Trading Economic News Events
Just quickly following up on a question from Michael asked as why we’ve seen so many muted reactions lately from important economic data.
Now, there are times when economic data will be less important and times when it will be more important. And there are a couple of criteria that we can use to help us gauge when the market will pay attention and when we can safely assume that the data point will be overlooked.
Now, the first criteria we need to consider is the overall or bigger picture environment that we are trading in.
Now to use our current environment as a good example we know that markets are not really reacting to economic data the way that they would normally do, because we are in a very unprecedented situation right now, with a worldwide pandemic that has pushed us into a global recession with proportions not really seen going back all the way to the Great Depression.
Now alongside this, we’ve seen the most central bank easing ever recorded in history with major central banks cutting rates down to almost zero like they did back in the global financial crisis, but they also introduced more QE than ever before.
And alongside that, we’ve also seen fiscal responses from governments that dwarfs anything else, any other type of stimulus measures we’ve seen before as well.
So right now, in this current environment, all the attention and all the focus is on the pandemic itself, how quickly we can bring the pandemic to its knees and of course, how fast the world’s major economies can come out of the lockdowns.
Thus, in times like this economic data is still important, but it’s not gonna be the main driver in the market, it’s merely used as a yardstick right now on trying to figure out how deep the downturns will be and more importantly, especially for the more forward looking market we’re trading in, how quickly we can expect that bounce back to occur.
Now when we are not in these type of one of global turmoil, global recession, huge volatility crisis events, then the criteria are a lot simpler.
When conditions are normal, so to speak, we only need to consider expectations. So, if we know a particular economic data point will be very important, and it’s highly anticipated by the markets and it’s a key driver, then we know we should pay more attention to it. And by evaluating the expectations going into the event, we can analyze with a higher probability, what the highest probability outcomes based on how the actual outcome differs from the expectation, so what will be the highest probability outcome based on the how the actual event differs from those expectations?
So, let’s use an example, if we know everybody is watching US inflation data right now. Maybe we know they’re watching it because the Federal Reserve has said that they will cut interest rates if inflation reaches let’s say, 1%, that’s just an example.
Now imagine We have inflation data coming up next week. And the current inflation rate is at 1.2%. So just 0.2% away from the Fed’s target to cut rates. Now, there’s lots of expectations that this inflation rate will reach 1%. So going into the event, there’s already a tradable expectation going into it. And now, imagine that the actual day for the inflation gauge arrives, and the rate comes in at not 1% but actually is a lower than 1% coming in at 0.8%.
So basically coming in lower than the minimum expectations and far lower than where the Fed said they will use as a gauge to cut rates. Now that will be a tradable event, to the downside for the dollar and for the US 10 year yields for example, because it will mean market will start to price in the possibility of a rate cut based on that inflation data.
So it’s all based on expectations. What is the market’s baseline for the currency right now? What is the expectation of the upcoming data? And then how does the actual data change the current bias and that expectations?
So, when there is no particular baseline for a currency, let’s say it’s a more neutral baseline or it’s a data point that doesn’t really have any significant expectations, maybe it’s an event that doesn’t really or isn’t really expected to change anything with regards to the central bank outlook, then that is mostly going to be a event that we can safely ignore for any particular trading session.