Not only is there a slew of U.S. data to remember, there are also crucial reports released in other countries that affect currency prices. Traders need to investigate which economic data is most critical in a certain country during a given period.

For example, in addition to housing prices and retail sales, manufacturing, industrial production and trade balance data are important in the U.K. and Japan because they tend to be more manufacturing and export-oriented countries, according to Dolan.

He also says understanding things such as employee compensation, which often differs from practices in the U.S., makes interpreting non-U.S. data more meaningful.

“In Japan, private consumption data is very important, like it is here,” he says. “But there, overtime earnings and seasonal bonus data are also extremely important. Bonuses comprise a significant amount of Japanese income, and if they are declining, you can bet private spending will fall.”

In Japan, numbers depend on where the main economic liabilities are, according to Beuzelin. Exports are very important there as well.

Lately, U.K. economic data has been weakening slightly: housing prices have moderated over the last few months, and some key reports, such as the September industrial production data, have come in weaker than expected.

The U.K. central bank’s rate-setting body, the Monetary Policy Committee, has been hiking rates in an attempt to curb the inflationary pressures stemming primarily from rampant consumer demand, particularly in the housing market, according to Beuzelin.

“If we see housing prices continuing to cool, that will weigh on the pound but be good for the dollar,” he says. Although some believe certain economic reports in general are untrustworthy, there are economic reports and data relationships that prove consistently reliable, Dolan says. For example, in Japan, machine orders are closely watched. If machine orders sink but tool orders rise, there will probably be more machine orders next month.

“You have to really know the data, know what to look for and what matters and why,” he says. “Investors have been pulling out of Japan — or the media has been saying that money is leaving Japan — because the economy isn’t growing. But [the machine orders and tool orders] data proves otherwise.”

All types of FX traders — not just fundamentally-oriented players — must inevitably keep abreast of economic conditions at home and abroad if they want to avoid being broadsided by the market.

“Investors should really be betting on consumer confidence,” Dolan says.

If consumer spending is not picking up consistently in Japan, it will undermine the yen and the dollar, Beuzelin says. It addresses the issue of whether, in the long run, Japan can sustain its growth and whether wages are growing too.

“Over time, the underlying economic performance of a country determines how well a currency will perform,” Beuzelin says.

“You cannot understate the important of economic indicators as a driver of FX market activity.”

Although economic numbers can offer great insight into the economy and the behavior of the FX market, it’s risky to put too much emphasis on an individual reading because many economic numbers fluctuate dramatically from month to month. Also, almost all of these numbers are released after the fact.

For example, although the employment report is generally regarded as the most important economic report in all markets, it is a lagging indicator and there are often tremendous changes in the payroll figures from month to month. The difference between October, when 337,000 jobs were created (nearly double what Wall Street expected), and September, when only 96,000 jobs were created, is a recent example. Accordingly, analysts and traders often average certain economic figures over several periods to smooth the readings.

In his book The Secrets of Economic Indicators, Bernard Baumohl, director of The Economic Outlook Group and former Time magazine economics reporter, lists the economic data with the most impact on the dollar as the employment report, international trade, GDP, the current account deficit and industrial production/capacity utilization. The ISM report and consumer prices are further down Baumohl’s list, although still in the top 10.

International trade summarizes import and export activity between the U.S. and other countries. In general, the foreign exchange market views any kind of increase in trade surplus as favorable to the dollar, according to Baumohl’s book.

“Trade data is extremely importantto the FX markets right now, especially if the GDP is above 5 percent,” Beuzelin says.

The current account balance data summarizes the net change in four areas: merchandise trade, services, income flows (the net income received from investing in foreign assets) and unilateral transfers (transfers of foreign aid, government grants and pension payments).

Participants in the FX markets generally pay more attention to this data than other types of traders. A deterioration in the U.S. current account balance — essentially a broad accounting of America’s trade and investment relationship with the rest of the world — will, over time, wear away the value of the dollar. If the trade balance or the difference in the value of a country’s imports and exports rises and moves toward surplus, it can hurt the dollar, according to Baumohl.

This data has more impact when the economy is weakening and is currently being closely monitored.

“U.S. growth has moderated enough that it makes [it more likely] account deficits will have an impact on the dollar,” Beuzelin says.

