Giao dịch Forex cho Người Mới Bắt Đầu Phần 5: Tỷ Giá Hối Đoái và Các Chỉ Số Sản Xuất

Exchange Rate and Inflation

Inflation is the most important indicator of the development of economic processes and, for the currency markets, one of the most significant benchmarks. Currency traders are observing inflation data.

From the perspective of the Forex market, the impact of inflation is naturally perceived through its relationship with interest rates. 

Since inflation changes price levels, it also changes the real returns actually received from the income generated by financial assets. 

This impact is usually measured using real interest rates ( Real Interest Rates ), which, unlike conventional nominal interest rates ( Nominal Interest Rates ), take into account the depreciation of money that occurs due to the general rise in prices.

An increase in inflation reduces the real interest rate since some part must be deducted from the income received, which will go to cover the price increase and does not give any real increase in the benefits (goods or services) received. 

The simplest way to formally account for inflation is to consider the nominal rate I minus the inflation coefficient p (also given as a percentage) as the real interest rate,

r = i – p

For obvious reasons, government securities markets (interest rates on such securities are fixed at the time of their issue) are very sensitive to inflation, which can destroy the benefits of investing in such instruments. 

The effect of inflation on the government securities markets is easily transferred to the currency markets closely related to them: the dumping of bonds denominated in a specific currency CRS due to rising inflation will lead to an excess in the cash market in this currency CRS and, consequently, to a fall in it—the exchange rate.

In addition, the inflation rate is the most important indicator of the “health” of the economy, and therefore it is carefully monitored by central banks. 

The only way to fight inflation is to raise interest rates. Rising rates divert part of the cash from business turnover; as financial assets become more attractive (their profitability grows along with interest rates), loans become more expensive; as a result, the amount of money that can be paid for goods and services produced falls, and consequently the rate of price growth also decreases. 

Because of this close relationship with central bank rate decisions, foreign exchange markets closely monitor inflation indicators.

Of course, individual deviations in inflation levels (for a month, a quarter) do not cause the reaction of central banks in the form of changes in interest rates; central banks follow trends, not individual values. 

For example, low inflation in the early 1990s allowed the FED to keep the discount rate at 3%, which was good for economic recovery. 

But in the end, inflation indicators ceased to be essential benchmarks for the currency markets. Since the nominal discount rate was small, and its real version generally reached 0.6%, this meant the markets that only the upward movement of inflation indices made sense. 

The downtrend in the US discount rate was broken only in May 1994 when the FED raised it, along with the federal funds rate, as part of a pre-emptive anti-inflationary measure. True, raising rates then could not support the dollar.

The main published indicators of inflation are the Consumer Price Index (CPI), the Producer Price Index (PPI), and the GDP deflator ( GDP Implicit Deflator ). Each of them reveals its part of the overall picture of price growth in the economy.

Exchange Rate and Inflation

It is impossible to correctly understand the meaning of changes in economic indicators and assess their consequences for foreign exchange markets without taking into account the cyclical behavior of the economy. 

It is known that the development of financial processes is cyclical: growth is necessarily accompanied by a recession, followed by recovery and new growth. 

The same change in a specific indicator can have completely different economic meanings (and hence financial consequences), depending on at what stage of the economic cycle it is observed. 

The expected impact of such a change on the exchange rate can be exactly the opposite in these cases since the financial authorities look at the state of the economy and make regulatory decisions taking into account its cyclical behavior. Knowledge of concepts

The economic cycle (Economic Cycle), otherwise called the business cycle ( Business Cycle ), is a natural form of development (growth) of the economy. 

Considering the dynamics of economic development, there are three main phases:

– Recession is a decline in business activity, a drop in production, employment, and income, distinguished by the degree of economic decline – crisis and depression;

– Recovery is the rise in economic activity, the growth of market conditions, the increase in output after its fall, which took place during the recession, to previous levels;

– Expansion is the continuation of economic growth after the stage of recovery, as a rule, until reaching a new maximum output, exceeding that achieved in the previous cycle. 

The expansion stage can sometimes include several cycles, which, in this case, are called growth cycles.

Every economic indicator demonstrates cyclical behavior in one way or another. 

