Why The Unemployment Rate Is Your Friend
The success and failure of foreign exchange trading hinges on all sorts of contributing factors, but they’re not all necessarily created equal, so knowing which ones to really focus on and perhaps lend slightly greater weight to can make all the difference when it comes to taking advantage of trading opportunities, as and when they present themselves.
What makes FX trading so exciting – and, no doubt, what appeals to many of you traders out there – is that markets change all the time and it can be for any reason, so opportunities appear as if from thin air, based on what’s happening in economies all over the world… and the rush comes when you spot something making waves and buy and sell accordingly.
Of course, it’s essential that you keep a very close eye on global economic news so you can identify these opportunities and get in there quick, assessing the impact of what’s happening on interest rates and monetary policy.
Hawkish and dovish
New to the trading game? Familiarise yourself with some of the terms you’ll likely hear bandied about and you can help maximise your chances of success.
If you’ve just started keeping a closer eye on what’s going on around the world, you’re sure to hear the word ‘hawkish’ being used to describe contractionary monetary policy, whether that means rising interest rates or reducing the central bank’s balance sheet, increasing inflation or strong economic growth.
And then there’s ‘dovish’, which is basically just the opposite. It indicates a fall in interest rates, with the hope that a stagnating economy will be stimulated. Depending on what you see happening throughout the day, you can then buy and sell as you judge to be appropriate.
But! It’s not just monetary policy that you need to keep a close eye on and there are other factors you’ll need to monitor to see what impact they’re having on markets, as well. And, unluckily, some of these are entirely unpredictable – so it’s all about acting fast when they do suddenly make an appearance.
Event risk is anything that will have a market impact but that you can’t see coming, everything from natural disasters and terrorist attacks to good and bad economic news, new technological innovations and inventions, comments from government or central banks and so on.
So what should you monitor first?
With so much to watch out for on a daily basis, it can be a little overwhelming for new traders to keep up with – so if you’re looking for one particular factor to really pay attention to, global unemployment rates would be an especially good place to start.
Why? Because unemployment rates are very significant indicators of any given country’s economic condition, reflecting changes that have already taken place.
What is the unemployment rate?
The unemployment rate is the percentage of unemployed people in the total workforce, comprising payroll or contract-based employees, the self-employed and the unemployed. People who are ineligible to work such as elderly people, children and so on are excluded from the rate.
By comparing rates from the current and past periods, it is possible to work out if more or fewer people are seeking government support – and, from there, you can then work out whether the unemployment rate is on an upward or downward trend.
Trends are strongly associated with business confidence. Expanding economies have more confident companies that are looking to grow, hiring more people in order to do so. But unstable economies hinder business confidence, with companies not looking to make any investments in their operations until conditions change and improve.
The release of unemployment rate reports is typically followed by high currency market volatility – an exciting time for any forex trader, since you’ll be faced with all sorts of high risk and high return opportunities.
And it’s because of this impact on financial markets that unemployment rate indicators are closely monitored around the world… so make sure that it’s at the very top of your list, whether you’re new to trading or old hat.
How can traders invest in unemployment rates?
Top note: When trading forex, make sure you’re comparing year on year rather than making more frequent report comparisons, as this latter strategy may not provide you with an accurate representation of actual unemployment trends.
There are three ways in which you can invest in unemployment rates – lower than predicted, higher than predicted and lower than natural.
Lower than predicted
A buying opportunity! When unemployment rates are lower than predicted, you’ll see an increase in workers generating income and consumption expenditure, as well as possible inflation and a rise in interest rates. This is, of course, very positive for one and all, and a strong indicator that an economy is on the up.
Higher than predicted
A selling opportunity! When unemployment rates are higher than predicted, you’ll see a drop in economic activity, lower incomes and decreased consumption. This could drive the government in question to bring in fiscal policies, launch public work projects or create demand within unemployment benefits.
Lower than natural
Historically, the natural rate of unemployment has remained relatively stable, hovering between 4.5 and 5.5 per cent. Unemployment won’t be sustained beneath this natural rate for long, because it will lead to higher inflation and force government hands to increase rates and moderate growth.
Knowing when the relevant reports are due to be released country by country is essential, as this will mean you’re better able to prepare yourself to trade assets and won’t be caught on the back foot.
Key unemployment rate reports
These reports are released monthly by the Office for National Statistics, affecting assets including British stocks, EUR, GBP, UK Gilts and the FTSE 100.
Covering Europe, these reports are released monthly by Eurostat, affecting assets like government bonds, CAC 40, DAX 30, EUR and EuroStoxx50.
These reports cover North America and are released monthly by the US Bureau of Economic Analysis. They affect US stocks, USD, the S&P 500, the Dow Jones, traded commodities and the NASDAQ 100.
Statistics Canada releases its reports monthly, which affects CAD, Canadian stocks, Crude Oil, S&P/TSX and Canada Marketable Bonds.
The Statistics Bureau of Japan releases its reports each month, with affected assets including government bonds, the Nikkei 225, Japanese stocks and JPY.
Released each month by the National Bureau of Statistics, affected assets include CNY, NZD, AUD, the China A50, Chinese stocks and government bonds.
The Australian Bureau of Statistics releases its reports monthly, affecting assets such as AUD, NZD, the ASX 200 index and both Australian and New Zealand stocks and bonds.
How to keep track of it all
You can’t expect to remember all the information you need to have at your fingertips in order to buy and sell in forex trading. It would just be impossible and you’d go mad trying – but, luckily, this is the digital age and there’s a lot of technology out there doing much of the hard work for you.
Economic calendars are really useful tools, covering financial events and indicators from all over the world. When new data is released, the calendars are updated in real time. Although these calendars aren’t meant to be a trading guide, only providing general information, they can be useful resources for maximising efficiencies and organising your trading strategies.
If you’re a news trader or plan to trade forex through fundamental analysis, you’ll need to monitor global economies based on macroeconomics data like the unemployment rate, inflation, consumption data, GDP and so on – and you can just keep your economic calendar open in a tab on your devices, so the information is right there as and when you want it.
And even if you’re not that bothered about macroeconomics when trading (although you probably should be), you can still use the calendars to check when high volatility data is expected to be released, allowing you to manage your trades more effectively.
The data is displayed in chronological order, divided by day. When new data is released, the page refreshes itself automatically so you won’t miss anything and you can enable notifications so you’re alerted to releases as they happen.
You’ll see a little flag icon next to the data release, indicating which country it’s from. The currency is right there next to it, so it couldn’t be easier to scan quickly through the list and see what currencies are likely to be affected now or in the future.
Give it a go
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