• What it is: A monthly measure of the domestic industrial output, weighted according to each input category’s relative importance.

• Who puts it out: Federal Reserve Board (www.federalreserve.gov)

• When it’s released: 9:15 a.m. ET around the 15th of the month after the actual month.

• What it means: It’s an indication of different trends within various industries. In addition, it estimates the “capacity utilization” (the level of potential production capacity at which a business, such as a factory, is operating) within the economy, which, must be interpreted carefully because of the difficulty of estimating the maximum capacity in the first place.

• What it is: A monthly survey of 300 purchasing managers,
representing 20 different industries.

• Who puts it out: Institute for Supply Management (www.ism.ws).

• When it’s released: 10 a.m. ET on the first business day of the month after the actual month.

• What it means: The index is designed to fluctuate around 50, with readings above 50 indicating a growing economy. Too-high numbers or extended periods of growth might indicate the economy is about to overheat. Using ISM index, a business cycle trough could be defined as a reading at or above 44 a few months in a row.

The markets are very sensitive to unexpected discrepancies in this number, especially if that also coincides with a turning point in the index.

• What it is: The current demand (new orders) and supply (shipments) balances in the economy.

• Who puts it out: U.S. Census Bureau (www.census.gov).

• When it’s released: 8:30 a.m. EST around the 26th of the month after the actual month.

• What it means: The durable goods number is another volatile indicator. It measures the demand for, and supply of, domestic products with an expected life length of at least one year, including both “intermediate” goods (for instance, building materials) and finished goods (cars, computer equipment, etc.). The report monitors the rate of growth within several large industry sectors, such as auto and electronics.

If demand is higher than supply it might indicate a new period of economic growth is around the corner. However, if demand stays above supply while unemployment is low, it also might indicate higher inflation ahead, as the industry will meet the demand with higher prices rather than increased production. This is most likely to occur at the end of a bull market and at the peak of the business cycle.

• What it is: The most timely, albeit volatile, report of consumer spending patterns, excluding any type of services.

• Who puts it out: U.S. Census Bureau (www.census.gov).

• When it’s released: 8:30 a.m. ET around the 13th of the month after the actual month.

• What it means: As is the case with the CPI, rising retail sales numbers might indicate demand is about to outstrip supply, which might lead to higher inflation. However, because the data doesn’t include services, but does include gas, cars and food, it is very volatile and subject to large seasonal changes and subsequent revisions.

• What it is: A quarterly measure of the production and consumption of goods and services, broken down into several sub-categories.

• Who puts it out: Bureau of Economic Analysis (www.bea.doc.gov).

• When it’s released: 8:30 a.m. ET, approximately one month after the end of each quarter.

• What it means: GDP is used to define business peaks and troughs, and together with employment data, it gives an important indication of productivity growth and economic strength.

Usually a growth rate between 2.0 and 2.5 percent is considered positive when combined with an unemployment rate of 5 to 6 percent. A higher growth rate and/or a lower unemployment rate might indicate inflationary pressure. A lower growth rate might indicate the economy is stalling. A relatively large increase of inventories might indicate a future decrease in the growth rate, as production (supply) at least temporarily has outgrown demand.

Thus, both numbers too low or too high can be interpreted negatively, depending on the current position in the business cycle. The fear of inflation, for example, generally gets more pronounced the longer a high-growth period lasts.

• What it is: The difference in price from one month to the next for a fixed basket of consumer products, used as a common measure of inflation. The “Core CPI” does not include food and energy prices.

• Who puts it out: Bureau of Labor Statistics (http://stats.bls.gov).

• When it’s released: 8:30 a.m. ET around the 15th of the month for the previous month’s data (i.e., the March CPI is released around April 15).

• What it means: A rising CPI indicates increasing inflation, while a high CPI indicates already high inflation. According to standard economic theory, inflation increases when supply no longer can keep up with demand, which usually occurs at or near the peak of the business cycle and when the unemployment rate is low.

High inflation, or expectations of high inflation, usually leads to higher interest rates, as lenders of money want to be compensated for the diminishing purchasing power of their dollars. Higher interest rates, in turn, mean higher costs of doing business for all parties in the economy (both investors and companies).

•What it is: Two surveys measuring 1) the number of people on payrolls and 2) the unemployment rate. Also measures average hourly earnings and the length of the average work week.

