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Fundamental analysis Macroeconomic indicators

Indicators of Business Confidence and Their Influence on the Forex Market

Елена Берсенева 15 march 2022 126 3

In this research, we will assess influence of indicators of business confidence on the forex market. By this article, we conclude the series of studies dedicated to the influence of the strongest macroeconomic indicators on the market.

 

Let us remind that traditionally, the considered strong economic indicators are:

  • interest rates of countries’ central banks;
  • labor market;
  • gross domestic product;
  • inflation indicators;
  • foreign trade balance;
  • retail sales.
Hypothesis
To conclusion

Growth of confidence indicators leads to consolidation of the national currency rate.

К выводам
Data used

To analyze the influence of business confidence indicators, reporting indicators for 8 greatest world economies were used:

  • the USA,
  • Canada,
  • Eurozone,
  • Japan, Australia,
  • New Zealand,
  • the United Kingdom,
  • Switzerland.


In total sum: 1,404 publications of the indicator.


Reporting indicators


Country
Name of an indicator
History of values,
years
Number of publications
Australia
National Australia Bank Business Confidence
11
44
The United Kingdom
U.K. Manufacturing Purchasing Managers Index (PMI)
11
141
Eurozone
Germany Ifo Business Climate Index
28
343
Canada
Canada Ivey Purchasing Managers Index (PMI)
11
139
New Zealand
New Zealand Manufacturing (PMI)
11
140
The USA
ISM Manufacturing PMI
49
355
Switzerland
Swiss Manufacturing PMI, SVME
24
242
Japan
Japan Tankan Big Manufacturing Outlook Index
11
40
Total number of publications
1404



Daily volatility, %


Let us see how volatility of currency pairs changes compared with the previous periods.


Country
Day of publication
Average for the preceding week
Average for three preceding weeks
The USA
0.689%
0.603%
0.615%
Canada
1.169%
1.047%
1.039%
Eurozone
1.045%
1.055%
1.073%
Japan
0.948%
0.842%
0.841%
The United Kingdom
1.146%
1.015%
1.040%
Switzerland
1.040%
0.965%
0.977%
Australia
1.229%
1.240%
1.247%
New Zealand
1.275%
1.273%
1.238%
Average value
1.068%
1.005%
1.009%


On the day of data publication, the market volatility raises by 5.9% compared with the preceding week, and by 5.3% compared with three preceding weeks.

 


Correlation between the published data on business confidence and national currency rates

 

The correlation ratio between changes in confidence indicators and the dynamics of quotes is determined on the basis of four time periods:

  • three days since publication;
  • 1 week since the day of publication;
  • 2 weeks;
  • 3 weeks.



Correlation


Country
3 days
1 week
2 weeks
3 weeks
The USA
0.052
-0.010
-0.030
-0.056
Canada
0.058
0.085
0.057
0.039
Eurozone
-0.011
0.051
0.085
0.092
Japan
0.001
-0.084
0.081
0.083
The United Kingdom
0.131
0.004
0.007
0.049
Switzerland
0.022
0.001
-0.001
0.054
Australia
-0.057
0.041
0.037
0.010
New Zealand
0.036
-0.049
-0.009
0.015
Average value
0.047
-0.004
-0.012
0.002


In general, results of calculations show a lack of correlation.

 


The momentum of the market after publication of business confidence indicators


The calculation was carried out on the basis of similar time periods. 


Country
3 days
1 week
2 weeks
3 weeks
The USA
0.17%
-0.09%
-0.04%
-0.09%
Canada
0.10%
0.18%
0.21%
0.19%
Eurozone
-0.04%
0.03%
0.10%
-0.08%
Japan
0.09%
0.09%
-0.02%
-0.05%
The United Kingdom
0.09%
0.25%
0.13%
0.15%
Switzerland
0.24%
0.05%
-0.01%
0.05%
Australia
0.03%
0.11%
0.13%
0.28%
New Zealand
-0.06%
0.00%
0.13%
0.26%
Average value
0.08%
0.08%
0.08%
0.09%



Let us look at the share of profitable positions with the following scenarios:

  • if the confidence indicator grows, open a position for increase in this currency exchange rate;
  • if the confidence indicator falls, open a position for decline of this currency exchange rate.

 


The share of profitable positions, %


Country
3 days
1 week
2 weeks
3 weeks
The USA
50.07
44.61
49.01
49.82
Canada
52.43
53.88
54.04
51.94
Eurozone
47.34
50.91
50.98
45.08
Japan
44.31
45.53
44.57
40.33
The United Kingdom
54.63
61.72
54.19
52.04
Switzerland
50.92
52.92
47.62
50.71
Australia
41.24
44.99
47.38
50.72
New Zealand
56.54
52.52
55.20
55.86
Average value
49.69
50.88
50.37
49.56


As we can see, momentum’s indicators as well as correlation’s values indicate a lack of influence on currency pairs quotes.

