Category Archives

Posts in Currency category.
forex the cat
Consumer Price Index (CPI)

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available. (U.S. Bureau of Labor Statistics https://www.bls.gov/cpi/ )

From Wikipedia, the free encyclopedia

CPI-U starting from 1913; Source: U.S. Department Of Labor

CPI vs M2 money supply increases

The United States Consumer Price Index (CPI) is a set of consumer price indices calculated by the U.S. Bureau of Labor Statistics (BLS). To be precise, the BLS routinely computes many different CPIs that are used for different purposes. Each is a time series measure of the price of consumer goods and services. The BLS publishes the CPI monthly.

Guide to Consumer Price Index

Investors are bound to encounter many terms. One of them is the consumer price index (CPI), which represents essential numbers. The CPI can reveal the health of the economy, helping investors determine whether or not inflation is possible.

This guide will help you understand what CPI is, its importance, and the current index. You will also learn how to calculate CPI.

What Exactly is the Consumer Price Index?

The Consumer Price Index (CPI) provides the measurement of the average change in prices of specific goods and services. Transportation, food, clothing, energy, and health care are among those that CPI measures.

Often, CPI is for measuring inflation, which allows the government, companies, and economists to understand the cost of living at a particular period.

In short, the CPI is an economic indicator. Along with its components, the CPI can be used to deflate other economic factors. It is why this percentage is vital to the government, businesses, and many other citizens.

As a deflator, the consumer price index helps control retail sales, consumer dollar value (for determining the purchasing power), and hourly or weekly earnings. Therefore, monetary value declines whenever the prices increase.

Why is the CPI Important?

In the economy, money flows in a circle, while other factors are considered, including production, goods, and services.

Let us dive in deeper.

As a worker, you earn an income that allows you to buy goods and services. This year, you spent it on different products. When you go to a store, you take some money with you to purchase things you need for some time, such as eggs, milk, orange juice, and cereal.

You also buy gas for your car, and you pay utility bills. All these expenses, including your plane fare to another country, doctor fees after a checkup, and buying a new car, will be incorporated into the yearly CPI. They will be measured across the whole financial system.

The question is: why does it matter?

When you go to the store next year, the same amount you spent last year may not have the same buying capacity. Prices of goods and services change over time – usually in an upward trend. During this time, your cost of living may have already increased. From the products you buy at the store to filling up your gas tank to your utility bills, your expenses may be higher than last year’s.

The CPI gives significant numbers to identify periods of inflation (or even deflation). Mainly though, the consumer price index is for measuring inflation, determining the cost of living, and understanding the efficiency of economic policies.

Tracking inflation is crucial because it is an indication of a healthy (or unhealthy) economy. It will be much easier to respond to inflation appropriately, which is significant to policymakers.

There are times when inflation would sharply increase. Knowing the CPI enables economists to gain an insight into the economic policy of the government that could affect the market. Therefore, it becomes easier to identify whether or not the present strategies work correctly. If not, the government can use it to create better policies in the coming years.

Inflation, when not appropriately determined, can have a considerable effect on the economy. It can make the cost of living difficult to maintain, especially if work salaries cannot keep up with the increasing prices of goods and services.

Ultimately, inflation lowers consumers’ living standards, which could mean a lower quality of life. It gets worse when inflation turns into hyperinflation, which causes financial devastation for the whole country’s economy.

With CPI, inflation and cost of living can be monitored. This way, the situation can be controlled before it gets out of hand.

All in all, the consumer price index is one way to help maintain a healthy and robust economy.

The CPI is also used to realign the eligibility levels of individuals for different types of assistance from the government. It includes Social Security, which automatically adjusts wages based on wage adjustments. The Bureau of Labor Statistics (BLS) has stated that the cost-of-living adjustments (COLA) of over 50 million Social Security users are based on the CPI. Others include retirees from the Federal Civil Services and the military as well.

Why Should You Care?

Aside from the reasons given above, the CPI statistics involve almost every individual in the country. Whether you are self-employed, working in a corporation, unemployed, retired, or have low income the CPI reports includes you. Those who are not in the report are from farm families, rural areas, inmates, and the patients in mental hospitals.

