Forex durable goods orders (just durable goods, really), is a tier 1 economic indicator for Fx traders.
To find out more, let’s first go through what exactly Forex durable goods orders is.
What are durable goods?
By definition, anything which is meant to last at least 3 years.
So your usual ice cream does not fit that definition.
Ok, but what does?
Cars, cars, and more cars!
Yes, that Ferrari counts (even if you crash it right away).
On a more serious tone, durable goods orders take into consideration appliances, automobiles, trucks, planes, computers, you name it.
Perfect. What does the indicator measure?
It is a measurement of the orders of durable goods conducted in an economy, in a given period of time (comes out monthly, but has yearly figures too).
Why is this important? Next section:
Demand for durable goods is a great indication of where the economy is headed.
An investor doesn’t buy a new plant if he doesn’t believe the economy will do well for years to come.
Think of the large sums required to build a plant, or buy an airplane.
And what about cars?
The decision to purchase a new vehicle is often pondered for a while.
After all, you will likely have to stick with the vehicle for a while, since selling it quickly will net you a loss.
You will also consider where things are going.
If you expect things to go well, and your income to increase, the decision becomes simpler.
But if work is drying out, and you think these hard times will continue, you will consider postponing the purchase.
Therefore, forex durable goods orders are a great signal of economic health (or ill).
Which takes us to…
Yep, Central Banks.
You guessed it.
By now, it should be no surprise to you.
Forex economic indicators, especially all of those part of what’s called tier 1 data, revolve around Central Banks.
In this case, durable goods are a leading indicator of manufacturing production, since it allows us to get an idea of next period’s production.
If orders increase, then a manufacturer will have to grow production to supply those orders.
This way, we could say durable goods orders are a pre-Industrial Production indicator.
So going back to Central Banks, this indicator will be particularly helpful when the Bank is concerned with the manufacturing sector.
It’s possible there are other signs of overheating in the economy, but the Central Bank does not want to raise rates because of a weak industrial production.
Thus, the Bank’s authorities may be interested in seeing whether the low production figures were transitory, or if there will be pickup, before they move forward.
Under such circumstances, better than expected durable goods orders will make a rate hike much more likely, since it will dissipate those doubts in the Banker’s minds.
Therefore, Fx traders will use the opportunity to trade in favor of the corresponding currency.
And said currency will appreciate shortly due to heavy speculation on it (speculation because the rate hike isn’t confirmed until it happens).
As always, the caveat to trading this indicator has to do with how much emphasis the market is paying to it, at the time of its release.
Damn, the indicator could be negative, and price could move up.
Not so much.
We need to consider what a currency’s sentiment is at the moment.
For example, if sentiment is particularly strong, and the opposing currency is pretty beat-up, then it’s likely this release won’t curb the bullish trend.
The only way (under the scenario in the previous paragraph) price would stop moving up, or even go down sharply, is if:
1. The release is being heavily watched by the market (since the Central Bank is paying attention to it).
2. Data comes out worse than expected (by a long shot, as in, lower than the low estimates).
But this is nothing new.
If it is, awesome.
See you soon,
The Forex Economist
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