Let's chat about the CPI; I mean the PPI!!
I don’t know about you, but when I started trading the Forex markets back in the day, I BARELY EVER focused on “the PPI”! I couldn’t care less, to be honest, and for a very long time, I never paid attention to this economic news event because I thought it was just something fancy for the traders at the bank.
I wanted to be the bank! Until I realized that that was where the money was, with the banks. So what did I do? I did basic research to understand it and understand exactly how it could affect me in the markets.
What is the PPI?
PPI stands for Producer Price Index. Now, is this any producer? Whether you produce socks or cars? No. It is not. The Production Price Index analyses industries-based, commodities-based and stage-on-processing companies in a particular country. The United States, China, or England (the United Kingdom usually represents most of them). The PPI measures a change in prices in the primary markets by producers of the mentioned above.
As a Forex trader, you can expect this economic data to be released every second week of the month. The reasoning for this is unclear; however, from what understanding its use and how the data is analyzed, I would believe it comes out at the perfect time, seeing that this indicator also acts as a LEADING indicator to the CPI numbers.
How is it used?
Seeing that this indicator is a leading indicator, forex traders will use it to indicate where price may go in the future. If the PPI rises, this may cause the interest rates to rise. The rise may be a good OR a bad thing – higher interest rates will attract more savings because the return on investment is higher while in the same vein while the consumers carry the increasing prices. It means it becomes costlier for consumers to spend their money. If there is a significant enough rise or decline in the PPI, this will affect the CPI in the same direction.
An example of this would be if the USD PPI were to rise, this would mean that the reward for investments in the United States would be significantly higher, too, driving foreign investments in the form of other currencies. Meaning that the Dollar would gain strength because the USD’s demand would increase as more investors look to invest in the US economy.
For the Forex trader, this would mean they would look to longs on the Dollar or shorts on any currencies against the Dollar whether it be the AUD, EUR, or the GBP. However, it also depends on how they perform respectively, following the patterns and adding to your various confluences.
The effects of the PPI
The PPI works the same way as the CPI. From a Forex trader’s perspective, the numbers affect the direction of the price and the central banks’ sentiment when these numbers are released.
The Producer Price Index has good and bad effects on the Forex markets. If the numbers increase, we can expect companies to spend more to hire more employees to meet the demand in the market through increased output.
However, there is a downside to an increase in the PPI numbers, which is usually experienced by the consumer once again. The downside is that the consumer’s purchasing power parity decreases, meaning that what $100 could buy you and your family a decade ago, the same $100 could only buy you half of what you could back then!
So as a trader, the ability to realize the effects these numbers will have on a given currency pair and to connect the dots between the PPI and the CPI will provide you with a clear direction as to where you could see the market heading, simply by monitoring the POSITIVE relationship between interest and inflation rates.
I wish all traders the best of luck this week!
Happy trading, fellow Traders!