 


Let us consider momentums movements if changes in confidence indicators are distributed depending on the rate of standard deviation.

 

For this purpose, the following notional groups are selected:

  • more than 2 deviations towards increase in confidence;
  • from one to two deviations towards increase in confidence;
  • within the range of one deviation;
  • from one to two deviations towards decrease in confidence;
  • more than two deviations towards decrease in confidence.

 


Distribution of indicators to the rate of standard deviation


Country
History, years
from б to 2 б
from б to ∞
The USA
49
350
535
Canada
11
105
150
Eurozone
28
365
600
Japan
11
15
45
The United Kingdom
11
115
190
Switzerland
24
80
110
Australia
11
50
55
New Zealand
11
90
155



Let us calculate values of momentums for each group.



Momentums depending on the size of deviation


Period of time
from б to 2 б
from б to ∞
3 days
0.07%
0.03%
1 week
0.01%
0.04%
2 weeks
0.03%
0.03%
3 weeks
0.01%
0.01%



Then,

We suggest using one more approach in the research which will be assessment of price momentums obtained with the following scenarios


The 2(+) scenario: two consistently growing values of business confidence are indicated;

The 3(+) scenario: three consistently growing values of business confidence are indicated;

The 4(+) scenario: four consistently growing values of business confidence are indicated;

The 2(-) scenario: two consistently decreasing values of business confidence are indicated;

The 3(-) scenario: three consistently decreasing values of business confidence are indicated;

The 4(-) scenario: four consistently decreasing values of business confidence are indicated;

 

With the performance of the listed conditions of scenarios, we carry out the momentum’s measurement from the date of publication of the last indicator in this chain.


For example, the “47” value of confidence was published in September, the “48” value in October, and the “50” value in November. We can immediately mention two scenarios in this chain: 2(+) and 3(+).


For the 2(+) scenario, we calculate the momentum from the October data publication of the indicator, and from the November date for the 3(+) scenario.


Having carried out the calculations, we obtain the following results.

 


Momentums in scenarios of consequent changes in the indicator


Period of time
2(+)
3(+)
4(+)
2(-)
3(-)
4(-)
m 3 days
0.04%
0.08%
0.10%
-0.03%
0.03%
-0.02%
m 1 week
0.05%
-0.14%
-0.16%
-0.01%
0.23%
-0.02%
m 2 weeks
0.15%
0.08%
-0.24%
-0.05%
0.20%
-0.12%
m 3 weeks
0.18%
0.14%
-0.11%
-0.10%
0.26%
-0.28%



The sample of values of momentums


Period of time
2(+)
3(+)
4(+)
2(-)
3(-)
4(-)
 3 days
1043
843
350
988
484
282
 1 week
1584
807
807
1617
795
455
 2 weeks
1583
823
481
1618
793
454
 3 weeks
1586
822
493
1623
799
458



The share of profitable positions in scenarios


Period of time
2(+)
3(+)
4(+)
2(-)
3(-)
4(-)
 3 days
38%
41%
35%
36%
32%
15%
 1 week
52%
60%
61%
57%
57%
45%
 2 weeks
51%
57%
53%
60%
55%
43%
 3 weeks
48%
56%
52%
60%
54%
42%


The Results do not make it possible to speak of any unambiguous regularities. 

Conclusion

On the day of data publication, the market volatility raises by 5.2% compared with the preceding week and by 4.9% compared with the three preceding weeks.


The results of correlation calculation indicate the lack of correlation. The exception is Australia with the estimated weak and minor negative correlations.


The obtained momentums are weak as all of them are below the value of 0.3%.


Momentums calculated on the basis of deviation groups also show weak values. The exception is a three-week period in a group from two or more deviations negatively.


A share of profitable positions shows a very small positive two-percent advantage in observation periods of 3 days and 3 weeks.


Momentums and shares of profitable positions calculated in scenarios of consecutive changes indicate the lack of any regularities.



Influence of Business Confidence indicators on the market direction has not been identified.

XLSX (0.02 MB)Correlation.xlsxXLSX (0.01 MB)Momentum.xlsxXLSX (0.01 MB)Volatility.xlsxXLSX (0.01 MB)Share of profitable positions.xlsxXLSX (0.02 MB)Sigma.xlsxXLSX (0.04 MB)Scenarios.xlsxXLSX (0.01 MB)Share of profitable positions.xlsx

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