What is the Current CPI?

The US Bureau of Labor Statistics (BLS) calculates different consumer price indices for a variety of purposes.

Here is the CPI formula:

-The cost of the market basket in a specific period divided by the base year cost of the market basket

-Multiply the answer by 100

Let us break down the elements of the CPI formula.

As you can see from above, the formula requires the “market basket” of goods and services. Then, it uses the estimated costs of a basket to get the index value (known as the CPI).

The market basket is deemed imperfect; however, it attempts to provide quality representation of consumer purchases from different categories, including:

  • Medical care
  • Apparel
  • Food and beverage
  • Education
  • Communication
  • Recreation
  • Health and medical care
  • Housing

The complete list of all the types and measurements performed is on the BLS website.

The inclusions of the basket are determined by collecting information from individuals over two years. Purchase details are gathered, which involve regular expenses and behavior in the consumption of goods.

According to the BLS, data from 2016 and 2017 came from the 2013 and 2014 Consumer Expenditure Surveys. About 24,000 people provided information about their quarterly spending habits. About 12,000 more consumers were included in the survey to make sure data was nearly accurate. They were asked to keep a list of everything they have bought for two weeks.

For two years, the collected information came from 48,000 people whose quarterly expenditures were recorded and another 24,000 with their biweekly diaries. The details helped determine the weight of the items based on the CPI structure.

Using all the gathered information, the market basket was built where both the items and their numbers were recorded. For instance, specific consumer purchases three gallons of milk regularly each month. The product and the quantity are both logged. They are just among the data analyzed to determine the weight or importance of items based on customer behavior.

It should be noted that purchase behavior does not include rural customers. Therefore, they are not considered when getting the consumer price index. Still, the total number of urban consumers amount to approximately 93% of the population in the US.

How is the Market Basked Priced?

The CPI formula can get a bit complicated when you do not know what the market basket price is. The first step is to figure out which products and services are included in the market basket. After that, logging the prices for the basket comes next. In this case, it included both the previous and current costs of different goods and services.

Knowing the current price of the basket, along with its history, gives analysts the ability to see the changes of the identified basket – whether the goods have increased or decreased over time.

BLS data collectors are tasked to collect detailed information regarding the prices of goods and services. Most of the work involves visiting thousands of companies, health centers, stores, and online shops as well. BLS has confirmed that the recorded prices of market baskets reach 80,000+ items monthly.

What about the Base Year?

Aside from the market basket, the base year should also be identified to compute the consumer price index. The base year is used as a benchmark year to compare it with the future years. Therefore, it can change anytime. Even so, it does take some time for it to adapt to obtain better data for comparison.

As seen in the CPI formula above, the market basket price of a particular year, such as the current year, will be divided by the base year’s worth of the same market basket. The quotient will be multiplied by 100 to get the CPI.

It should be noted though that the base year’s CPI will remain 100 since the formula asks to divide the market basket price by itself. Therefore, the result is 1. Multiplying the value by 100 allows us to see whether there is an increase or decrease in the consumer price index.

Meanwhile, if year three’s CPI is 125, for example, you can quickly compare the CPIs and see there is a 25% increase.

Understanding and using the consumer price index also involves knowing how to interpret the index value itself. As you may have learned, indices help streamline the movements of a data series. The difference between the index values can be read as “points,” but describing it in percentage makes it easier to understand.

Types of Consumer Price Index

Every time the BLS creates the CPI report, it comes with two types of CPIs. The first one is known as CPI-W, which measures urban wage and clerical workers. From 1913 to 1977, the BLS only estimated this type of CPI in which households with administrative or wage jobs participated based on their income. The statistics also focused on families with at least one worker who had been employed for 37 weeks or more for a particular year.

The primary reflection of the records showed the changes in the benefits offered to those individuals in Social Security. Today, this CPI represents 28% (at the very least) of the country’s population.

The other type of consumer price index is CPI-U, which is for urban consumers. This measurement now accounts for almost 90% of the US population. Therefore, it is more accurate since it represents the more significant portion of the general public.

