You may have been trading the Forex currency market for years, but do you really understand the general economic characteristics of the currency you are trading? This series takes a snapshot of each of the major currencies traded in Forex to help you trade Forex with your eyes wide open. This will help you measure what economic data has a significant impact on the currency’s movement.
Quick Currency Facts About The USD
- Over 90% of all currency deals involve the USD.
- The most liquid currencies are EUR/USD, USD/JPY, GBP/USD and USD/CHF. These currencies represent the most frequently traded currencies, and clearly all of these pairs involve the USD. Therefore, it is important to keep abreast of US developments and movements of the USD index, as they will impact the majority of currency positions.
A Few Key USD Indicators to Follow
Following the USD Index
Market participants closely follow the US Dollar Index as a gauge to overall USD currency strength or weakness. The USD index is a futures contract traded on the NY Board of Trade that is calculated using the trade-weighted geometric average of six currencies. It is important to follow this index because when market participants are reporting general USD weakness or decline in the trade-weighted USD, they are typically referring to this index.
Stock and Bond Markets
There is a strong correlation between a country’s equity and fixed income markets and its currency: if the equity market is rising, investment dollars are coming in to seize investment opportunities. If equity markets are falling, domestic investors will be selling their shares of local publicly traded firms only to seize investment opportunities abroad. With fixed income markets, economies boasting the most valuable fixed income opportunities with the highest yields will be capable of attracting foreign investment. Daily fluctuations and developments in any of these markets reflect movement of foreign portfolio investments, which would require foreign exchange transactions.
Employment Report to Gauge Unemployment
The Non-Farm Payroll monthly report is the most important and widely watched indicator on the economic calendar. Its importance is mostly due to political influence rather than pure economic reasons, as the Fed is under strict pressure to keep unemployment under control. As a result, interest rate policy is directly influenced by employment conditions.
GDP to Determine Aggregate Economic Health
Gross Domestic Product is a measure of the total production and consumption of goods and services in the U.S. The Bureau of Economic Analysis constructs two complementary measures of GDP, one based on income and the other based on expenditures. The advance release of GDP, which occurs the month after each quarter ends, contains some BEA estimates for data not yet released including inventories and trade balance, and is the most important. Other releases of GDP are typically not very significant unless a major revision is made.
Retail Sales: Is there Spending or Hoarding?
The Retail Sales Index measures the total goods sold by a sampling of retail stores over the course of a month. This index is used as a gauge of consumer consumption and consumer confidence. The most number typically does not include autos, as auto sales can vary month-to-month. Retail sales can be quite volatile, due to seasonality; however, it is an important indicator of the general health of the economy.
Trading the USD
At ForexSignal.com, we trade most of the USD majors, but our favorites include the GBPUSD, EURUSD, USDCAD, AUDUSD and USDCHF. Almost 20 years of Forex trading experience has taught us the ins and outs of trading the USD. We have made available various Forex trading tools to our subscribers, including our most popular features; our Forex Signals sent to email/SMS and automated trading with our Trade Copier.