.

As the second largest economy, France comes next with around half the number of German releases and here the list includes: industrial production; PMI data for manufacturing and services; preliminary GDP for the quarter along with consumer spending and employment data, both of which are released monthly.

So between them, Germany and France constitute virtually all the economic reports at this level for Europe on an individual country basis.

Europe denominated data is shown as EUR and covers all the countries using the euro. For example, retail sales in Europe will be shown as EUR Retail Sales m/m. On the other hand German retail sales will be shown as EUR German retail sales m/m. Again the reason for this additional release is that any drop in German retail sales is likely to have more impact due to the strength of the German economy. A drop in Italian retail sales is hardly worth a mention (despite my own best endeavours) and not significant enough, even though Italy is the third largest economy in the Eurozone in terms of GDP.

Furthermore, even an EUR consolidated number will often have less of an impact than the equivalent German figure.

In this group there are also several economic releases for Europe. These include the unemployment rate reported as the headline rate; industrial production figures; monthly CPI and core CPI percentages. Again this consolidated data will have a relatively muted effect, as it generally follows the German equivalent.

Other releases include the GDP figures along with M3 money supply figures and the ECB monthly bulletin. Of these it is odd the M3 money supply release is classified as a tier 2 indicator release, given that M3 measures the amount of currency in circulation and is therefore a direct indicator for inflation. It is also one of the measures the ECB uses in its monthly interest rate decision. M3 is also important because in the early part of an economic recovery an increase in the money supply indicates a growing economy with increased spending and investment, whilst later in the economic cycle it leads to inflation and higher interest rates. So, if this number is better than expected it is generally good for the euro, as long as inflation is under control.

The ECB monthly bulletin which appears about a week after the rate decision fleshes out the criteria for the decision, coupled with a look ahead to the future for the economy. Once again it is strange this does not have more impact on the markets given the volatility created by its equivalent from the Federal Reserve, namely the FOMC minutes.

Finally, for the euro what has never been made clear is why there are quite so many releases. However, it may simply be an attempt to portray the Eurozone as one, united entity hence the need for so much data.

Among the tier 2 indicators for the US dollar the first one to note is the weekly Crude Oil Inventories. This release is unusual in that it can have an equal impact on the Canadian dollar, for obvious reasons. Moreover, it is the only oil specific release and, in my view very important, particularly if you are trading the Canadian dollar.

The indicator reports the oil inventory at Cushing in the USA. Cushing is a major oil supply hub and the inventory figures confirm whether there has been a build in the oil reserves or a draw. The significance of these figures is fairly straightforward. A build in the oil reserves represents an increase in the oil inventories which suggests a fall in demand. Conversely, a draw is a decrease, suggesting an increase in demand.

These numbers are presented as either positive or negative. A positive figure represents a build while a negative one indicates a draw. As a rule of thumb, a draw or reduction in the inventory is generally positive for the Canadian dollar, as it suggests an increase in demand and higher oil prices likely to follow. Conversely, a rise in the inventory is not such good news for the Canadian dollar as it suggests a fall in oil prices in the short term. Remember however this is reported weekly, so more of an intraday trading indicator.

Another economic indicator that appears in the orange tier is the quaintly named, Beige Book which appears eight times a year. There is divided opinion on this release with some traders believing it should be considered a tier one release, whilst others (myself included) believe its impact is muted. In addition, this type of release can often move the markets simply when there is no other news.

The Beige Book is, in essence a collection of anecdotal evidence and information gathered from senior employees from member banks within the Federal Reserve network of banks. It consists of their thoughts and comments on the current economic climate. Its use is in giving traders some clues to the market and how the Federal Reserve is likely to react in the future. It is generally released around 2 weeks prior to the FOMC meeting itself and FED watchers pick through every comment and word to try to interpret any likely changes in future monetary policy.

The principal reason why I do not advocate its use is that the FED also has two other books, one Green and one Blue. However, as neither is made public it does rather beg the question as to the validity of the information in the Beige book.