In 1978, improvements were made to the methods of measuring the CPI. A broader group of people was introduced. CPI-U was based on how people in metropolitan or urban areas spend their money. The group includes professionals, retirees, and even the unemployed. Urban wage and clerical employees were also in the statistics.

Even with the existence of CPI-U, the BLS still measures CPI-W. However, the main difference between these two types revolves around the expenditure weights of item categories and where the consumers are located.

CPI Limitations

The consumer price index has cemented its importance in analyzing the economy for investors, the government, economists, and many others. However, some people seem to think of CPI as inaccurate, especially when it comes to determining inflation. Some would argue that it overstates inflation by about one percent. This argument stems from the perceived bias toward expensive products and services.

In a way, it does have some limitations. The rationale behind the “bias” involves a few points. First, the consumer price index should not be used when considering the substitution effect. It happens when the prices of certain goods or services increase. When there is an increase, the natural reaction of consumers is to go for the more affordable product of the same value, quality, or category. However, the CPI fails to take into account such a change.

Instead, CPI assumes consumers will continue purchasing the same products or basket. The only time it will be modified is when the behavior or buying patterns of the consumers will change toward a particular item when new data pulling occurs.

Another limitation takes place when different products increase in quality. Such a change is difficult to quantify, which means CPI cannot be measured. Consumers do benefit from better quality, but this change cannot be tracked until new data show a new pattern in buying.

It should be noted that the CPI also includes taxes from sales, but does not comprise of income taxes, as well as prices of stocks, bonds, and other investments.

The CPI also does not include the sales price of houses in the country, which can also change drastically from time to time. However, the index value does include the monthly equivalent of being a homeowner, which depends on rent prices.

At this point, it can be misleading since rental rates can drop whenever vacancy rates are high. This phenomenon typically happens when the interest rates are low, while prices of homes for sale are on the rise. The conclusion is that people tend to purchase houses when they see a thriving market.

On the other hand, home prices become cheaper when interest rates increase. As a result of the housing market’s deterioration, people tend to move to rental homes, such as apartments. The move only causes rent prices to increase.

Due to how CPI is measured, the result can give a deceptively low reading during those times when rents are cheap, and home prices are high. It was one of the reasons why the consumer price index did not notify authorities and some experts about the 2005 housing bubble.

Some, including the school of economics in Austria, would argue that the consumer price index should not be prioritized. The value may not mean that much, as well as the impact of inflation. While inflation is often viewed as the effect of rising prices, Austrians, especially those at Mises.org, believe otherwise.

Economists and other professionals of the Austrian School consider inflation as a decline in the value of capital relating to the products and services it can buy. Furthermore, inflation is a phenomenon involving money, not the price. According to the institution, the prices do go up. However, the increase takes place because inflation is occurring and not the other way around.

Nevertheless, setting aside any other interpretations, it is undeniable that CPI is valuable. It is why the government and its agencies, along with economists in the country strive to grasp it.

The simple fact is this: the consumer price index is widely utilized all over the country. Whether or not you agree with it and its value, the formula itself is unquestionable. CPI can assist in measuring inflation, even though it is not the only value that should be considered.

Inflation has always been one of the biggest dangers to a thriving and stable economy. When it occurs, people’s standard of living is greatly affected. The only way to survive it is to make sure your income does not go down as the prices rise. As it continues, inflation causes the cost of living to increase.

A high enough inflation rate can devastate the US economy. For the Federal Reserve, the CPI helps in determining economic policies that should be changed to avoid inflation. Contractionary monetary policy is often used to slow down the country’s economic growth right before inflation starts.

Currently, the consumer price index does not show any threats of inflation. It is good news for both the country and the consumers. The BLS will continue to update or revise the CPI when needed, particularly when consumer buying habits shift significantly.

forex hedge fund trading
Understanding the Basics of Forex Trading

Forex trading is not easy. Before you dabble into it, you should understand the basics of the business.

Introduction

Forex trading can be a lucrative career. However, before you can start expecting reaping returns, you have to first understand how it works. Many, thinking that it is an easy way of making money, have been attracted to Forex trading only to end up getting burned by it. You can choose not to become one of those.