It is only necessary to take into account the individual characteristics of the cycles of these indicators to consider their ratios in terms of time parameters and terms of the magnitude of the drops.

Depending on the nature of the indicators and their connection with the general economic dynamics, it is customary to single out procyclical indicators (the course of which coincides with the general direction of economic growth – corporate profits grow on the rise of the economy), counter-cyclical (which are directed against general growth – unemployment rises when the economy falls) and acyclic (the behavior of which changes little inside the cycle). 

A brief classification of some indicators by this property is given in the table below.

Since indicators are created to identify and take into account the characteristics of precisely various aspects of economic processes, their behavior also has its specifics. 

In particular, it is important to know whether a particular indicator tends to be ahead of the overall trend or if it lags behind the main course of the economic cycle. 

On this basis, the most well-known indicators are classified as shown below.

In the United States, there is a special non-governmental research organization, the National Bureau of Economic Research (NBER – National Bureau of Economic Research), which is busy tracking economic cycles and determining their turning points. 

This is not as easy a task as it might seem since different indicators have their cycles shifted relative to each other in time. 

It is very important to trace the global economic cycle using them and give its objective characteristics since many participants in economic activity will be guided by this cycle in their business plans.

According to the NBER method, a recession (recession) begins with a fall in real GDP for two consecutive quarters in a row. But in itself, such a fall does not necessarily mean a recession because indicators often deviate from the main trend.

 A large number of other indicators are involved in order to form a general assessment of the trend, which most researchers and practitioners will accept. 

At the same time, not even the values ​​of economic indicators themselves (GDP, industrial production, trade balance, etc.) are of the greatest importance, but their changes from month to month, from quarter to quarter, and in the longer term – from year to year. It is in these changes that the impact of the economic situation on business results in changes in the mood and activity of producers and consumers is most clearly expressed.

Procyclical		Anticyclical
Strongly correlated	Weakly correlated	Counter-Cyclical	Acyclical
Cumulative Output and output by sectors of the economy Business Profits Monetary Aggregates Velocity of Money Price Level Short-Term Interest Rates	FMCG Agricultural Production Natural Resource Extraction Long-Term Interest Rates	Stocks of Finished Goods Stocks of Raw Materials and Supplies Unemployment Rate Bankruptcy Rate	Trade Balance

Leading Indicators	Lagging Indicators	Coinciding Indicators
Workweek Length Number of New Businesses Housing Starts Stock Market Indices Corporate Profits Change in Money Supply Change in Stocks	Number of Long-Term Unemployed Spending on New Enterprises and Means of Production Unit Spending on Wages Average Interest Rates of Commercial Banks	GDP Unemployment Rate Industrial Production Personal Income Producer Prices Official Interest Rates Advertising Applications

There is no convincing general theory of economic cycles, just as there is no consensus on the causes that give rise to them. As the main factors that cause economic fluctuations, various economic theories consider, for example:

• – Impulse impacts on the economy, economic shocks, such as technological shifts, the discovery of new sources of raw materials, big changes in world prices for raw materials, political shocks;
• – Unplanned increase in stocks of raw materials, investment in production;
• – Labor relations, the struggle of trade unions for job security and wages.

Taking into account such phenomena cannot be a simple matter. 

The main thing that has been well understood for a long time is that cycles are an inevitable phenomenon generated by internal causes that are among the integral driving forces of economic development. 

Therefore, tracking and forecasting the parameters of the cyclical development of the economy in all civilized countries is performed as the most important state function.

Economic Growth Indicators, Gross Domestic Product

Gross Domestic Product (GDP) is a general indicator of the amount of value added created over a certain period by all manufacturers operating in the country. 

GDP is a broad indicator of the strength of the economy (or vice versa, its weakness during recessions). Its connection with the exchange rate is always obvious and quite direct – the stronger the GDP grows, the stronger the national currency. 

For currency markets, this is one of the main indicators. The reaction to the publication of not only the growth indicators of the main economies but also their corrected (updated) values can be quite significant.

The definition of GDP, known from macroeconomics textbooks, gives it a double entry for consumption and income components:

GDP = C + I + G + NE = PI + PR

Where C – Consumption, I – Investment, G – Government Spending, NE – Net Exports (Exports – Imports), PI – Personal Income, PR – Profits owners.