In addition to the above orange group of releases in the US, the markets are also subjected to an endless round of statements and speeches from FOMC members. Impact is generally muted as these events are a means of reiterating current FED policy. The only exception will be speeches and statements from the FED Chairman himself.

Of the next set of orange flag indicators, namely Core PPI, Durable Goods Orders, Revised UoM Consumer Sentiment, the Advance GDP Price Index and the Employment Cost Index, only the last two, I believe, are deserving of a higher rating.

Even though the US GDP figure is usually well known in advance, any GDP related release is always important, particularly for the world’s largest economy so should, in my view, take a higher priority.

Similarly with the Employment Cost Index which is released quarterly and measures the percentage increase in wages and salaries over the period. This is a key measure of inflation and interest rates with any increase suggesting higher interest rates and therefore highly US dollar positive. A fall in this number suggests a weakening economy and lower interest rates likely to follow, with consequent US dollar weakness.

In the last clutch of tier two releases for the US, the two most important include The Empire State Manufacturing Index and Core PCE.

Core PCE is an interesting indicator, standing as it does for Personal Consumption Expenditure and measures consumer spending on goods and services by individuals. It is important because many believe the Federal Reserve keep a sharp eye on consumer spending patterns for clues as to the economy and inflation.

The headline figure is a simple percentage. If the number is positive and moving higher it is signalling that consumers are happy to spend and the economy is likely to be expanding. An expanding economy signals higher interest rates to follow and again is generally US dollar positive. If a negative number is reported which is also in a falling trend, expect the dollar to weaken as a result

The Empire State Index, is a monthly release and is a diffusion index based on manufacturers in New York State and, despite only having a survey size of approximately two hundred, it is nevertheless a widely regarded index. The tipping point for the index is zero so anything above the line is positive and below is negative. A good number coming in better than expected is usually good news for the dollar, and a bad number should see the dollar decline.

One reason for mentioning the Empire State Index is to highlight the fact other cities also produce similar survey based releases. For example, the Chicago PMI is another diffusion index based on surveys in the Chicago area. What makes this release particularly interesting is that it is released 3 minutes earlier to paid subscribers allowing them to take market positions, as a result. The Chicago PMI is also interesting as the private subscribers can sometimes impact the market and the US dollar.

Finally, in this round up of releases and indicators for the US markets, the twice yearly Treasury Currency Report produced by the Department of Treasury deserves a special mention.

The report itself does not always appear as scheduled in the economic calendar. This is because it is subject to heavy, last minute revisions so the release date and time can be a movable feast.

However, it is worth the wait, not least because it details the views of the US Treasury on economic conditions, foreign exchange rates and currency manipulation around the world.

The immediate impact of the release on the currency markets can be variable. However, its importance is in revealing which countries the Treasury believe are manipulating their currencies. In addition, it also gives traders some excellent background reading on the US Treasury’s views of the currency markets themselves.

The first is the Bank of Japan’s monthly report which provides details of the Bank’s view of the longer term economic outlook, as well as the economic data used for the latest interest rate decision. Despite Japan’s rates having remained low for a decade or more, the report still makes interesting reading. However, the report lacks market impact for this reason.

The same reason applies to the BOJ meeting minutes. These are released around a week after the interest rate decision and this is the reason they are here, since the minutes are unlikely to reveal any surprises for the time being. However, at some point in the future this will change.

Japan too has city specific economic indicators of which the Tokyo Core CPI Index is the most important. The index is the same as for the Japanese CPI Index and only includes consumer data from Tokyo. What is useful about this report is that it is released a month before the figure for the whole of Japan, and can be an excellent guide for the national release. In my view, it is an extremely important release since Tokyo is the largest city in Japan and therefore an excellent guide to the national trend.

The Tokyo Core CPI is a monthly report and, just like its bigger brother, is a leading indicator of inflation which is reported either as a negative or positive percentage.

