A forex trader’s goal is to accurately predict the relative price trends of the currency pairs on which they’re focused. The holy grail of forex trading rests on finding that elusive magical formula, which, when put to work, will anticipate price movements moving in sympathy with client sentiment most of the time.
Unfortunately, consistent predictability isn’t simple and cannot emerge from some mystical “black box.” Instead, it depends on integrating numerous indicators with the understanding that it’s humanly and technologically impossible to be right 100% of the time. Secondly, one must approach transacting in the forex arena unemotionally, thus releasing oneself from chasing a losing hand and appreciating that we only count the profit once the contract closes.
As a result, savvy traders learn quickly that data is the open sesame to insights that make a difference. Unfortunately, they face a torrent of reports and indicators covering change dynamics from every angle, and it’s frequently overwhelming. Thus, too many useful ones go by without even a glance. Indeed, big data is fantastic support when you know what you’re looking for, but it is no help if you never see it. So why is it easy to miss? Often, references to the issues converged on are blurry, or the reports get buried in a pile of paper. However, the consumer confidence index (CCI) represents vital information traders should extract first and never dismiss as irrelevant, for reasons we outline below.
This article delves into all the ins and outs of a consumer confidence report, with significant emphasis on the CCI as its key focus to support traders’ preparation when trading in the futures and other primary markets.
What Is a Consumer Confidence Report (CCR) or (CCI)?
The Conference Board (CB) – a highly reputable non-profit business membership and research group – issues a monthly updated CCI. Notably, the latter isn’t one of those lagging indicators relying on what’s happened in the past. Instead, it revolves around consumers’ outlooks for the near future. The insight concept isn’t complicated, hitting directly at consumer or client sentiment, gauging whether they have an optimistic or pessimistic view of things to come. So why is this overview crucial? Because optimism drives accelerated buying behaviour of goods and services, and pessimism, the opposite – consumers cut back and spend less. In short, client sentiment is a powerful indicator of people’s motivations that either stimulate economic activity or stall it. Moreover, it can swing currencies left and right (depending on the pair you’re trading) and delivers must-know insights to traders.
How do you measure CCI?
As a gauge of consumer confidence, the CCI has measured consumer saving and spending activities since 1985, deploying the latter calculation as its benchmark. The index value adjusts monthly based on CBs household surveys soliciting:
- Consumers’ opinions about current economic conditions
- Their expectations of future changes.
So, to put this in the proper perspective, (1) above weighs in as 40% of the index and (2) above the rest.
On its website, CB creates a respondent profile defined by demographics such as age, income, and region. However, putting that all aside, the concept couldn’t be more straightforward:
- The CCI trending up signifies escalating confidence in income stability (and the economy), resulting in accelerated marketplace spending. Thus, we’re likely to see GDP growth.
- Conversely, a down-trending CCI denotes fear that incomes will dissipate, resulting in people protecting their savings and spending less, with GDP retraction.
How is Consumer Confidence Calculated?
In a nutshell, CB asks around 5,000 US households to check off three optional boxes reflecting positive, neutral, or negative feelings against five constructs, starting with current conditions:
And the same rating procedure looks at respondent expectations six months into the future against expectations around:
- Business conditions.
- Employment conditions.
- Family income stability.
The CCR comes on the last Tuesday of each month so traders can schedule their agendas to shift attention to the CCI accordingly.
After collecting the data, the following takes place:
- Step 1: Establishes a ratio for each of the five questions to reflect Positive/Negative Responses, thus deriving a relative value factor (i.e., let’s call this R1).
- Step 2: Divides R1 by R2 (this being the very first 1985 relative value calculated the same way), thus creating an “Index Value” (IV) for each question.
- Step 3: Adds the five IVs and divides them by 5 to arrive at an average, which CB calls its Consumer Confidence Index.
- Step 4: Adds the two IVs relating to (1) and (2) above and divides the sum by 2 to calculate the Present Situation Index.
- Step 5: Adds the three IVs relating to (3), (4), and (5) above and divide the sum by 3 to calculate the Expectations Index.
- Step 6: Presents the findings for the US as a nation (all demographics merged into one) and for nine census regions as well as age and income segmentation.
How does CCI help Forex traders?
When writing this article on 1st February 2023, the latest CCI index was 64.9 – a jump of 8.7% from the previous reading but down by 3.42% from a year ago. Generally speaking, 5% (or less) index changes receive insipid audience responses (regarding the change as inconsequential). In contrast, moves of 5% or more (as in the case above) signify a significant shift in confidence and, by implication, forex client sentiment.
We don’t want to get too complicated here, noting that too much writing on CCI applicability to forex trading makes it excessively confusing. So, here’s our take on CCI when it qualifies as something to pay attention to:
- The CCI is USA-centric, not European, Asian, African, or Australian. Therefore, if, for some reason, you’re trading in pairs without the USD in the mix, the CCI is next to useless. Indeed, you shouldn’t ever be transacting with USD absent because that creates market liquidity risk and faulty stop losses.
- Accelerating confidence (identified by a +5% CCI) works in favour of domestic popularity for the US currency as a spending medium, therefore helping the currency to strengthen.
- Be aware that a stronger US Dollar and a rising CCI are unlikely simultaneous events, with currency reactions generally lagging. Thus, Forex traders with longer-term horizons will likely emerge as the primary beneficiaries gaining the most from the information.
- However, (1) to (3) above relates to USD in isolation, which is certainly not the case in the forex world. It’s surprisingly seldom raised in CCI conversations that there’s another currency in the trading process (or numerous other currencies if multiple trades are in the forex model).
Let’s assume, as an example, we’re trading in two pairs USD with the GBP and AUD. Thus, the obvious question to ask next is how the British feel about the GBP or what’s the Australians’ sentiment toward their currency (i.e., AUD). So, consider the following as vital:
- If CCI confidence and the other country’s Equivalent-to-the-CCI Index (hereon called ECCI) are equivalent, there may be no emerging price change because one neutralises the other. In our example, AUD ECCI and GBP ECCI are easily accessible. So, as a first crucial lesson – don’t trade currencies where you can’t get reliable ECCIs.
- Even with an insignificant CCI (i.e., neutral), an increase in the pessimism of AUD and/or GBP (such as occurred with the Brexit issues and PM resignations), the USD price should trend up, relatively speaking (or vice versa if the CCI is negative and the other currency ECCI projects neutrally or positively).
- Taking this line of thought further, forex traders should identify viable pairings with the USD where it’s evident that the pricing, one way or another, is heading for a shift. In other words, look for currency situations (even if you’ve never traded them before) reflecting the following:
- CCI negative versus other countries’ ECCIs that are neutral or, better still, positive. In this instance, going short, the USD may be on the cards.
- CCI neutral versus ECCI positive – also a USD shorting consideration.
- CCI neutral versus ECCI negative – suggesting a USD long position.
- CCI positive versus ECCI neutral or, better still, negative – also a USD long consideration.
- Avoid situations where CCI and ECCI are the same.
Trade Forex with our Top Brokers
We recommend connecting with your broker (see a list of recommended ones below) for their insights on CCRs reflecting CCIs and various ECCI reports available to traders. If these metrics are considered, your prediction accuracy will head in the right direction.
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Severely contrasting CCI/ECCI metrics can move forex client sentiment and price trends fast, whereas moderate differentials indicate waiting for the following readings to confirm. These reports centre on “relativity” through and through, not precision numbers of “apples to apples” comparatives. Thus, they’re indicators one should address as one of the “open sesame” watchlists mentioned in our introduction.
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