Relative Importance Of Data Changes Over Time

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With a dynamic market, one caveat Is that the significance of economic data releases does change with time. According to a paper titled Macroeconomic Implications of the Beliefs and Behaviors of Foreign Exchange Traders" written by Cheung and Chinn of the National Bureau of Economic Research (NBER) in 1992, the trade balance was the number one market-moving U.S. economic release on a 20-minute basis, while non-farm payrolls (and unemployment data) was the third. In 1999, unemployment took the top place while the trade balance fell to the fourth. As indicated in the earlier table for 2004 (Table 4.1), the trade balance and inflation reports switched places with the trade balance being the third most market-moving indicator in 2004 instead of inflation, which took the ranking in 1997, while the significance of labor market data held steady. Intuitively, this makes sense since the market shifts its attention to different economic sectors and data based on the. conditions of the domestic economy — for example, trade balances may be more important when a country is running unsustainable deficits, whereas an economy that has difficulty creating jobs will see unemployment data as more important.

FX Dealer Kinking of Importance of Economic Data: Changes over time

As of 1997 As of 1992

1. Unemployment 1. Trade balance

2. Interest rates 2. Interest rates

3. Inflation 3. Unemployment

4. Trade balance 4. Inflation

Rankings are based on reaction one minute after data is released.


Contrary to popular belief, the GDP report has also become one of the lesser important: economic indicators on the U.S. calendar and has led to one of the smallest relative movements in the EUR/USD. One possible explanation is that GDP reports are less frequently released than other data used in the study (quarterly versus monthly), but in general the GDP data is more prone to ambiguity and misinterpretation. For example, surging GDP brought about by rising exports will be positive for the home currency; however, if GDP growth is a result of inventory buildup, the effect on the currency may actually be negative. Also, a large number of the components that comprise the GDP report are known in advance of the release.


For breakout traders, the knowledge of which data has the potential of leading to the largest average range can be useful in determining how to weight positions accordingly. For example, in Figure 4.1, which shows the daily EUR/USD chart, there is a triangle forming as prices consolidate significantly. A breakout trader would probably overweight positions ahead of the August 6, 2004, nonfarm payrolls release on the eve prior in the anticipation of a large breakout move following this release. In contrast, the third bar of the consolidation was the day of the GDP release. As you can see, the range, was still comparatively tight, and given the knowledge that the average instantaneous 20-minute move off of the GDP release is only a third of the nonfarm payrolls move, the same breakout players hoping for a large move off of that economic release should probably put on only 50 percent of the same position that they would have put on for a no alarm payrolls-based breakout. The same guidelines apply for range traders or system traders. Nonfarm payrolls day would be a perfect day to stand on the sidelines and wait for prices to settle, whereas GDP day still provides an opportunity for solid range or systems-based trading.

Overall knowing what economic indicator moves the market the most is very important for all traders. Knowing the 20-minute versus daily range is also very important because the exchange rate adjustment to economic news appears to be very swill. Any reaction beyond a 15-to-30-minute window after the data is released may be the result of investor overreaction or trading related to customer flow rather than news alone. The GDP is a perfect example—the 20-minute reaction ranking is higher than the daily ranking. It is also critical to stay abreast of which data the market deems important at any point in time because the market's focus changes from period to period; once-relevant data may end up having less of an effect on currency values later on, and vice versa.

Figure 4.1 EUR/USD Daily Chart (Source: eSignal.


"Macroeconomic implications of the Beliefs and Behavior of Foreign Exchange Traders,"

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