In addition to the Tokyo CPI there are several other indicators which are also important for the Japanese economy and the yen. These include Retail Sales, Preliminary Industrial Production, Core Machinery Orders, Household Spending, Preliminary GDP Price Index and Final GDP.

However, what is perhaps surprising is that for such an important economy the Trade Balance Figures, the Tertiary Industry Activity and the All Industries Activity releases are all classified as second tier. Tertiary Industry simply means the third industry sector, and in this case refers to the services sector of the market, in particular services purchased by businesses. The figures are released monthly and are considered a leading indicator. Therefore, if the actual is better than forecast this is usually good news for the yen thereby making it an essential release for traders involved in the carry trade, particularly in the NZD/JPY.

In this group of economic indicators for the Japanese yen is a subsidiary of the Tankan Survey, namely the Tankan Non Manufacturing Index. This is released with the main Tankan Survey and is a diffusion index based on a survey from non manufacturing companies. Although not as important as the one for the manufacturing sector, this release is nevertheless worth watching, as it can reinforce the main report with additional information on the Japanese economy.

Tier two economic indicators for the British pound which deserve some attention include the Trade Balance figures and the Construction PMI data, a key leading indicator for economic growth fuelled by the construction industry.

The Retail Price Index release now appears in this group having been replaced by the Consumer Price Index. This was a political decision in order to show a lower figure when calculating pensions and state benefits. However, the RPI is still reported and is released at the same time as the CPI.

There are also two mortgage approval releases which come into this category. The first is Preliminary Mortgage Approvals, a leading indicator of the economy, which confirm the number of new housing loans approved during the month. The second is the BBA Mortgage Approvals, from the British Bankers Association which reports the same thing, so one confirms the other. The important point to note here is how the number relates to past levels of lending and, whilst the number may be better than expected and suggest a pick up in demand for mortgages, if the numbers are extremely low compared to three or four years ago, clearly the economy is a long way from the peak of a cycle. Therefore, always check against the historical data and where the lending level is in relation to the past.

This group also includes a couple of consumer sentiment indicators in the form of the Nationwide Consumer Confidence and GFK Consumer Confidence. Once again leading indicators of the economy, but classified as second tier data.

Finally, to round off the UK, there is the NIESR GDP estimate indicator, an important release which attempts to forecast the UK GDP figures on a monthly basis. The reason for watching this indicator is that it is released by the National Institute of Economic and Social Research, a learned body, with a good track record in forecasting GDP data.

As mentioned earlier in this chapter, economic releases for China are now the norm and vital for all traders. As the world’s second largest and fastest growing economy all Chinese data will cause markets to react and have particular impact in the currency market.

In the orange group (tier two releases) there are six economic indicators to consider. These are, HSBC Final Manufacturing PMI, HSBC Flash Manufacturing PMI, New Loans, Fixed Asset Investment, Industrial Production and finally, and surprisingly, the PPI indicator.

The first two economic indicators are prepared and released by the Hong Kong and Shanghai Bank and, of these the Flash Manufacturing is the more important as it is released first. Both indicators are diffusion based with a tipping point at fifty, so any number above fifty indicates the Chinese economy is in expansion, and below fifty in contraction. Flash Manufacturing is the more important as it is released approximately one week before the final and therefore has more impact across the forex markets, as a result.

Both these reports are released monthly and, if they come in better than expected then this is good news for the world’s second largest economy, and should provide a boost to both currencies and commodities.

The New Loans data too is monthly and released by the central bank (PBoC). The release provides details of new loans denominated in Chinese yuan and can be a good indicator of consumer and business confidence in China, with a positive figure providing a good news story for the global economy. However, this is the release which can highlight how the Chinese also appear to be creating a credit bubble similar to the one responsible for the current financial crisis.

The Fixed Asset Investment release is a measure of capital spending by the Chinese in major infrastructure and new projects. It is reported monthly by the National Bureau of Statistics as a simple percentage, so an increase is good news and seen as increasing demand for base commodities and confirming economic growth, whilst a decrease suggests a slow down and reduction in spending as a result.

