FX Foreign Exchange-Economic Information:Leading And Lagging Indicators Index

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It’s important to constantly update yourself with the economic information of the country where you have foreign exchange exposure. At times,the economic information might explain to you the reasons of the strength,weakness or volatility of the currencies.

Economic information is divided into two categories: 

• Leading indicators which provide signals about how the economy is going to perform in the months ahead. They affect impending changes to the business cycle and provide signals or warning as to where interest rates are heading, 
• Lagging indicators which provide signals for the performance of the economy in the near future. They show the performance of the economy as it is currently. These indicators confirm or deny a trend or change in the trend implied by the leading indicators. The figures revealed in these indicators showed the degree or change that has or is taking place in the economy. When on or more reports or indicators is released,the market may adjust rapidly as the FX traders are now aware of the activity whether it is advancing or declining. The activity may confirm earlier signals of the leading indicators. 

Leading Indicators Index consists of the following

• Net business formation

• Average work week of Production and Manufacturing workers

• New orders for Consumer goods and materials

• New orders for Plants and Equipment

• New building permits for private housing units

• Net change in inventories on hand and on order

• Changes in total liquid assets

• Money supply

Explanation:

The information reveals to us the optimism or pessimism of the economy. For example,if the economy is picking up,output should be increasing due to increased demands which lead to lengthening of work week or additional new hiring of workers.

The information is not released simultaneously and normally release monthly.

This may account for the short-term volatility in exchange rates or prices of the indicator points to a weaker economy,lower rate is expected as a result of the expectation of a slacken economy.

Lagging Indicators Index consists of the following:

• Unemployment 
• Trade Balances
• Domestic Auto Sales-a good monthly indicator of how much confidence consumers have on the economy
• Consumer Credit:a monthly indicator which reflects the attitude and confidence of consumers towards spending.
• Retail Sales:a monthly report which shows the volume of retail activity for the past month. A higher volume of sales whether credit or cash,reflects a growing confidence of consumers
• Producer Price Index:a monthly report which reflects the cost of resources needed to produce manufactured goods and is a good indicator of future consumer price increases as it shows the rate of inflation for raw materials
• Business Inventories:reflects business confidence. For example,inventories are low and the economy is picking up,one could observe a brisk business activity and mild inflation. The process of rebuilding inventories creates jobs and ultimately causes consumer demand to increase.
• Housing Starts:a monthly information which reflects the optimismor pessimism of consumer toward the economy. Is a good indicator of the demand for long-term mortgage loans and short-term construction loans.
• Industrial Production:released monthly and show the level of factory output for the previous month
• Personal income
• Gross National Product
• Consumer Price Index:a measure of inflation.

Which Economic Information is important?

We have looked at both leading and lagging indicators. So which is more important? 

The indicators are all important,it’s a matter of identifying which factor or information is the “most important” at that time. As there are many indicators,some focused during an earlier period whilst other focus at a later period,the market will generally concentrate on one or two at a time,ignoring the others for the period concerned.

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