Economic Numbers that Move the US Dollar

1. How important the market considers a particular release to be.

2. How close to market estimates the number comes in at. Remember that markets anticipate news, so generally if an economic release comes out as expected, there is very little if any market reaction to that release.

How important the market considers a particular economic release to be, is something that changes over time depending on what is happening from a US Dollar fundamentals standpoint. If there are worries that the economy is going into recession, then the market is going to be extra sensitive to any numbers, such as non farm payrolls and consumer spending, which may provide early warning signs that this is the case. Conversely, if the economy is heating up and the markets are worried that inflation may become a problem, then the most market moving numbers may be price data releases, such as the CPI and the PPI. For your reference, according to Dailyfx.com the most market moving indicators for 2007, in order of importance were:

1. Non Farm Payrolls
2. FOMC Releases
3. Retail Sales
4. ISM Manufacturing
5. Inflation
6. Producer Price Index
7. The Trade Balance
8. Existing Home Sales
9. Foreign Purchases of US Treasuries (TIC Data)

Why the US Dollar is Still the King of the Currency World

The first reason why the US Dollar is the king of the currency world is the fact that it is a part of each of the world’s most actively traded currency pairs. According to the Bank of International Settlements and as outlined here, these currency pairs account for 67% of the daily turnover in the forex market. When you add the US Dollar Swidish Krona currency pair and all of the currencies categorized as “other” traded against the US Dollar, that total rises to 89%

EUR/USD 27%
USD/JPY 13%
USD/GBP 12%
USD/AUD 6%
USD/CHF 5%
USD/CAD 4%
USD/SEK 2%
USD/Other 19%

A second reason why the US Dollar is still the king of the currency world is because it is the world’s primary reserve currency, accounting for over 63% of the world’s currency reserves. A reserve currency is a currency held by the governments/central banks of other countries in large quantities. Countries do this so they can purchase goods which are priced in the reserve currency at a cheaper rate than if they had to convert, and to borrow money at a cheaper rate, since lenders will be more likely to lend knowing they hold large quantities of what is considered a more credible currency. Perhaps most importantly for traders, many countries and especially countries in Asia (the most talked about example being china) maintain large reserves of US Dollars so they can either peg the value of their currency to the US Dollar, or maintain a loose peg. The goal here is to either stabilize their own currencies and therefore their economies and/or to hold the value of their currencies artificially low in order to make their goods more competitive overseas, something which we will examine further in our next lesson.

Thirdly, many private businesses and individuals located outside the United States hold US Dollars for trade reasons, because they consider the currency more stable than their home country’s currency, or for a multitude of other reasons. This, combined with what we just covered on the US Dollar being the world’s primary reserve currency, means that over 2/3rds of all US Dollars in circulation are held outside of the United States.
The last major reason why the US Dollar is still king of the currency world is because many major commodities such as oil, gold, and silver are priced in US Dollars, making access to US Dollars essential for anyone in the world who wants to purchase these products.

More than simple interesting facts, these factors can have huge affects on the value of the US Dollar, and are therefore extremely important to us as traders. Exactly how these things affect the US Dollar, and therefore exactly what we should watch out for as traders will be the topic of our next lesson so I hope to see you then.

As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading!

Moving Average

A Moving Average is a simple measure of the average price or exchange rate over a specific time frame. For example, if we take the closing prices of the last 10 days, add them together and divide the result by 10, we have created a 10 day Simple Moving Average (MVA on Trading Station 2).

"Market Noise"

Student’s Question:I have heard the expression “Market Noise” but do not know what it means. Thanks!Instructor’s Response:“Market Noise” refers to the very random price action that occurs on lower time frame charts. It is the normal movement and fluctuation of the price of a currency pair during the trading day. It is much more pronounced on the lower time frame charts. This is one reason why trading on those lower time frames can be more challenging.Take a look at the 5 minute chart below…

Each 5 minute candle reflects the all the trades that were made during that 5 minute period. Since the time frame is so short, oftentimes, no discernable trading pattern can be identified. Because of that, identifying entries along with the placement of stops and limits are much more difficult. As a trader moves to larger and larger time frames, the price action will be less random and, therefore, “Market Noise” will become less and less of a factor.

What Do They Mean by Overbought and Oversold?

Many times in trading we here the terms overbought and oversold. We hear an analyst state that the AUD/USD is overbought and due for a correction or that the EUR/CHF is oversold and due for a bounce. But how does one determine what is overbought and what is oversold and just what does that mean?

The terms are used to describe a market condition that is quantified by certain technical indicators. These indicators are called oscillators with two popular examples being the Stochastics and RSI. An oscillator is a commonly used momentum indicator that measures the current currency price compared to its historical price over a given time period. It looks to gauge the strength and momentum of a currency pair's move by measuring the degree by which a currency is overbought or oversold. The scale for the both indicators is 0 to 100. When Stochastics reaches a value of 80, the market is considered overbought and when Stochastics reaches a value of 20, the market is considered oversold. RSI uses the same scale of 0 to 100, but the value for overbought is 70, while the value for oversold is 30. The idea is when the market reaches either extreme, the chance for a reversal increases.

However, a reversal is not imminent.

Markets that are in a strong uptrend can remain overbought for long periods of time and markets that are in a strong downtrend can remain oversold for long periods of time. This is why these oscillators have limited value in trending markets. However, when the market is in a downtrend and the oscillator moves up to overbought, there is a much better chance of a reversal. On the flip side, when the market is in an uptrend and the oscillator moves down to oversold, there is also a good chance of a reversal.

Here is an example using the daily chart of the AUD/USD. Also plotted on the chart is a Slow Stochastics using values of 15,5,5. You can see that while the market is in an uptrend, the Stochastics will spend more time in an overbought condition and little time in the oversold condition. This is typical in a strong uptrending market. Also, when Stochastics moves down to an oversold condition, the market has a tendency to reverse. This is one way some traders use this tool to identify a buying opportunity. But the key here is that the market is in an uptrend. If the market was in a downtrend, the opposite would be true and those same traders would treat a move up to overbought as a selling opportunity. So while oscillators can be valuable in identifying trading opportunities, it is the direction of the trend and trading in that same direction that increases the reliability of these tools.