GDP is calculated both in nominal form (in current prices) and in prices of a fixed period (Real GDP). 

The ratio of nominal GDP to real GDP is the GDP deflator (Implicit Price Deflator); it is also published as one of the inflation indicators. 

In addition to GDP, the Gross National Product (GNP) indicator, which is close in meaning to it, is also used, which takes into account the total production of goods and services by residents of a given country, regardless of where they are located, within national borders or abroad.

GDP data are released quarterly; the usual release time for the US is the 20th of the month following the end of the quarter. 

Over the next two months, revised (revised) values of the indicator are published. Half-yearly data may be updated up to three years later. 

When analyzing the dynamics of economic cycles in terms of GDP, one should take into account phenomena of very different scales, from very long-term ones, like demographic factors or world wars, to shorter-term causes that cause imbalances in the economy.

Manufacturing Sector Indicators

Industrial Production

Industrial Production (IP) measures the output of manufacturing plants in industry, extractive industries, and energy supply.

 It is important for the foreign exchange market, as it has a direct impact on all indicators of economic growth and, therefore, is closely related to financial policy. 

The development of IP means the strengthening of the economy as a whole, including the strengthening of the country’s position in the world economy, which should lead to an increase in the competitiveness of the goods of this country on the world market and hence, the growth of its trade balance and the exchange rate of the national currency.

The IP index is published monthly around the 15th.

Capacity Utilization

Capacity Utilization (CAPU) is the ratio of total industrial output to the value of the total productivity (potential output) of industries. 

This indicator is of great importance for the foreign exchange market due to its close connection with the dynamics of the business cycle, thanks to which it becomes an additional benchmark for the market in difficult moments of waiting for changes in the policy of central banks, suggesting possible future decisions of the Central Bank.

Durable Goods Orders

The indicator Durable Goods Orders covers the statistics of production orders for durable goods with a lifespan of more than 3 years (cars, furniture, refrigerators, jewelry, etc.). 

Orders by industry are divided into 4 main categories: metalworking (primary metals), mechanical engineering, electrical equipment, and transport. 

To exclude the impact on statistics of large military orders, statistics are kept separately from defense/non-defense.

The indicator is important for the foreign exchange market because it is an indicator of consumer confidence.

 A large volume of orders for high-value items shows the willingness of the consumer to spend money, which stimulates production and, consequently, other indicators of the economy. 

Therefore, high data on durable goods is a factor that strengthens the exchange rate.

Inventory Indicators

Indicators characterizing the dynamics of stocks and their relationship with sales volumes (Business Inventories and Sales) are also useful benchmarks due to their pronounced cyclical dynamics. 

Data sources for them are manufacturers of goods, wholesalers, and retailers. T

hey are published in the form of three indicators: stocks, sales, and the ratio of stocks to sales (Inventories to Shipments Ratio, INSR) monthly, 6 business days after the release of data on durable goods.

Inflation Indicators

Few economic indicators can be compared with inflation indicators in terms of their importance for the currency markets. 

Traders keep a close eye on price action, as the central bank’s anti-inflation tool is raising interest rates, which acts as a strengthening factor for the exchange rate. In addition, the inflation rate changes the real values ​​of interest rates. 

For this reason, government bond markets are very sensitive to inflation data. With their very significant volume, the redistribution of cash flows caused by the movements of these markets will certainly affect exchange rates.

As with other indicators, the reaction of foreign exchange markets to inflation data depends on the stage of the business cycle at which the given economy is located. 

If there are signs of inflation during the growth stage, the central bank can take preemptive action by slightly raising the official interest rate. In this case, the main factor from the point of view of the foreign exchange market will be the interest differential that has increased in favor of this currency, and the exchange rate will rise. A completely different reaction will be when inflation begins to accelerate at the very top of the business cycle, when the overheating of the economy is real, threatening a severe recession. In this case, in response to rising inflation, the central bank will also raise rates in order to cool activity, but the market reaction will be just the opposite. Realizing that a recession is ahead in this economy, associated with the inevitable fall in stock prices, investment volume, and problems with foreign trade, traders will begin to sell this currency, as well as other assets associated with it, so that its rate will fall as a result. Some examples of the reaction of the foreign exchange market to inflation data are presented in the book.

