Trading economic releases, (US dollar) non farm payroll, GDP vs Quarterly income statements (shares)

Hello all, I am new to markets and am not very certain of many factors.

I'm looking into short term investing based on economic reports and at the moment I'm caught between two paths, I will explain why I have come to this conclusion and maybe some people can give me advice on my current ideas or generate new better ideas.


Foreign exchange (AUD/USD) There are some really good economic figures released monthly to trade the US dollar, primarily the non farm payroll and GDP figures, the idea would be to invest long or short in the US dollar and hold for perhaps a few days, possibly upto a week upon release of the monthly figures and then exit, these economic releases are not only shorter time frame (monthly) but also do very much so influence the market to move.

Shares, investing in company or equity index, correct me if I'm wrong but I believe most companies release their income statements quarterly at the minimum, this would mean about 4 trades throughout the year rather than 12 with the non farm payroll, the other thing is I'm not sure how much volatility capital gains and losses on the quarterly reports can create in a share, what I do know however is that the non farm report definitely creates desired volatility in the US dollar.

For these reasons I am a little unsure of shares but here is the reason I am considering shares..

Less exposure the multiple economic factors - The US dollar is affected and exposed to so many different and complex economic factors, this could make it a bit more difficult to make profitable investment decisions, shares in a single company however aren't as directly exposed to such large and diverse economic factors, therefore possibly making them an easier product to profitably invest in.


So there are pros and cons to each avenue and for now, I can say I'm more confident investing in the US dollar than shares, but I would enjoy reading some insight based on my concepts.


Thank you

 

Hi Philip, trading the US Dollar and trading shares are two very different instruments unless you want to trade a USD ETF.

Forex trading is more risky due to the sharp moves in the exchange rate and the potential for 'whiplash' whereby your 'stops' can be broken in both directions. The advantage of trading the USD or currencies is the leverage you can get from the CFDs whereby you can make a lot of money from only a small movement in the exchange rate and vice versa for losses (if you are not careful) by using a smaller amount of capital.

Shares can also be risky as the company you own a part of is influenced by a variety of risk factors from the general stock market sentiment, to the industry the shares are and other unforeseen factors and information that is not made publicly available such as an impending capital raising or mine disaster for example.

If you want to trade the events such as US NFP or GDP figures, you should be aware that it not always possible to guess correctly what the figure might be and the market's reaction to that result. If you trade for a long time, you might be able to accurately guess in advance what the figures might be and be able to trade accordingly. For example, the January NFP figures came in better than expected at more than $300k. This result means that the US economy is not contracting as widely forecasted in the media and is still robust and may still be growing. As a result of the strong result, it is likely that the US Federal Reserve would not be cutting interests rates anytime soon, maybe still thinking about the possibility of another rate hike. As a result of the increased interest rate expectations, the USD 'should' rise after the result as the probability of interest rates increasing (or not being cut) have increased.

The only problem I find with the US figures, is the tendency for the figures to be 'revised' upwards or downwards a month after the figures are released. The December figures were revised downwards from a 300k+ rise to 241k. This means that the figures can't really be trusted! A downward revision would mean that the economy is shrinking and not expanding?

So how would I trade the USD from here based on the possibility of further revisions of the data?

I would have a look at other factors such as the hours worked (non-farm), average hourly earnings growth, core CPI, the Leading Index from the Philadelphia Fed. There are also other factors to consider such as the Chinese support of the Yuan which may lead to USD weakness. Also I look at the Gold price as this often trades inversely to the USD. Also look at the chart of the DXY Dollar Index and determine the support and resistance levels.

With trading shares, it may be a good option if you are a beginner in trading. Trading the quarterly results is probably a strategy best left for the smaller speculative companies as these announcements are market movers potentially. One problem is trying to guess when these quarterly results are issued as they are not all issued at the same time but are issued before the deadline being the end of the month following the end of the quarter. For example, Dec quarterly reports are issued by the end of January. So in theory the quarterly reports can be issued at any time in January if the company is able to do so, usually they are issued by the 3rd week, sometimes the 2nd week.

The results in the quarterlies can also be a guessing game, unless you know the company well and have an idea of how the company is going. For example, if you know the company has good management and has been reporting good results, then you can buy ahead of the results to profit from the release of the good news. However, there is a risk of any unforeseen bad news that can be released in the quarterly, such as increased costs of production, flooding of mines, reduced production etc. These negative results can lead to the share price falling, thus ruining your strategy. In the quarterly results for the small companies I would also look at the cashflow report and see if the company is running out of cash by burning cash too quickly by spending it all during the quarter. If the level of cash is low, the company may need a capital raising. This event should cause the companies share price to fall as additional share capital raised would dilute the value of the existing shareholders.

The economics can be a bit hard to understand if you are new to this, but once you understand it, you will find the trading much easier.

 

You mentioned holding the USD for a long time. Correct me if I'm wrong but arn't there holding costs for FX and CFD's, which would make long term holding unprofitable?

 

I wouldn't hold the USD for long term as I think the trend is down now with the Federal Reserve looking to pause its rate hikes, but if you wanted to have USD exposure for a longer period of time I might invest in a USD Etf like the one that Betashares offers or just open a USD foreign bank account. There is a cost of holding being the Indirect Cost Ration (ICR) that is charged of 045%, but the Etf pays dividend distributions as well. With CFD FX there is a interest holding cost per day of approximately $2.50 for a $10,000 position.

I think Philip wants to hold the USD position for only a few days or a few weeks so the trade may still be profitable depending upon the size of the position and whether the trade is in the right direction! Remember, CFDs FX are leveraged at something like 100:1 so the potential profits can be very high, but so can the losses.