WHICH REPORTS ARE MORE IMPORTANT

WHICH REPORTS ARE MORE IMPORTANT
THAN THE OTHER?
I want you to know that whether you are a beginner or an advanced trader,
it is important to know what to look for and how certain reports may affect
the price behavior of the markets. Figure 1.10 shows what I see as the major
focuses of economic reports here in the United Statees and what is in my
opinion the order of importance. My selection holds true in all business cycles.
The number-one focus should always be to read and to listen to what
the voting members of central banks are looking at and on what they are
basing their decisions to adjust interest rates. That makes sense, right? So
the releases of their FOMC meeting announcements are important, as well
as the minutes of their last meeting. The minutes are released within two
weeks of the last FOMC meeting. In Figure 1.10, I have two small branches
from the FOMC meetings: One is the Beige book; heighten your awareness
of this, as it is released two weeks prior to a Fed meeting. The other is the
Federal Reserve districts business surveys; these reports will show the underlying
strength or weakness of everything from business credit conditions
to the health of the consumer debt to income ratios.
You and I want to watch the reports and speaking engagements of the
voting members of the FOMC. Generally, they will give clues as to what
their intentions are and what their concerns are. One series of reports is the
Fed’s Beige book, and the other reports are the individual Fed district business
surveys, such as the Philadelphia Fed survey. Then we trickle down
42 FOREX CONQUERED
the flow chart reading from left to right and see the employment situation;
in good times, we should see a low employment level with moderating wage
costs. In hard times, we should see high unemployment rates. When times
are good, as in the period through 2005 when the nation’s unemployment
level was under 5 percent, we need to be aware of ugly inflationary pressures;
so forex traders need to focus on these inflation reports, such as the
Producer Price Index and the Consumer Price Index. After that, taking a
look at the financial health of the consumers is key to determining the continued
strength or weakness of the economy. After all, if they have no more
spending cash or are maxed out on their credit cards, we can anticipate a
downturn in the retail sector, right? If the consumer stops shopping for
clothes, electronic products, home design products, cars, or appliances,
which we consider durable goods, then that won’t be good for the economy
and the Fed would be expected to stop raising interest rates or to possibly
lower rates.
Here is a great example of why we want to pay attention to Fed speakers.
When newly appointed Chairman Ben Bernanke took over, he had a
private conversation with Maria Bartiromo, anchor of CNBC, one weekend.
When she revealed his thoughts in an exclusive interview on national
The Business of Trading Money 43
FOMC
Meetings
Fed
survey
Beige book
Employment report Inflation reports Consumer reports Housing reports
Jobless
claims
Producer
Price
Index
Retail sales
&
Vehicle sales
Housing Starts
&
Permits
Hourly
wages
Consumer
Price
Index
Durable
goods
New &
existing
home
sales
FIGURE 1.10 Economic Report Reference Chart
TV, the markets responded in such a way that Bernanke will be more selective
in what he says and who he talks to at private functions! Once again,
we need to follow the people who make the decisions, and we need to listen
to and to read what drives their decision-making process for adjusting
interest rates.
FOMC Meetings
The Federal Open Market Committee consists of the seven governors of the
Federal Reserve Board and five Federal Reserve Bank presidents. The
FOMC meets eight times a year in order to determine the near-term direction
of monetary policy. Changes are now announced immediately after
FOMC meetings. There are a few accompanying statements the Fed may
make after it announces any adjustments in interest rates. One statement is
if the economy is at risk for economic weakness, or the other is if the economy
is at risk for inflationary pressures. And there is always a chance for a
neutral stance.
Beige Book
The Beige book is a combination of economic conditions from each of the
12 Federal Reserve regional districts. Truthfully, the report is aptly named
the Beige book due to the color of its cover. This report is released usually
two weeks before the monetary policy meetings of the FOMC. This report
on economic conditions is used at FOMC meetings, where the Fed sets interest
rate policy. These meetings occur roughly every six weeks. If the
Beige book portrays an overheating economy or inflationary pressures, the
Fed may be more inclined to raise interest rates in order to moderate the
economic pace. Conversely, if the Beige book portrays economic difficulties
or recessionary conditions, the Fed may see the need to lower interest
rates in order to stimulate activity.