• Who puts it out: Bureau of Labor Statistics (www.stats.bls.gov).

• When it’s released: 8:30 a.m. ET on the first Friday of the month after actual month (i.e., November’s employment statistics are released in early December).

• What it means: The payroll report –– probably the most widely watched report in the financial markets measures the current state of the economy by way of the employment situation. It is more of a lagging indicator. Strong employment is generally considered the bedrock of a solid economy. The more people who work and the more money they make, the more money they can spend, which will increase the demand for goods and services. However, if supply can’t keep up with demand, inflation can develop, as explained in the next section.

The third most important set of economic statistics, according to Gain’s Dolan, is inflation data, including that reflected in the Institute for Supply Management (ISM) report, inventory data, and consumer prices.

The ISM report provides one of the first glimpses inside the economy every month. It surveys purchasing managers in the manufacturing and non-manufacturing (i.e., service) industries, the latter in a separate report later in the month. Although the report sounds rather dry, it is closely monitored because the activity of manufacturing purchasing agents reflects the pickup in demand for manufactured products, which in turn is a barometer for manufacturing activity in general.

Some lagging indicators may indicate the economy is supposedly expanding or contracting when it really is not. For example, a gross domestic product (GDP) report can affect a few months of consumer confidence reports, Dolan says, as the nation spends and consumes according to what the GDP reveals.

The GDP’s effect on the FX market is determined by how strong or weak the report is. A strong report tends to spur corporate profits and firm up interest rates, making the dollar more attractive to foreign investors.

As the economy grows stronger, eventually the focus shifts to inflationary indicators such as the Consumer Price Index (CPI), Dolan says. The CPI reflects price inflation in retail goods and services by measuring the average change in retail prices over time in a basket of 200 assorted goods and services. It does not have as much of an effect as some other reports on the FX markets, but can still have an impact because of its relevance to interest rates. If rates surge on growing inflation concerns, it can hurt the U.S. dollar. High U.S. inflation erodes the value of dollar based investments held by foreigners.

A related measure is the Producer Price Index (PPI), which measures the change in prices paid by businesses for raw and semi-finished goods (as opposed to what consumers pay for finished products). A fast-rising PPI can hurt the dollar because the Fed can respond so aggressively as to jeopardize U.S. economic growth altogether.

However, a gradual rise in inflation accompanied by well-timed tightening of interest rates can lead to a steady or rising dollar.

“Inflationary indicators are not as much of a concern right now,” says Dolan.

On Monday, Oct. 4, before the September employment number came out, the European market began to price in a better-than-expected jobs report by buying up the dollar, as shown in the USD/CHF rate. After a sharp rally from 1.2530 to 1.2670, the market settled into a narrow sideways range between approximately 1.2610 to 1.2670 through Thursday. In the final eight hours before the employment number release, the market made several feints, first down out of the range (chasing out weak longs who had bought anticipating a strong non-farm payroll number) and then up (squeezing out weak shorts who had sold the break of the range). At the moment of the NFP release (8:30 a.m. Friday, Oct. 8), the market had returned to the midpoint of the range around 1.2630/40.

According to Dolan, the second group of key indicators is “hard data” such as retail sales and durable goods, both of which are related to private consumption. “[Private consumption] is what ultimately will determine the direction of the dollar,” he says. “You’re not going to buy a big-ticket item such as a refrigerator when times are tough. It’s a real-time indicator.”

Lots of U.S. retail activity (read shopping) firms up interest rates, which is bullish for the dollar. However, an overly robust retail sales report can cause trouble for the dollar because many of the goods U.S. consumers buy are imported. A jump in imports increases demand for non-dollar currencies to pay for all of the imports, which can hurt the dollar.

Durable goods orders are important because they provide a look at what products will be produced in the months ahead. The actual goods are products with a life expectancy of at least three years. Ajump in orders suggests employees and factories will be busy, while a decline suggests assembly lines will slow and plants may close, which is bad for the economy. Another indicator that falls into the “real time” private consumption category is the personal income and spending report, released by the Bureau of Economic Analysis. It records the income Americans receive and how much they spend and save. A vigorous increase in income and spending is good for the dollar as high consumer demand encourages growth and places upward pressure on interest rates, but too much spending can trigger inflationary worries. “Reports that pertain to consumer spending are important to the currency markets right now,” says Beuzelin. “[This data] is very important –– if it is true the U.S. economy is moving out of its soft patch. The Fed is optimistic [about the economy] and the FX market is skeptical of that optimism, so participants pay more attention to consumer reports.”

