The economic surprise index
The surprise index tracks the performance of the major forex countries as defined by their published data. The data is taken from the FXSTREET economic calendar and using the surprise index methodology gives us a graph that shows how the data is performing relative to previous results and predicted results. The charts are updated each month and inform my trading activity as part of my trading plan.
Australia and canada
As you can see from the graph above the Australian economy has stayed pretty close to the zero line throughout 2018 and had a good performance in July moving it into positive territory again. Close to the zero line means on targetwhich is always good, few countries at the moment are in positive territory meaning we could expect the Aussie to do well in a number of crosses. Much will depend on global trade as Australia is a trading country and its economy reflects the swings in global growth and sentiment
The other country with a good July was Canada but the chart is quite different, after 6 months of relatively poor performance the Canadian economy has put in a very good month and may have turned a corner. A similar improvement was seen in March but it quickly fizzled, if the data can continue to be strong then the CAD represents a good potential buy especially if the oil price continues to rise.
China had an essentially flat surprise index in July, this means that their economy was more or less on target and very similar to June. Remember the Surprise index tracks the forecasted results as well as actual result so a flat line means essentially as expected. China is often as expected and although it does not release that much data one does have to wonder how much influence the Chinese government has, it is amazing how many times the data is on message. The graph has been vitually flat all year only just touching negative in March and consistent the rest of the year.
Surprise Index losers
A downward sloping surprise index suggests that the economy performed below expectation during July, this can imply a weaker currency going forward, the EU and the UK economies seem to have returned to their downward trend implying continued weakness for the Euro and the GBP. The political concerns around the UK and the Brexit issues are likely to be involved here and add to the chance of further losses for the pound. The two economies are closely linked and generally track each other with the UK showing more volatility but the same direction
The third weak economy was New Zealand, this was quite unexpected as the Canadian, Australian and New Zealand economies normally move together in a similar way to the EU and UK. The NZD hasbeen weak for some time and they have one of the most dovish central banks who appear to be no where near raising rates suggesting a cut is equally as likely.
The Surprise Index surprise
The big surprise this month was the US whose surprise index turned lower for the first time in over a year. This is quite different to the UK and the EU, the US economy has been on fire all year repeatedly performing at a level above what had been expected, July is most likely merely a moderation ( a pretty steep one) rather than a change in direction but we will have to watch it going forward. The Fed is very bullish about the economy and the market is pricing in all of the rate hikes the fed are proposing, any weakness in the economy could cause a significant change to that position and allow us to fade the dollar strength.
The surprise index brings together all of the economic data for each country as a result it provides a third of the information we need to take trades (the other parts being Technicals and sentiment). The index alone suggests we want to buy the AUD and the CAD and sell the EUR, GBPand NZD. No clear signal for the dollar