The main indicators of inflation in all countries are the Consumer Price Index (CPI) and the Producer Price Index (PPI).

Consumer Price Index

The Consumer Price Index (CPI) is the main indicator of inflation; it measures the change in the prices of goods and services included in a fixed consumer basket, covering goods and services of constant demand (food, clothing, fuel, transport, medical care, etc.).

The consumer price index is usually built on the basis of a selected basket of goods and services. 

If Pi (0) is the price of the i-th product (service) from the consumer basket at a fixed point in time (base period), and Pi (t) is its price at time t (“now”), and wi is the weight assigned to the given product in the consumer basket (the sum of all weights is equal to 1), then the index can be calculated as:

I = wi × Pi(t) / Pi(0)

The choice of the composition of the consumer basket is not an easy task and is based on special statistical studies since it should reflect the typical composition of consumed goods for a given country, the change in prices for which would really objectively show the direction of ongoing economic processes.

The CPI is published monthly, usually on the tenth business day of the month. The main release form is the amount of change from the previous month for both CPI and Core CPI. 

As a rule, a deviation of 0.2 from the expected value is enough to cause a noticeable reaction in the foreign exchange market.

The main features of CPI behavior in the business cycle:

• – The greatest volatility (variability) occurs for food prices and energy sources; price volatility is greater for goods (where the contribution of energy is up to 50%) than for services (where the contribution of food and energy does not exceed 6%);
• – Inflation in the services sector lags behind inflation in the commodity market by about 6-9 months;
• – Inflation has its cycle, lagging in relation to the general cycle of economic growth.

Producer Price Index

The Producer Price Index (PPI) is an index with a fixed set of weights that tracks changes in prices at which national producers sell their goods at the wholesale level. 

PPI covers all stages of production: raw materials, intermediate stages, finished products, and all sectors: industry, mining, and agriculture. The prices of imported goods are not included in it, but they influence it through the prices of imported raw materials and components. 

Thus, its main difference from the Consumer Price Index (CPI) is that it covers only goods, but not services, and at the wholesale level of their sale.

The US Producer Price Index is based on a sample of 3,400 items with 40,000 participants; the weight of the main group of goods in the index is 24% food, 7% fuel, 7% cars, 6% clothing. 

As before: Core PPI = (PPI EX FOOD & ENERGY). If consumer prices tend always to rise, then producer prices can also have periods of quite noticeable decline.

The PPI is published monthly on the tenth business day of the month. Typical properties of PPI in the economic cycle:

• – More volatile than CPI (food & energy make up about 36% of it and about 23% in CPI);
• – Has its cycle, lagging relative to the general economic cycle, similar to the CPI cycle;
• – PPI peaks (expressed as a percentage per annum) are usually 3-6 months later than the general peaks of economic activity, and their lows are 9 months later than the lows of economic activity;
• – Most often, PPI and CPI extremes are reached in one quarter and are almost always removed no further than a quarter.

International Trade

The functioning of the foreign exchange market and the dynamics of exchange rates are closely related to international cooperation in the fields of trade, cultural exchanges, interstate interactions, and international investment. 

In financial terms, the reflection of the place that a given country occupies in the global world structure is expressed by its balance of payments, which is the result of international financial transactions of residents of this country. 

The Balance of Payments thus fixes the ratio of all major types of international interactions: international trade, capital flows, international services (tourism, etc.), and interstate settlements.

In the long term, the competitiveness of a given country is determined by its national resources, industrial base, professional qualifications of the labor force, and price structure. 

Ultimately, the non-obvious nature of the relationship between these factors, even more, complicated by the current political realities, makes the relationship of the balance of payments itself with the dynamics of short-term exchange rates not so obvious that its analysis would give the trader concrete grounds for making decisions. 

Therefore, the foreign exchange market usually focuses on the main component of the balance of payments – the trade balance.

Trade Balance (Merchandise Trade Balance, TV) is the difference between the amount of exports and the amount of imports of goods by a given country. 

The balance of trade reflects, first of all, the competitiveness of the goods of a given country abroad. 

