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Further economic indicators

There are further economic indicators that contribute to a currency value increasing or declining. This lesson explores additional common economic indicators that affect a currency value.

Unemployment rates

The unemployment rate measures the percentage of the labour force that does not have a job and is actively seeking employment.

Low unemployment rates mean a strong economy, which increases the demand for the currency.

If a low unemployment rate is reported, then investors may believe the economy of that country is good. Therefore, they may seek investment opportunities in that country, causing a rise in the value of that currency. A country with a rise in unemployment could be interpreted by investors as a weakening economy, causing investors to seek opportunities elsewhere, and so the currency may depreciate.

Gross domestic product (GDP)

GDP measures the total amount of consumer spending, investment spending, international trade and government spending within a country over a certain period of time. It essentially measures the total produce of goods and services for an entire country. GDP is mostly measured on a quarterly or annualised basis.

GDP measures the total produce of goods and services for a country.

If the GDP growth rate is high, then the economy is considered to be robust and the currency will likely appreciate in value. If the GDP growth rate slows, then this can be seen as a weakening economy and the currency is likely to depreciate.

Economic growth outlook

Government agencies, as well as investment banks and economic think tanks, publish growth outlooks – an estimate of what they think the future GDP will be.

Growth outlooks give investors and traders guidance by providing an estimate of the future GDP. If growth outlook is reduced, the currency will fall; if growth outlook is raised, the value of the currency will appreciate.

These provide a guidance to investors and traders on the future performance of a country’s economy. When estimates are made public, they also affect a currency value. Typically they estimate the GDP for one or two years into the future. If the growth outlook is reduced, this has a negative effect on the value of the currency. If growth outlook is raised, this has a positive effect.

Retail sales

Consumer spending can account for a majority of an economy. If it does not account for the majority, it still generally makes up a substantial proportion of it, and so retail sales data is an important indicator. Retail sales measure the total amount of consumer spending in a given month across various sectors, such as electronic retailers, restaurants and car dealerships, to name a few.

Strong retail sales means consumers are confident in the economy and have more money to spend, therefore having a positive effect on the currency.

Strong retail sales growth indicates that consumers are confident regarding the economy and that they have extra income to buy goods and services. An increase in retail sales therefore has a positive effect on the currency.
Home sales

The housing market is one of the most visible signs of strong growth in the economy. Home sales are measured by:

  • New home sales
  • Pending home sales
  • Housing starts
  • Building permits
Home sales rise and fall based on consumer confidence, mortgage rates and the general strength of the economy. A strong housing sector is therefore positive for the currency.

Each of these housing reports rise and fall based on consumer confidence, mortgage rates and the general strength of the economy. Housing figures show a clear sign of economic strength and so strong housing data is therefore positive for the currency.

Trade balance

The trade balance report compares the exports and imports of a country in a given period. A country will either have a trade surplus or a trade deficit. A trade deficit is when the imports of a nation exceed exports – a trade surplus is when the exports of a nation exceed its imports.

A trade deficit lowers the value of a currency because more foreign goods are being imported than exported. In order to do this, the local currency has to be exchanged into the currency of the country from where the goods originated.

A trade surplus will have a positive effect, because foreign currency is being converted to the domestic currency to purchase the domestic goods and services, thus increasing demand for the local currency.

A change in trade balance is just as important

The trade balance report gives details on the amount of imports and exports for a country over a given period. A trade deficit is negative for the value of a currency, while a trade surplus is positive for a currency.

An important point to note when considering the trade deficit or the surplus: If the figures change from the last published report, then this also has an influence on the currency. If a country actually increases its trade deficit, then the amount of currency converted to a foreign currency to buy the goods or services also increases.

This means that a trade deficit increase has more of an impact on the devaluation of a currency than just the report of the deficit alone. This is the opposite when a country increases its trade surplus.

Summary

So far you have learned that:

  • unemployment rates are used to measure the percentage of the labour force that does not have a job, but is looking for employment. A higher level of unemployment has a negative effect on the value of a currency.
  • GDP measures the total produce of goods and services within a country. An increase in GDP will have a positive effect on the currency.
  • retail sales account for a significant proportion of the economy in many countries. An increase in retail sales results in a positive effect on the currency value.
  • the housing market is an important driver of the economy and is measured by new home sales, pending home sales, housing starts and building permits.
  • An increase in any of these results is a positive effect on the currency.
  • trade balance measures the total imports and exports of a country. If a country has a trade deficit then this is likely to have a negative effect on the currency value.