Indicators of Business Confidence and Their Influence on the Forex Market
15 March 2022
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.
Growth of confidence indicators leads to consolidation of the national currency rate.
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.
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.
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