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2011-11-15 14:08:57
Posted: Mar 16, 2011
One of the great advantages of trading currencies is that the forex market is
open 24 hours a day (from 5pm EST on Sunday until 4pm EST Friday). Economic
data tends to be one of the most important catalysts for short-term movements
in any market, but this is particularly true in the currency market, which
responds not only to U.S. economic news, but also to news from around the
world. With at least eight major currencies available for trading at most
currency brokers and more than 17 derivatives of them, there is always some
piece of economic data slated for release that traders can use to inform the
positions they take. Generally, no less than seven pieces of data are released
daily from the eight major currencies or countries that are most closely
followed. So for those who choose to trade news, there are plenty of
opportunities. Here we look at which economic news releases are released when,
which are most relevant to forex (FX) traders, and how traders can act on this
market-moving data.
Tutorial: Top 10 Forex Trading Rules
Which Currencies Should Be Your Focus?
The following are the eight major currencies:
1. U.S. dollar (USD)
2. Euro (EUR)
3. British pound (GBP)
4. Japanese yen (JPY)
5. Swiss franc (CHF)
6. Canadian dollar (CAD)
7. Australian dollar (AUD)
8. New Zealand dollar (NZD)
This is just a sample of some of the more liquid derivatives based on the
currencies above:
1. EUR/USD
2. USD/JPY
3. AUD/USD
4. GBP/JPY
5. EUR/CHF
6. CHF/JPY
As you can see from these lists, the currencies that we can easily trade span
the entire globe. This means that you can handpick the currencies and economic
releases to which you pay particular attention. But, as a general rule, since
the U.S. dollar is on the "other side" of 90% of all currency trades, U.S.
economic releases tend to have the most pronounced impact on the market.
Trading news is harder than it may sound. Not only is the reported consensus
figure important, but so are the whisper number and the revisions. Also, some
releases are more important than others; this can be measured in terms of both
the significance of the country releasing the data and the importance of the
release in relation to the other pieces of data being released at the same
time.
When Are News Releases Issued?
Figure 1 lists the approximate times (EST) at which the most important economic
releases for each of the following countries are published. These are also the
times at which you should be paying extra attention to the markets if you plan
on trading news releases.
Country
Currency
Time (EST)
U.S.
USD
8:30 - 10:00
Japan
JPY
18:50 - 23:30
Canada
CAD
7:00 - 8:30
U.K.
GBP
2:00 - 4:30
Italy
EUR
3:45 - 5:00
Germany
EUR
2:00 - 6:00
France
EUR
2:45 - 4:00
Switzerland
CHF
1:45 - 5:30
New Zealand
NZD
16:45 - 21:00
Australia
AUD
17:30 - 19:30
Figure 1: Times at which various countries release important economic news.
What Are the Key Releases?
When trading news, you first have to know which releases are actually expected
that week. Second, it is key for you to know which data is important. Generally
speaking, these are the most important economic releases for any country:
1. Interest rate decision
2. Retail sales
3. Inflation (consumer price or producer price)
4. Unemployment
5. Industrial production
6. Business sentiment surveys
7. Consumer confidence surveys
8. Trade balance
9. Manufacturing sector surveys
Depending on the current state of the economy, the relative importance of these
releases may change. For example, unemployment may be more important this month
than trade or interest rate decisions. Therefore, it is important to keep on
top of what the market is focusing on at the moment. (For more insight on these
indicators, see Economic Indicators To Know.)
How Long Does the Effect Last?
According to a study by Martin D. D. Evans and Richard K. Lyons published in
the Journal of International Money and Finance (2004), the market could still
be absorbing or reacting to news releases hours, if not days, after they are
released. The study found that the effect on returns generally occurs in the
first or second day, but the impact does seem to linger until the fourth day.
The impact on order flow, on the other hand, is still very pronounced on the
third day and is still observable on the fourth day.
How Do I Actually Trade News?
The most common way to trade news is to look for a period of consolidation
ahead of a big number and to just trade the breakout on the back of the number.
