Fundamentals Rule!

technicals are so zigzaged from wedges I still dunno. Over all I still look for euro to rise but who knows.

Seems like there is a stale mate between bears and bulls.

All the sharp move up then back down distort waves and ma's. Been like that for a month and a half. I at least need some consilidation between waves.

Dave

Before we jump into this I should explain what an Index is. Basically it’s a composite of various surveys, previous data, volumes etc that are compiled into one figure that gives an indicator of a particular sector, or economy. That’s it! Simple as that!


Tomorrow we have what is called the Leading Index and this is published by the Conference board;

Leading Index

A leading Index (There are various ones published by different groups. The one tomorrow that we’re studying is published by the Conference board) is simply a tally of indicators that occur before market conditions I.e. its meant to predict where the economy is heading! It compiles a list of indicators (And note many of them have been released separately in the previous month so normally big traders would have a good idea of where this is going - I.e. may not be much market movement) such as housing permits, new orders, orders for consumer goods and materials etc. Suffice to say that they then mash all these figures together and come up with one magical figure. If this figure is rising it’s a good measure of the economy, if its falling a bad sign.

Digging deeper and you also get from the Conference board;
- The coincident Index
- The Lagging Index
Very briefly the Coincident Index is composed of : Industrial Production, employees on non agricultural payrolls, manufacturing and trade sales, personal income less transfer payments. Whereas the leading Indicators give early signs of where the economy is going the coincident index is composed of indices or facts that occur at the same time eg payrolls.

Have I lost you yet???

So if the Leading Index predicts, the coincident index consists of things that are happening now then the lagging index is a tally of items that occurs after the fact so to speak. In other words this index ‘lags’ the economy or occurs after the economic activity eg. items such as the interest rate (the average prime rate used by banks), average duration of employment, commercial and industrial loans outstanding amongst others or the percentage change in consumer price inflation

Normally it’s the leading Index that will hit the headlines but if you have time get onto their website and have a delve into the other two indices. Keep track of all three to build a clearer picture. Some economists don’t place a lot of weight on this report tomorrow given that a lot of the data has preciously been released but as a snapshot of the way things are going I find it useful.

Note also that you can get figures for different countries from the Conference board.

Philadelphia Fed Index

Another Index, this time published by the Philadelphia Fed. It measures the mood and expectations of manufactures in their district. Its tracked because it seems to be an indicator of the way manufacturing trends are heading. Its normally closely allied with the ISM manufacturing Index and Industrial production figures (by this I mean that the two normally move in the same direction).

Its basically a detailed survey that analyses various conditions and moods within manufacturing. It can give some idea of whether manufacturing sees the economy as growing (maybe more orders, positive attitudes etc) or shrinking( pessimistic outlook, drop in orders etc). Some of the components of this index can be further analysed (If you have the bloody time to do so ) to give an idea of inflation (eg. By looking at the price for commodities etc - rising commoditiy prices may feed into inflation)


You can get all the past data on either of the two above indices by going to their respective websites.

I was going to start into the current account definitions and explanations but I think I'll leave it to the end of our months cycle for the simple reason we'll get to cover the components that make up the current account by then...which will make it a lot easier to explain!!!

Hey money,

1.2730/35 and 1.2750/55 are the prices to watch as they are the key breaking points on my charts. A daily close above those prices are significant confirmation to an up move on euro$

Dave

Cheers Dave, I's already after dipping into your thread to glean the information

Sure be interesteing see what happens if it does, Will it continue or will it be a false break? At this rate we might not see it until the indexes come out in 3 hours time.

yea I know, I am not a break out trader just because they don't usually make it in forex. Its the patience of waiting for the close above, and then waiting for the next candle to break the high of the previous. And further waiting on a time frame of one lesser degree to find support/resistance and swing to the side of the break. Always gotta wait for the retrace and swing befor entry. This gets you in at just the right time.

Dave

Shows you how new I am to fundies. This was enlightening, just what these words meant. Good stuff so far!

Until the above, I could never figure out why phily's fed moved the market so much.

Money...your f'in brilliant....with the exception of that "I don't trade technicals" idiosyncracy, of course.

@ Rince, While I don't trade technicals I don't ignore them either. Some of the data they produce can be quiet interesting and informative to say the least. Its just I base my decisions on the fundamentals, thats all. As I've said I've a healthy respect for anyone who uses technicals and is consistently profitable...I don't think I'd be able to do it.