EMPLOYMENT REPORTS
The unemployment rate is a strong indicator of a country’s economic
strength. When unemployment is high, the economy may be weak and its
currency may fall in value. The opposite is true as well. Many economists
look for answers to the question “What is a country’s full employment capacity
level?” That knowledge will give clues to the peak in productivity and
economic output. That also helps determine a country’s capital flows and
is, therefore, good information for currency traders to follow for longer-
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The Business of Trading Money 45
term trend identification. The unemployment rate measures the number of
unemployed as a percentage of the nation’s workforce. Nonfarm payroll
employment tallies the number of paid employees working part time and or
full time in the nation’s business and government sectors.
There are several components that are also included in the employment
report. One is the average hourly work week; that figure reflects the
number of hours worked in the nonfarm sector. Another component is the
average hourly earnings; it shows the hourly rate that employees are receiving.
There are two versions of this report. One is a weekly report that is
released every Thursday morning; and the other, the more influential report,
is the monthly figure that is usually released on the first Friday of
every month. The fear when we are at or near “full employment is that employers
might have to pay overtime wages to their existing workforce and
use higher wages to bring in new workers from the competitor. This action
can raise labor costs because of a shortage of workers. This leads to wage
inflation, which is bad news for the stock and the bond markets. Federal
Reserve officials are always on the lookout for inflationary pressures. In
August 2006, the monthly employment report showed a less-than-expected
increase in new jobs. This gave a hint to traders that the Federal Reserve
might halt its interest-rate-hiking campaign. That so-called campaign took
the Fed funds rate from 1.0 percent to 5.25 percent with a record-setting 17
consecutive interest-rate adjustments. When the market thought the Fed
was done due to the potentially weakening jobs market, the dollar fell
sharply and foreign currencies exploded in value in short order. The British
pound chart in Figure 1.11 shows a 15-minute time period, one of my favorite
time periods to watch for trade signals. The bullish indicators, as represented
by the triangles that are pointing up, generated buy signals before
the report was released (the construction and theories behind this particular
trading system will be discussed throughout this book) and would have
given an extremely profitable trade. The explosive behavior of the market’s
reaction was due to the sentiment that the Fed would change its interestrate
policy from a tightening mode to a neutral watch-and-review mode.
One other method I utilize is trading like or similar markets, which is
often referred to as trading tandem market relationships. In a situation that
reveals a major change in interest-rate policy, such as a surprise in the employment
growth or a contraction in the United States, we should see the
dollar move against the entire spectrum of currencies. Call it a second-dimension
confirmation technique.
Figure 1.12 shows the euro currency. Utilizing the same time period as
in Figure 1.11, a 15-minute chart, we have similar buy signals generated before
the report. It was the internal technical condition of the market on not
one but two “like” or tandem markets that signaled that a change might
take place in the value of these currencies.
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FIGURE 1.11 British Pound Explodes on Employment Report
Used with permission of GenesisFT.com.
FIGURE 1.12 Euro/U.S. Dollar (15-minute buy signals)
Used with permission of GenesisFT.com.
As the charts show, a major change in fact did take place; the euro rocketed
to the upside, generating over a 170-PIP profit per position in less than
one hour. If you examine the two charts closely, you can see that while they
both generated buy signals, both were at or near their pivot point support
levels; but the trend in the British pound before the report was in an upward
direction and the trend in the euro was in a declining mode.
What is interesting about this observation is that some traders were
bound to be selling prior to the report, possibly because they were unaware
that a significant report was due out or that it was an important enough
event to warrant attention or because they were not looking at the same
specific technical techniques that we will be covering in this book.