This can be done on both a short-term intraday basis and a daily basis. Let's
look at the chart in Figure 2 as an example. After a weak number in September,
the market was holding its breath ahead of the October number, which was to be
released to the public in November. In the 17 hours before the release, the EUR
/USD was confined within a tight 30-pip trading range. For news traders, this
would have provided a great opportunity to put on a breakout trade, especially
since the likelihood of a sharp move at this time was extremely high.
Figure 2: This chart illustrates the indecision of the market leading up to the
October non-farm payroll numbers, which were released in early November. Note
the increase in volatility that occurred once the worse than expected news was
released.
Source: eSignal
We mentioned earlier that trading news is harder than you might think. Why? The
primary reason is volatility. You can be making the right move but end up being
stopped out, or the market may simply not have the momentum to sustain the
move.
Let's look at the chart in Figure 3 as an example. This chart shows activity
after the same release as the one shown in Figure 2, but on a different time
frame to show how difficult trading news releases can be. On November 4, 2005,
the market had expected 120,000 jobs to be added to the U.S. economy, but
instead only 56,000 jobs were added. This sharp disappointment led to an
approximately 60-pip sell-off in the dollar against the euro in the first 25
minutes after the release. However, the dollar's upside momentum was so strong
that the gains were quickly reversed, and an hour later, the EUR/USD had broken
its previous low and actually hit a 1.5-year low against the dollar.
Opportunities were plentiful for breakout traders, but bullish momentum in the
dollar was so strong that such a bad payrolls number failed to put a
sustainable dent in the currency's rally. One thing you should keep in mind is
that, on the back of a good number, a strong move should also see a strong
extension.
Figure 3: This intraday chart shows that, while the worse-than-expected
non-farm payroll numbers sent the EUR/USD rate upward for a short period of
time, the strong momentum of the U.S. dollar was able to take control and push
the dollar higher. Keep in mind that when the EUR/USD rate falls, the U.S.
dollar is going upward, and vice versa.
Source: eSignal
Can I Avoid Getting Hit by Volatility When Trading News?
The answer to capturing a breakout in volatility without having to face the
risk of a reversal is to trade FX SPOT options. A number of different FX
brokers offer a variety of exotic options. Exotic options generally have
barrier levels and will be profitable or unprofitable based on whether the
barrier level is breached. The payout is predetermined and the premium or price
of the option is based on the payout. The following are the most popular types
of exotic options to use to trade news releases:
Double one-touch option
One-touch option
Double no-touch option
A double one-touch option has two barrier levels. Either one of the levels must
be breached prior to expiration in order for the option to become profitable
and for the buyer to receive the payout. If neither barrier level is breached
prior to expiration, the option expires worthless. A double one-touch option is
the perfect option to trade for news releases because it is a pure
non-directional breakout play. As long as the barrier level is breached - even
if the price reverses course later - the payout is made.
A one-touch option only has one barrier level, which generally makes it
slightly less expensive than a double one-touch option. The same criterion
holds - the payout is only made if the barrier is breached prior to expiration.
This is a good option to buy if you actually have a view on whether the number
will be stronger or weaker than the market's consensus forecast.
A double no-touch option is the exact opposite of a double one-touch option.
There are two barrier levels, but in this case, neither barrier level can be
breached before expiration - otherwise the option payout is not made. This
option is great for news traders who think that the economic release will not
cause a pronounced breakout in the currency pair and that it will continue to
range trade.
FX SPOT options are a viable alternative for those who do not care to get
whipsawed in the markets by undue volatility before they actually see the spot
price move in their desired direction.
The Bottom Line
As we've seen, the currency market is particularly prone to short-term
movements brought on by the release of economic news from both the U.S. and the
rest of the world. If you want to trade news successfully in the FX market, key
considerations to keep in mind are knowing which releases are expected when,
which ones are most important given current economic conditions and, of course,
how to trade based on this market-moving data. A variety of exotic options are
available for traders who want to capture a breakout in volatility without
having to face the risk of a reversal; do your research and stay on top of
economic news and you could reap the rewards.
by Kathy Lien