Quarterly GDP

What is it?

This data is the ultimate snapshot of an economy’s health. The technical definition
of GDP is the market value of all goods and services produced by a country. It is
also considered to be a measure of a country’s standard of living.
Although it is reported quarterly, the data in the major economies usually includes
an annual growth rate, so you can see how the economy performed in the past 12
months.

When is GDP data released?

GDP is reported quarterly for most countries in the world. Usually a GDP report is
released in the first month of a new quarter, but consult an economic calendar to get
the exact date and time. Also, there are usually a couple of subsequent revisions to
GDP data after the main release, especially in the major economies.

Why is GDP significant?

GDP data tells the story of how an economy performed over a period of time – its
change relative to previous quarters gives a good indication of which direction the
economy is moving and where it may go in the future. A strong positive reading is
good news for an economy, while the opposite is bad news. The annualised data is
extremely useful for detecting changes in the economic cycle, which can have big
implications for FX markets.
Since GDP data is used to determine a country’s position in the economic cycle, it is
of use for a longer-term trader. Like inflation data, GDP data is of more limited use
for the short-term trader – they would be watching to see if the actual figure exceeds
or misses the consensus estimate by a large margin. Usually if GDP data is in line
with estimates then it barely moves the FX market.

FX market example

GDP can cause volatility in the FX market if it is wildly different to consensus
estimates. Let’s look at two examples of data surprises and see how it impacted FX.

Example 1: UK
Third quarter UK GDP in 2012 was much stronger than expected, rising 1% versus
expectations of a 0.6% rise. This data was even more important than usual since it
meant that the UK had exited recession for the first time in 2012. This was difficult
to predict, so the better trading strategy, in my view, would be to digest the data and
then make your move. This was my strategy:
1. I asked myself what caused the UK to grow so strongly (it ended up being
one-off factors like the Olympics and the Jubilee bank holiday, which
weren’t expected to contribute to growth later in the year).
2. This made me think that GBP strength on the back of this report may be short
lived.
3. I wanted to trade the pound, but I had to be clever about it. A long GBP
position would most likely only work against a currency where growth is
weak. The euro was an obvious candidate. As you can see in Figure 1.8,
EURGBP declined 190 basis points in the two weeks after the data release.

Example 2: Japan
Japan’s economy contracted sharply in the third quarter of 2012, in contrast to the
UK. It contracted by 3.5% on an annualised basis in Q3, a sharp slowdown relative
to the 0.3% expansion in the second quarter.
Japan’s economy was weaker than expected, but rather than cause the yen to sell off,
it actually caused the yen to strengthen by 100 pips versus the USD in the immediate
aftermath.
How so?
The yen is a safe haven currency and even when there is a negative domestic
economic shock it can cause a flight to its perceived safety. However, it would not
have paid to remain short USDJPY for long, as you can see in Figure 1.9.
The price action after the data release is circled, but in the following three weeks
USDJPY rallied 300 pips. Thus, the rush to the safety of the yen was only temporary,
and once the market digested the news the yen reacted as you would expect, and
started to weaken.