It is closely related to the level of the exchange rate of the national currency since a large positive value of the trade balance, its positive balance (the predominance of exports over imports) means an influx of foreign currency into the country, which increases the exchange rate of the national currency. 

A negative value of the trade balance (trade deficit – imports prevail over exports) means the low competitiveness of this country’s goods in foreign markets; this leads to an increase in external debt and a depreciation of the national currency.

On the other hand, changes in the exchange rate of the national currency themselves affect the results of international trade and, therefore, the trade balance. 

With a low exchange rate of the national currency, the goods of this country receive an additional advantage over competitors in foreign markets, which leads to an increase in exports. On the contrary, due to the growth of the national currency, the prices of national goods in foreign markets will increase, which will lead to their displacement by cheaper goods from other countries. 

It is, therefore, clear that many actions of central banks to reduce the exchange rates of national currencies are caused precisely by the desire to provide competitive advantages to national exporters.

Trade balance data is published monthly, usually in the 3rd week of the month. 

The form of data presentation is seasonally adjusted in both nominal and fixed prices. Trade results are grouped into six main categories of goods (food, raw materials and industrial supplies, consumer goods, automobiles, capital goods, other goods) and by trade with individual countries. 

Typically, the foreign exchange market looks at the trade balance of a country as a whole rather than at individual bilateral trade balances with different countries. 

But there are exceptions: the US trade balance with Japan has long been the subject of separate consideration due to the traditionally large size of its deficit and the political problems it generates, trade sanctions, etc.

In fact, despite the obvious importance of trade data, interpreting it in terms of exchange rates is not straightforward. The volumes of exports and imports in relation to their economic significance are not considered equal.

 Exports have a more direct impact on a country’s economic growth, so financial markets place more weight on export data. On the other hand, an increase in imports may reflect strong domestic consumer demand, or it may be driven by, for example, an increase in raw material inventories, in which case the economic consequences will be different. 

The inconsistency in foreign exchange markets’ reactions to trade data is primarily due to the market’s perception of whether the exchange rate itself is a matter of particular concern to monetary policymakers or not. If the dollar is the focus of financial authorities, then as deficits rise and exports fall, markets will decide that the dollar must fall to ease the problems of exporters. 

The inflationary consequences of such an expected exchange rate movement will be negative for participants in fixed-income securities markets (government bonds). If a redistribution of the composition of investment portfolios begins, this will also affect the exchange rate. 

But if the dollar and inflation are not the primary concern right now, then the mere fact that exports have fallen can push many stocks down (shares of export corporations) and raise bond prices. Thus, the same economic data can cause directly
opposite consequences for the foreign exchange market.

Employment Statistics, Labor Market

The state of the labor market is the main factor in the development of economic processes, and employment indicators are the most important indicators of economic dynamics, which currency markets always look at very carefully.

 Analysis of employment in economically developed countries is an urgent task of socio-economic statistics; in the USA, like nowhere else, it has a detailed structure of indicators, and the government spends considerable money on its collection and analysis.

 Foreign exchange market traders carefully monitor the main indicators of employment: the unemployment rate, employment in the manufacturing sector, average earnings, length of the working week, etc. Data on employment in the transition stages of the economy, during the transition from recession to recovery or vice versa, is of particular importance for foreign exchange markets.

We will look here at some of the employment indicators and the basic rules for interpreting their behavior in the economic cycle. 

To determine the level of employment in US statistics, two independent characteristics are measured: an indicator of established employment based on data from non-farm payrolls; 

indicator of self-employment (household employment), based on the results of a personal survey (sample of 60,000 people, and the sample does not change for the next month) among the civilian population, including agricultural workers and private entrepreneurs; An employee is considered to be someone who:

• a) received a salary during this week or was employed in their own business (self-employed);
• b) did not work for a valid reason (illness, vacation, labor dispute) but had a job/business.

An unemployed person is considered to be someone who has attempted to find a job during the previous four weeks.
If the payroll indicator measures the number of jobs, then the household indicator measures the number of employed people. Their long-term dynamics coincide, but in the short term, they can even go in opposite directions.
The unemployment rate (UNR) is calculated as the ratio.

UNR = (LF – EF) / LF

Where LF is the Labor Force, and EF is the number of employees (Employed Force).

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