Chinese data is important but is often reported at odd times, including weekends so may impact any open positions. Five years ago Chinese data rarely appeared on economic calendars, but now it moves markets. The same will happen as many Asian countries, Mexico and Brazil, continue to grow and begin to influence global growth. China is simply the first of many.

Finally, here are some tier two releases for Australia, Canada and New Zealand. As this is quite an extensive list I have only included the indicators which, I believe, carry the most weight in the market.

In New Zealand the ones to watch are the Trade Balance, Building Consents, and the REINZ HPI indicator, with the last two providing views of the housing market, so leading indicators. However, as always these releases can and do impact all carry strategies.

For Canada the CPI is the most important in this group. In many ways this release should be classed as tier one given its importance as a leading indicator of inflation and therefore interest rates. The CPI is a monthly release from Statistics Canada. CPI should always be read in conjunction with Wholesale Sales, Retail Sales and Manufacturing Sales, all of which provide data on the the three primary sectors of the economy in terms of sales revenues.

These sales indicators are all leading indicators and reported as simple percentages of change, so easy to check and monitor both on the trend and also against the release. As always, positive numbers are perceived as good news for the Canadian dollar, provided they fit within a rising trend.

Finally, for Australia there are over twenty tier two releases but the most significant are as follows. The first is the Commodity Price Index which tracks the prices of commodities on a monthly basis and, not a surprise given the strength of the Australian export market. This index is usually released on the first business day after month end. The index is reported as a simple percentage change in price. Any increase is generally seen as good news for the economy and the Australian dollar. However, any increase can also signal inflation and higher interest rates elsewhere in the world. Therefore a vitally important release for all currencies.

Next is the Westpac Consumer Sentiment release. This is a diffusion index published monthly and based on a relatively large sample size. The Westpac is generally read in conjunction with the business confidence index published by National Australia Bank. Again the tipping point for these indices are zero.

In this group are several other indicators including the Wage Price Index. This is a quarterly indicator produced by the Australian Bureau of Statistics and tracks labour costs, one of the key ingredients of inflation. Therefore, an important number and the reason why it has been included here. The release is reported as a simple percentage change and if the trend is rising with positive increases in wages and salaries, expect the central bank to be watching, and interest rates likely to rise as a result. Conversely, a fall is likely to signal a weak economy with a consequent fall in interest rates.

The second inflation indicator is the MI or Melbourne Institute Index which is, in fact, a report that forecasts future inflation. The report is released around the middle of the month and is reported as a simple percentage figure.

Finally for Australia, two sales related indicators, the HIA New Home Sales and New Vehicle Sales data, both of which can give the markets strong signals as to consumer confidence in these sectors.

If you have read to the end of this chapter – many congratulations. It has been a long trek but one which I hope has proved to you understanding these indicators is not difficult. I also hope it has proved the importance of these indicators.

There are, of course, many more whose significance will depend on the economic cycle. In addition, economic indicators, like football teams, move up and down a league. One day they may be in the Premier Division and, on another be relegated and languishing in a lower league. These indicators are not static, they are fluid as central banks and their political masters use (and abuse) them in an effort to drive and control their economies as well as their own political ambitions. Remember also, how they are constructed does change, so always check for any changes in methodology or approach.

Finally just to round off this chapter, let me briefly recommend the calendar I use, which is from http://www.forexfactory.com .

This is the most popular calendar available, and is where all the releases mentioned can be found. All are coded in the way I have described in red, orange or yellow. I have deliberately excluded the yellow set as this would make this chapter three times as long. The one thing I would urge you to do when checking any release is to click on the chart icon on the right hand side of the screen, which will reveal the trend for the release over the previous months, which is so important.

This concludes the fundamental section of the book and in the next few chapters we're going to look at the third and final element of my three dimensional approach to forex trading, namely technical analysis.