From the November 01, 2009 issue of Futures Magazine • Subscribe!

Using surveys to measure currency direction

An area of technical analysis that has been often overlooked by traders is sentiment surveys. These surveys interview consumers and producers about their attitudes regarding economic conditions. There are sentiment surveys throughout the world covering every major country that has a floating currency. These surveys enable traders to gauge attitudes and expectations about the future direction of the currency.

Survey results are posted in regularly scheduled economic data releases. When they are released, they often move the market if there is a surprise change in reported expectations. However, the trader need not restrict himself to using confidence measures only on data releases. Sentiment surveys are in fact leading indicators, not only for forecasting economic directions, but for currencies as well. They provide a very effective projection of the direction of a currency pair. Let’s look at the example of the GFK UK Confidence Indicator.

This survey asks consumers the following questions:

• How does the financial situation of your household now compare with what it was 12 months ago?

• How do you think the financial position of your household will change over the next 12 months?

• How do you think the general economic situation has in this country changed in the last 12 months?

• How do you think the general economic situation in this country will develop over the next 12 months?

• Do you think there are any benefits in people making major purchases such as furniture, washing machines, TV sets, etc.?

These questions result in a monthly survey conducted by GFK Great Britain Ltd. Even though the results are a one-month lag, what is fascinating is the co-movement of the confidence results with the GBP/USD currency pair (see “Leading the way”).

Notice that in March of 2009, UK consumer confidence broke through its own resistance lines, portending a large rise in the pound.

Another example of how consumer sentiment surveys can be used to select direction in a currency pair is the European Commission consumer confidence indicator for the Eurozone. This indicator represents the average of answers to only four questions regarding past and future economic conditions. When we overlay the results against the EUR/USD, we can see close correlations of the direction of the EUR/USD and the change in sentiment surveys (see “Hand in hand”).

What is important to look for is a change in direction as well as the duration of an existing uptrend or downtrend. For example, if the current positive Eurozone sentiment turns flat or negative, it should be viewed as a negative alert to those looking to hold EUR/USD. A dramatic alert for going long the EUR/USD occurred in June when the survey results broke the consistent lows and reversed. What followed was a period of EUR/USD strengthening.

Consumer sentiment surveys provide a rich data source to be mined and analyzed to help shape trading strategy. Traders who simply look at the price charts miss important clues that can provide an edge. After all, there is the adage that “the consumer is always right.”

Abe Cofnas is the author of “The Forex Trading Course” and “The Forex Options Trading Course” (Wiley). Reach him at abecofnas@gmail.com .

About the Author
Abe Cofnas

Abe Cofnas is author of “Sentiment Indicators” and “Trading Binary Options: Strategies and Tactics” (Bloomberg Press). He is editor of binarydimensions.com newsletter and can be reached at abecofnas@gmail.com.

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