US employment and payroll data are due on October 7th and 8th and I would like to share several remarks about them.
First, the job / payroll data seems to be quite important for forex traders, especially over the long run. There is a serious negative correlation between US unemployment (blue line) and the dollar index (orange line). A strong negative correlation is visible with the naked eye. As unemployment rises, the dollar index falls, and vice versa. The correlation coefficient equals -0.43, which indicates that both variables are clearly related to each other.
A surprising relationship between GDP and the dollar index
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| US Unemployment vs The US Dollar Index |
The relation (or the correlation) is one thing. And the other one is the cause-and-effect relationship. We may measure the influence of exchange rates on unemployment or the influence of unemployment on exchange rates. The Keynesian economists like to do the first, the forex traders need the second.
The first approach shapes economical policies of many governments. Their assumption is simple. The cheaper currency promotes export, discourages import, and saves jobs. Most governments want to depreciate their currencies to save jobs. When they do - other governments want to do the same (in order to save jobs in their countries), and what we usually have as a result is called a currency war.
But wait a moment and look at the chart again. This is what the real world looks like. Lower dollar = higher unemployment. And for the forex traders - higher unemployment = lower dollar. The relation is very clear, at least in the US economy between 2006 and 2021, according to FRED data.
Keynesians, please explain this.
The real data shows some bad news for trend followers
Data credits:
U.S. Bureau of Labor Statistics, Unemployment Rate [UNRATE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UNRATE, October 7, 2021.
Board of Governors of the Federal Reserve System (US), Trade Weighted U.S. Dollar Index: Broad, Goods and Services [DTWEXBGS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTWEXBGS, October 7, 2021.