Dolan lists the top report in the current environment as — not surprisingly the non-farm payroll numbers (released as part of the monthly employment report, and almost always the most closely watched U.S. economic indicator), followed by retail sales, personal income expenditures and durable goods.

“My thinking is the employment report is more significant now in terms of assessing the economy,” he says. “[Employment] is the prevailing model of growth; it’s supposed to be strong in what we thought was a growing economy. You won’t have a sustainable economy without jobs.”

The U.S. Labor Department’s monthly payroll numbers — which reflect the actual payroll statistics of non-farm jobs — is important to the U.S. dollar because a vigorous jobs report could drive interest rates higher, which can make the dollar more attractive to foreign investors. A weak report softens demand for U.S. currency because it puts downward pressure on rates, potentially making the dollar less appealing to foreign investors.

“The employment report plays a critical role in the actions of the dollar,” says Alex Beuzelin, foreign exchange market analyst at Ruesch International. “The markets view it as a good barometer of economic activity and it plays a role as to why the Fed raises and lowers rates.”

Macro analysis in the FX market is complicated for many traders because foreign exchange participants don’t necessarily digest economic data the same way as their stock counterparts, and there’s also data from multiple countries to contend with. It takes a vigilant trader to stay on top of it all.

Not all the reports have immediate importance, but some are crucial, and it is essential to know which constitute news and affect market sentiment and which are irrelevant at a given time. “How economic reports affect the FX markets depends on whether you’re trading in a declining, or weakening environment,” says Brian Dolan, vice president of research at Gain Capital. “Fundamentals have a lot of weight in a weakening environment.”

Naturally, reports that reflect the U.S. job market are more important during a weak economic environment.

When the environment strengthens and the economy is improving, inflationary reports become more of a focus.

As the world’s largest financial market, forex consists of a variety of players, ranging from individuals to institutions, operating on different time frames and using different kinds of transactions. Although swaps and forwards are not part of retail online currency trading, individual traders should understand how these activities affect the FX market as a whole.

If the forward rate is higher than the current spot price, the difference is referred to as a “premium”; if it is lower it is called a “discount.”

The premiums or discounts for any given forward dates are known as “swap rates.” The amount of the premium or discount reflects the difference between the interest rates on the underlying pair of currencies.

FX swaps are transactions involving the immediate exchange of two currencies (and their associated interest rates) at a spot rate and, later, a future offsetting exchange at a forward rate.

(Forward transactions, by comparison, do not involve the immediate exchange of currencies at the spot rate.)

For example, a swap might consist of one party exchanging $1 million for Japanese yen at the current USD/JPY rate and reversing (at a specified future date) the transaction at an agreed-upon exchange rate.

Among other things, a swap allows a trader to extend an existing forward position to an even later date.

“The forward time frame is not locked down — it can be applied at any date in the future,” says Kurt Hoeksema, chief dealer at Global Forex Trading. “And you can ask for the future date at the time the trade is entered into. That flexibility is what is so beneficial to a long term trader.”

FX forward contracts are transactions in which participants agree to exchange a specified amount of different currencies at some future date, with the exchange rate being set at the time the contract is entered into. Forwards are similar to futures contracts, except they are not standardized. That is, two parties can determine the size of the trade and the delivery date — aspects of a trade that are unalterable in exchange-traded futures.

Although there is no standard transaction period for forward contracts, typical time frames are one, two or three weeks, then in monthly intervals. The flexibility of a forward transaction is largely what makes it attractive.

FX forwards remove uncertainty, and are therefore common transactions to hedge risk for future business transactions denominated in a particular currency.

The spot (cash) market is by far the most important sector of the forex world for individual traders. A spot market is one in which commodities or financial instruments, including currencies, are bought and sold for immediate delivery, which usually takes place the same or next business day.

This is the market in which retail traders are participating when they trade currencies through an online forex broker.

Although virtually no individual online forex traders will engage in forward and swap transactions, understanding how these trades work will give retail currency traders a better understanding of the larger market in which they operate.