@ Minute, You're welcome We all had to start somewhere and I can remember getting mixed up in the most basic of concepts. It'll come after a while. I try to explain every term I use here and not get bogged down in the tiny details of the surveys etc, that'll come later! For this month we'll just try get an overview of what everything does and how they all come together. The important thing is that you get a rough grasp of what the item is saying and why its followed..Once you have this I can't recommend enough going to the website and looking up past data and graphing it...Do this and you'll be amazed and how proficient you get at predicting at where everything is going. Hell, you can then type as much rubbish as me!!!

The hard part in fundamentals is that their is no 'right' or 'wrong' answers - by this I mean there is no absolute answers. With a technical system you wait until all indicators/lines etc give an entry point and close the trade when they say exit. With fundamentals we're trying to determine where the market will go 3/5/10 months from now so you get a lot of difference, even if the overall consensus is the same. For instance nearly everyone agrees the USA economy is slowing but there is a wide divergence on whether it'll crash land, take a soft landing, go into recession and then trying to determine a time for all these things to happen.

I'll definitely visit those sites and throw some graphs together. I hope I've got the knack.

One question arises, you say that fundy is looking at a 3,5 etc month outlook,
which begs the question as to the time frame of trading?

Hi minute,

My trades last over months rather than days tho I do sometimes take day trades or weekly trades. I normally don't close a position until I think we've reached a turning point in the economy or the data starts worsening leading to a turnaround for say a few months. The main trick is managing your money so that

1. you can carry the trade this long.
2. The interest on any money borrowed from broker doesn't wipe out the gains you make.

Looking ahead to tomorrow for the EurUsd there's no major data from America and the only data from Europe is;

Euro New Orders Index


Yet another index, this time for Europe. Yesterday we defined the three types of Indices, Leading, Coincident and Lagging. This one is a leading Index (I.e. it gives a clue as to where the economy is heading in the future). The Euro new orders Index simply measures the change in value (on a monthly basis) of New orders placed with Manufacturers from clients. It gives an idea of how manufacturing will fare in the coming months. And that’s about it in a nut shell! The actual report is published by Eurostat and the link for the previous report is :

http://epp.eurostat.ec.europa.eu/pls...ers%20index%22

For tomorrow I think there will be additional emphasis placed on this report by the markets for two reasons;

1. There’s hardly any other significant data released tomorrow for the USA or Europe.
2. Secondly a lot of people are wary that the slowdown in the American Economy may stem the growth of Europe (I.e. drag Europe down with it). I think this may be the reason that we’ve seen uncertainty in the market and relative dollar strength given the slew of bad data recently from America (If Europe is going to slow down also then we’re on a par with America hence the dollar strength). If the new orders index tomorrow comes out ahead of expectation we’ll see the dollar heading into the 1.28’s quiet easily.

Hi Money talks. Good postings!

Re the orders data I may be wrong but I have never seen this data have a meaningful impact on the euro - the only economic data that seems to give the euro a bit of a kick is the IFO and sometimes preceeding that, the ZEW. That said, I agree it's definitely worth tracking as this, and another whole lot of indicators, are pretty good at giving a steer on the state and direction of the euroarea economy, and with it, clues for the eventual course of monetary policy which of course has implications for the euro. It's all about putting pieces of the puzzle together.

Cheers Abob, Good point about the lack of emphasis, its just I think the market will focus on something tomorrow for the Eurusd and this seems to be the only kind of data that can be focused on (There's also the French COnsumer spending and italian trade balance data tomorrow). But what you say about the ZEW data and the IFO is spot on

Cool, thanks.

Me too. I just posted this so I can sign up for this thread. Great work, keep it up!

IMHO... a cheaper dollar is being quietly supported by big players because it will help reduce the trade deficit. So supporting a very general upmove over the long term (weeks, months) for Eur/Usd. Thus News release reactions would be noise for the shorter term.

Thus my positive view on a 'weaker' dollar.

Lou

Yes I have to agree Lou. I can't see the big players, depsite the rhetoric, allowing a very strong dollar. The only thing thats worrying me is signs that Europe may not weather the USA slowing down so I'll be watching that one.

Tomorrow we’ve basically no data for the EurUsd bar the German CPI. German figures are normally carefully watched for Europe given that it’s the largest economy in Europe so bad/good CPI figures can give an indication of the Euro inflation figure. We’ll use the German CPI to explain the concept and later in the month we’ll delve into CPI in more detail.

