Economic Data

book-threedimensionalapproachAs Mark Twain once said, although some attribute the quote to Benjamin Disraeli  – there are lies, damned lies and statistics, and in dealing with the economic data which is released in a constant stream around the world, it is always best to have this famous quotation at the back of your mind.

When it comes to fundamental news releases and the associated economic numbers, all is NOT what it seems at first sight, as you cannot rely on on the data being valid as there are so many reasons for it to be massaged and therefore presented in the best possible light for all concerned.

This of course makes it difficult for us as forex traders to ‘read between the lines’, and the purpose of this section is for Anna to provide you with an insiders view of the data, as she highlights the truth behind the numbers, and how they are distorted by government and financial institutions, month in and month out, as well as pointing the way to those numbers that are important, and those that are less so and why.

In the forex markets, economic data is generally referred to as fundamental news, which in simple terms refers to data which is released by a variety of governmental agencies, and financial institutions, and which provides economic yardsticks for measuring such things as employment, economic growth and inflation, giving an overview of the economic health of the nation and it’s people.

Economic data is cyclical

This in turn of course is then reflected in the currency markets, which consequently react to each piece of economic data as it is released. Whilst some of these releases generally carry more weight and significance such as interest rate decisions, or employment data, it is important to realize that these releases, also have a cyclical bias which changes over time. As an example, historically interest rate decisions by the central banks have always carried the greatest significance for the currency markets in general, since it is the interest rate differential between currencies which essentially drives the money flow with investors and speculators taking advantage of these differentials.

However, in the last few years, with the financial world teetering on the brink of collapse, and with interest rates slashed to historic lows, the impact of any interest rate decision from the central banks has diminished rapidly, since the prospect of any change is increasingly unlikely. As a result, any market reaction to these announcements is muted, and in some cases almost passes unnoticed, something that would have been unheard of, even a few years ago. Indeed this is a situation that seems likely to continue for some time to come, and is reminiscent Japan’s lost decade, from which it is only now slowly starting to recover, have seen interest rates there remain at zero or just above since the late 1980’s following the bursting of the asset bubble.

Manipulation of economic data

One of the classic examples of economic data manipulation comes in the monthly employment release from the US Department of Labor. This is a government body run by civil servants keen on developing their own careers and therefore doing as they are told by their paymasters, the politicians. Politicians of course are only interested in one thing – re-election, and therefore keen to ensure that positive messages are sent to the voting public, which is why the headline unemployment rate in the US is currently reported at around 9%, whilst the true figure is actually more than double this at almost 20%. If the true figure were released then the politicians would be guaranteed a swift exit from office.

All fundamental economic data is therefore massaged before it is released, either to hide the negative aspects or to accentuate the positives. This is a fact of life when dealing with economic data, in all it’s various forms. It is equally important to realize that one piece of economic data is rarely, if ever, sufficient on it’s own, to change or reverse a longer term trend. What generally happens is that the market pauses, and may reverse temporarily, before continuing to move in the direction of the established trend once more.

The reason for this is simple – no single piece of economic data, has the power to change a trend. There are too many other factors which influence the forex markets for one number, no matter how significant, to change a long term trend.

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