While most participants in the FX market are purely technicians, it has been estimated that 25% of all foreign exchange dealers trade with fundamentals, compared to 30% who use technicals. Among the speculative day trading community, this ratio is probably even more weighted towards technicals. However, as we have all learned throughout the past few years, fundamental releases have become increasingly important market movers.
Relative Importance of Data Changes Over Time[/B]
The relative importance of economic releases also tends to evolve with time. Intuitively this finding makes sense as the market shifts its attention to different economic sectors and data with the changes in market environment?for example, trade balances may take precedence when a country is seen to be running unsustainable deficits. Similarly, in an economy that has difficulty creating jobs, unemployment data will be viewed by the market as more important.
Over the past year, the monthly non-farm payrolls report is once again the most market moving indicator for the US dollar after being briefly dethroned by the Institute of Supply Manager?s manufacturing survey in 2006. In this changing market environment, we felt that it was important to update our most market moving indicators report to cover price action and a select number of US economic reports for the period of July 2006 to July 2007. The results as usual, are very interesting. The employment data dominated the fundamental scene on all three time frames we covered in our analysis (20 minutes, 60 minutes and 1 day following the release), suggesting the consumer?s health remains priority number one for the market, especially with the US economy coming under pressures from other sectors. Another immediate take away from a quick skim through the data was the consistency with which the Federal Open Market Committee?s interest rate decisions have dominated the shorter time periods despite the fact that the Board of Governors had not changed the Federal Funds rate in over a year. This is a clear sign of the market?s interest in trying to divine the next change in monetary policy from commentary. Aside from the usual reshuffling of a few of the top tier indicators, a more general observation jumps out at us through the data - namely, the considerable drop in overall volatility. Regardless of whether you trade on technicals, fundamentals or a mix of the two; knowing which data releases have a history of stoking volatility is crucial for knowing when to be in the market and when to be flat.
[B]A Shifting Hierarchy[/B]
The US dollar is the most liquid currency in the world and it is estimated to be on one side or the other of 90 percent of all currency transactions. Therefore, US indicators should be closely monitored to prepare for unwanted (or perhaps sought after) volatility. Our study was aimed at finding those releases that were the most market moving over the past year; which gives us the most objective list of the top movers in the months ahead. Starting with the rankings for the immediate (knee-jerk?) reaction and working our way up, we first look at the average price action for the 20 minutes following each report. Employment held the top spot once again in 2007 with an average 67 point reaction following the 12 non-farm payroll reports released over our sample period. The fallout from the Fed?s rate decision and brief statement took second place with a distant 50 point follow through on average. These results are not at all surprising considering the data we have from the previous two years. The employment gauge and policy announcement have held the first and second spots respectively for three years running. Moving a little further down the list, there are a few notable changes. Retail sales rose two places as the general well being of the US consumer became a top priority for keeping growth on track and inflation in modestly hawkish territory. Along that same thread, the Consumer Price Index and Producer Price Index were accounted. And, interestingly enough, the Foreign Purchases of US Treasuries (TICS) and Personal Consumption reports were replaced by Durable Goods Orders and Existing Home Sales. The latter makes sense given the quick deterioration of the US housing market and the evolution to subprime credit problems.
The results from the knee-jerk reaction are largely echoed through the higher 60-minute and daily averages. Over the hour following each report, the NFPs and rate decision are once again number one and two. From the daily time frame, a period that perhaps shows the true consequence of each report, the employment report crowds out the top space. However, the FOMC meeting drops to number eleven. Since the Fed has not changed its official stance on monetary policy (aside from projections offered through the official statement) at any of its gatherings over the year, the follow through would likely be minimal. The rest of the indicators populating this particular list are the ones usually touted as fundamental big wigs when traders try to recount the indicators they would trade from. A mix of trade, inflation, housing, business, and consumer activity cover the broad spectrum of economic activity.
[B]Why the NFPs and Interest Rates?[/B]
So, why are the non-farm payrolls report and interest rate decision topping the list? Employment remains the market?s primary volatility anchor because it is considered a unique and leading consumer indicator. In foreign exchange, a currency is often a reflection of its country?s economy. For the US economy (the largest in the world), sectors like business investment, manufacturing and housing have both contributed to growth and detracted from it over the past few years. However, throughout the same period, the consumer has consistently proven himself a pillar of growth. Therefore, when GDP reports released earlier this year showed a considerable cooling in expansion rates, market participant?s fear steered them their interests to reports that would give insight into the very foundation of growth - the US consumer. The payroll report is unique in that it is easily understood as a net increase or decrease in employment. From this one report, consumer?s confidence, financial health and spending habits can all be implied.
While it is obvious why the economy?s health would and should be a primary concern for currency traders, why would the FOMC?s rate decision command price action when the policy group has not changed the benchmark lending rates in over a year? Sometimes, the one thing more important than an interest rate hike or cut is the market?s expectations for future hikes or cuts. Since the Fed left rates unchanged last June, speculation has intensified over when the next shift would come and which direction it would take. When growth started to slow and credit problems began to spread beyond the boarders of the subprime market, the calls for a rate cut to save home owners and protect the economy from a recession grew. All of this only helped to stoke speculation as to when or if a cut would be in the cards.
[B]Volatility Continues To Fall[/B]
Though the individual rankings of each of the top market movers is certainly important for forecasting periods of high-risk price action, we should also use the data to appreciate the bigger picture. Comparing the average price changes on all of the time frames for 2007 to past years, it is clear that overall volatility continues to fall. Take the evolution of the average range for the non-farm payrolls report between the years. In 2004, the employment report roused a mean of 193 points over the release day. This range fell to 130 points in 2006 and has fallen to 104 this year - barely above the 100-point barrier. These muffled conditions are not unique to the currency market. Indeed, equities, government bonds, corporate paper and commodities markets have all seen ranges contract.
[B]What?s In Store for the Future[/B]
It seems as if it is business as usual with the top market movers holding their spots for yet another year and overall volatility holding a cooling pattern; but does that mean the conditions will evolve the same way over the coming year? Not necessarily. Just in the past few weeks, overall volatility has rallied from multi-year lows across the various markets. This should help to create a more reactive market base for the top market movers to work off of. What?s more, as market commentators continue to argue the future of growth (a soft landing, recession or rebound) and interest rates (holding steady, a cut, or series of cuts), interest in the individual fundamental indicators will grow. It is therefore important for all traders to stay on top of the most market moving indicators for the US dollar.