Predicting the direction of forex markets, particularly on a short term basis, is no easy task. For longer durations, however, it is a good idea to see a list of economic indicators as these show the fundamental reasons why currencies move. Technical indicators work too, but they are best combined with the fundamentals.
Below is a table that shows some of the world’s leading economies and their respective economic indicators. For trading forex, you should be particularly interested in four things: growth, interest rates, inflation and the current account balance. Once these factors are analysed, it is then a good idea to look at other measures such as the technical outlook or the Commitment of Traders report. This list of economic indicators also indicates the unemployment rate and debt as a percentage of GDP.
List of economic indicators
Data as of 23 Dec 2013
Typically, growth or output of a country is measured by GDP (gross domestic product). Higher GDP generally translates to a stronger currency since the rise in economic growth in a country usually means a higher demand for its currency.
Countries with higher interest rates will usually see their currencies appreciate while those with lower interest rates will see their currencies fall. This is partly due to the carry trade – where investors borrow money in a low yielding currency (such as the Japanese yen) and park it in a higher yielding currency (such as the Australian dollar).
Inflation is another big factor in forex markets. High inflation in a country means that its products are more expensive compared to elsewhere. This leads to less demand for its products and therefore less demand for its currency. The reverse is true for low inflation. High inflation invites higher interest rates from central banks as they seek to control it. Thus, high inflation can result in a stronger currency in the short term but a weaker one in the long term. Again, the reverse is the case for low inflation.
Current account balance
A current account deficit occurs when a country imports more than it exports while a surplus occurs when it exports more. While there are other influences, such as if the imports are mostly financial transactions, as a general rule, countries with current account deficits will see their currency depreciate over time while those with current account surpluses will see their currency appreciate.
Current account deficit’s more than -5% are often considered to be unsustainable and are a sign of potential turmoil. Many currency crises have started when a country’s account deficit grows larger than -5%.
For a full up to date list of economic indicators take a look at Trading Economics and see how many countries have a deficit more than -5%. These countries should definitely be avoided – I will be looking at these in a future article.
Thank You For Reading
Joe Marwood is an independent trader and the founder of Decoding Markets. He worked as a professional futures trader and has a passion for investing and building mechanical trading strategies. If you are interested in more quantitative trading strategies, investing ideas and tutorials make sure to check out our program Marwood Research.
This post expresses the opinions of the writer and is for information, entertainment purposes only. Joe Marwood is not a registered financial advisor or certified analyst. The reader agrees to assume all risk resulting from the application of any of the information provided. Past performance is not a reliable indicator of future returns and financial trading is full of risk. Margin trading can lead to losses more than in your account. Mistakes in backtesting and presenting of analysis regularly occur. Please read the Full disclaimer.