10 Things to know about Currency Trading in India

As you know by now, currencies are traded in pairs. So, when you buy the USD in a USD-INR currency pair, expecting the value of USD to rise, you’re technically taking a contrary position with respect to the INR. 

In such a situation, it is essential for you to be aware of certain events that can influence the rates of the USD-INR currency pair, is it not? For that matter, it’s important to be aware of events that can influence any currency, so you make informed currency trading decisions with regard to that asset. That’s exactly what we’re going to be discussing in this chapter. 

Here’s a brief look at 10 important events and data points that you, as a trader, should know about when you engage in currency trading.  

1. GDP growth rate data

The Gross Domestic Product (GDP) data is a metric that’s used to measure the total value of all the goods produced and services rendered in a country over the course of a specified period of time. 

The GDP growth rate measures the rate of growth in the GDP between two specified periods of time. For instance, India’s GDP growth rate for the year 2018-2019 was 6.1%, which means that the GDP grew at a pace of 6.1% in that year, compared to the previous year.

A high rate of GDP means that the country is growing at a faster rate, making it a more favourable destination for investments. This effectively makes its currency stronger by increasing the currency value. Most countries release GDP growth rate data for every financial year as well as for every quarter of a year.

2. Non-farm payroll data

The non-farm payroll (NFP) data is specific to the U.S. If you’re trading in currency pairs involving the USD, this data can prove to be very crucial for directing your currency trading moves. The NFP data is essentially a monthly report of job data and is released by the U.S. Bureau of Labor Statistics. It gives you a deep insight into the job and employment figures of the non-farming sectors.

A high non-farm payroll metric effectively means that more jobs are being created and that people are being employed, which is a sign of a growing economy. Conversely, lower NFP metrics signifies that the economy is slowing down. The USD tends to weaken and lose value if the NFP data released every month does not conform to the expectations of the market.

3. Unemployment rate

Quite self-explanatory, the unemployment rate is a metric that indicates the percentage of the unemployed labour force in a country.  It is also a very good indicator of the state of a country’s economy. Believe it or not, this rate plays a huge role in determining the way a currency’s exchange rate moves. A high rate not only signifies that the economy has slowed down, but also impacts the GDP of a country because unemployment means that there will be fewer purchases of goods and services.   

4. Interest rate announcements

The lending interest rate is the rate at which the central bank of a country lends money to banks and other financial institutions. Central banks such as the Reserve Bank of India, Federal Reserve, European Central Bank, and the Bank of England make regular announcements regarding the lending interest rates and monetary policy stance through their monetary policy committees. The interest rate announcements by the monetary policy committees of various central banks are usually made every quarter. 

An increase in the lending rate would make borrowing money costlier and therefore, it would lead to lower circulation of money in the economy. This, in effect, would appreciate the currency value in a country.  

5. Consumer price index (CPI) data

Also known as the cost-of-living index, the consumer price index (CPI) data is essentially a metric that measures inflation. As we saw in the previous chapter, a high rate of inflation causes the value of a currency to drop and depreciate. However, a high CPI would prompt the central bank of a country to raise its interest rates, which would have the effect of increasing the currency value. In most countries, the CPI data is reported on a monthly basis. 

6. Purchasing managers’ index (PMI) data

The purchasing managers’ index is a series of indicators that measure the economic trends in industries. It includes both manufacturing and service sectors. This data is then used by analysts to determine whether the economy is expanding, stagnating, or contracting. If the PMI for a country is low, the central bank of that country would typically intervene and reduce the interest rates to boost productivity and consumption. This would then lead to a drop in the value of the country’s currency.  

7. Core retail sales data 

The core retail sales data, which pertains to the U.S., is an economic indicator that shows the aggregate retail sales data (excluding automobiles and gasoline sales). This metric is released every month, and it indicates the overall health of the country’s economy since it measures the levels of spending by the consumer. A high core retail sales data is favourable and can lead to an appreciation in the currency value. 

8. Consumer confidence index and consumer sentiment index 

The consumer confidence index and the consumer sentiment index are both indicators of the feelings of consumers. Strong consumer indices are signs of bullishness, whereas a weak consumer sentiment can bring the value of a country’s currency down. This data is widely circulated mainly in the U.S. 

9. Industrial production index 

As the name suggests, the industrial production index is an indicator that signifies the level of output in the manufacturing, mining, gas, and electric utilities sectors. This index is published each month by the U.S. Federal Reserve and is a good indicator of the health of the country’s economy.  

10. Elections

As we’ve seen before, uncertainty is an investor’s nightmare. A country that’s up for elections generally has an air of political uncertainty around it. Sometimes, such uncertainty can play a role in the depreciation of a country’s currency. In such a scenario, traders and investors would generally stick to just monitoring the situation and wait till the election results are out to make a move. However, once the results are announced, the volatility in the concerned country’s currency would most likely shoot up with a clear bullish or a bearish trend.  

Wrapping up

With this, we’re done with the chapter. Always remember, before getting into a currency trade, it is prudent to look at all of the above-mentioned events from the perspective of both the base currency as well as the quote currency. The upcoming chapters are sure to get very interesting since we’ll be moving onto the specifics of the various currencies and the trading process. So, make sure to tune in!   

A quick recap

• The Gross Domestic Product (GDP) data is a metric that’s used to measure the total value of all the goods and services produced by a country over the course of a specified period of time. 
• A high rate of GDP means that the country is growing at a faster rate, making it a more favourable destination for investments. This effectively makes its currency stronger by increasing its value.
• The non-farm payroll (NFP) data is specific to the U.S. If you’re trading in currency pairs involving the USD, this data can prove to be very crucial for directing your trades. 
• A high non-farm payroll data effectively means that more jobs are being created and that people are being employed, which is a sign of a growing economy.
• A high rate of unemployment signifies that the economy has slowed down. It also impacts the GDP of a country because unemployment means that there will be fewer purchases of goods and services.
• An increase in the central bank’s lending rate would make borrowing money costlier and therefore, it would lead to lower circulation of money in the economy. This, in effect, would appreciate the value of a country’s currency.  
• The consumer price index (CPI) data is essentially a metric that measures inflation. A high CPI would prompt the central bank of a country to raise its interest rates, which would have the effect of increasing the value of the currency.
• The purchasing managers’ index is a series of indicators that measure the economic trends in industries. If the PMI for a country is low, it would then lead to a drop in the value of the country’s currency.  
• The core retail sales data, which pertains to the U.S., is an economic indicator that shows the aggregate retail sales data. A high core retail sales data is favourable and can lead to an appreciation in the currency’s value. 
• Strong consumer indices are signs of bullishness, whereas a weak consumer sentiment can bring the value of a country’s currency down.
• The industrial production index and elections also impact the currency rates of a country.