Consumer Price Index

Yup, we’re still on Indices. The previous indices we looked at (such as the Phil Fed Index or the leading indicators index) gave us an indication of how manufacturing was doing or how respondents viewed the health of their business and the economy. The Consumer Price Index, at its most basic level, tells us how Consumer Prices are faring, whether they are increasing, decreasing or at the same level. That’s literally it when all the fancy language is stripped away.

There are various ’baskets’ of goods that are used to determine the CPI. For instance an overall basket might take into account (these are just examples) the price of Coca cola, matches, fresh food, heating oil, petrol, electronic goods, medical care, entertainment etc. The price of all these is taken and compared to cost of the same basket of goods last month. If its more expensive this month it means that the CPI is rising!. There are various baskets of goods that are used (eg there might be a basket that excludes volatile items like petrol or heating oil. In Japan there is a CPI that excludes Fresh Food).

The CPI is reported in several different ways. In can be an absolute figure (eg 102.5 last month, 103 this month) or percentage terms (e.g. 0.2% last month, 0.3% this month) or indeed it can be year on year (This months basket of goods compared to the same basket of goods at this time last year) such as 2% y/y or 2.5% y/y. Normally the headline figure is reported in percentage terms month on month. So if the report say 0.2% m/m it means the basket of goods increased 0.2% compared to last month.

So why is the CPI important anyway? Like everything else when we’re dealing with currencies its to do with the interest rates. Generally speaking, the CPI is Inflation. So when you hear everyone banging on about inflation targets and that they are exceeding target levels it generally means that the CPI is exceeding its target level. This usually means higher interest rates which means a stronger currency. The CPI is the figure favoured by many central banks around the world as the one that gives the strongest reading on inflation and how past policies are feeding into consumer prices.

In the USA the federal reserve prefers the ‘Core CPI’. What this means is that they prefer the CPI index excluding volatile items like Energy and food items.
Looking back to the German CPI tomorrow over the last few months its figures m/m are;

0.9%, -0.5%, 0.4%, 0%, 0.4%, 0.2%, 0.2%,0.4% -0.1%
The forecast for tomorrow is -0.3%

If the CPI comes in on target or worse, expect to see a lot of reports about how the ECB may be done raising rate at after the next two 0.25% rate rises.

Also out tomorrow is the French business confidence indicator if anyone wants to monitor it. i will be to see how confidence is faring up there. :

The inflation data from the German states gives us an idea of what to expect for the September eurowide inflation data due on Friday (HICP) - the market expects a drop to 1.9% y/y from 2.3% y/y in August.

Today's German inflation data for the states of Hesse and Brandenburg both fell by 0.4% in Sep, lower than expectations so far. The other states data will be released later today at various times.

Here is a comment from David Brown at Bear Stearns:

"German regional inflation data are serving up an inflationary shock that the ECB will find hard to swallow.
"Early reports suggest that German consumer prices could have fallen by as much as 0.4% in September, possibly dropping the national inflation rate down as far as 1.0 percent in September from 1.7 percent in August. It is all thanks to lower oil prices. Inflation is being topped and tailed by the recent sharp drop in crude oil prices and by positive base effects from last year's energy price rises.

"This could have very positive knock-on consequences for September Eurozone inflation data later this week, possibly pulling the headline rate down as low as 1.7-1.8 percent from 2.3 percent last month. This could stop the ECB's plans for aggressive tightening extending into next year in its tracks.

"This expected slowdown in Eurozone inflation should not stop the ECB hiking to 3.50 percent in this cycle, but it should make the ECB think long and hard about raising rates any higher next year. These numbers raise the odds that the ECB will hike by a half point in October rather than a quarter point to get rates to their required level as quickly as possible before they are compromised too much by lower inflation and slower growth prospects in the Eurozone."

I'm not sure about the logic in the last bit about hiking aggressively before inflation drops to low!

---

Elsewhere, French consumer confidence dipped a little to 107 in Sep:

Sept Jly Jun May Apr Mar
Composite business climate 107 108 107 108 109 106
Recent past output 11 13 14 13 21 8
Finished product stock 11 12 9 13 12 11
Overall orders and demand -4 -3 -4 -2 -4 -9
Foreign orders and demand 4 14 11 9 8 4

For both the the German and French data I wonder what impact the stronger euro is having (disinflationary and reducing demand for exports).