To do so, you should dedicate yourself to learning the basics. According to statistics, over 90% of Forex traders lose their money and quit the business for good. Therefore, if you want to be different from those, if you want to succeed at Forex trading, you must be ready to give it your best — in education and practice.

Therefore, here are the essential basics of Forex trading that you must know as a beginner.

Currencies

What is traded in the Forex market? Money. Currencies. Forex market is the global market whose participants buy and sell currencies and attempt to profit from variations in their exchange rates. However, even though the Forex market is the financial market for currencies, not all currencies are traded equally.

The most heavily traded currency is the United States Dollar. Then come the Euro, Japanese Yen, Great Britain Pound, Switzerland Franc, Canadian Dollar, Australian Dollar, and the New Zealand Dollar. Consequently, these currencies are known as “major currencies.”

Currencies are generally represented by three letters: the first two stand for the bearing country while the last represents the currency itself. An example is the USD (United States Dollar).

Furthermore, every Forex transaction is conducted in pairs. That is, there must be two currencies for a Forex transaction to occur. As traders buy one currency so do they simultaneously sell another. Consequently, all the currencies available for trading are paired into:

  • Major pairs
  • Cross/Minor, and
  • Exotic pairs.

The major currency pairs are those that include the U.S. dollar in them. Because they are the most widely traded pairs, they also have the highest level of liquidity and the lowest trading costs. They are:

  • EUR/USD
  • USD/JPY
  • GBP/USD
  • USD/CHF
  • USD/CAD
  • AUD/USD
  • NZD/USD

The crosses, also known as the minors, are those currency pairs that do not include the U.S. dollar. Although not as widely traded as the major currency pairs, those among them based on EUR, GBP, JPY also experience a significant market action and are the most popular of them. They include:

  • EUR/CHF
  • EUR/CAD
  • EUR/AUD
  • EUR/JPY, etc.

Finally, the exotic currency pairs are the least traded of all. And because of that, they have the highest transaction costs of all of them. An exotic currency pair includes a major currency and the currency of one of the emerging economies such as Brazil or Mexico. Examples include:

  • USD/BRL (United States Dollar/Brazilian Real)
  • USD/MXN (United States/Mexican Peso)

At this juncture, it is important to highlight that the two currencies in each pair are known as the Base and Quote/Counter currencies respectively. The first of the pair is the base; the other is the quote/counter currency.

The base currency, as it is known, is the “basis” for each trade. That is, when you buy a currency pair, you are essentially buying the base currency. And when you sell the pair, you are essentially selling it.

Pip

The pip, short for “percentage in point, ” is a measure of the minimum value by which a currency pair can change. For example, assuming the pair EUR/USD changes from 1.1000 to 1.1002, the currency pair is said to have moved 2 pips. Except for pairs involving the yen, most currency pairs have their pip change represented by the last of the 4 decimal places in their price quotes.

In Forex trading, pip is used to represent losses and gains.

Leverage

When you trade with leverage, you will be able to control a large trading account with small capital. In short, when you trade on leverage, you use a small amount of money to open positions while your broker borrows you the rest.

Leverage is expressed in ratios. For example, when you use your deposited amount of $1,000 to open a position of $50,000, your leverage level will be 50:1. Here, 50:1 is your leverage while the $1,000 you deposited is your margin, the amount required by your broker to open a position.  

Bid-Ask Spread

For each currency pair, there are two different prices. These are the bid price and the ask price. The bid price is the price at which your broker is willing to buy from you. On the other hand, the ask price is the price at which it is willing to sell.

Hence, you sell at the bid price and buy at the ask. As earlier stated, the base currency is the “basis” for the transaction and you are either buying or selling it. The difference between the bid price and the ask price is called the spread, and it is the fee that accrues to the broker itself.

The pip, short for “percentage in point, ” is a measure of the minimum value by which a currency pair can change. For example, assuming the pair EUR/USD changes from 1.1000 to 1.1002, the currency pair is said to have moved 2 pips. Except for pairs involving the yen, most currency pairs have their pip change represented by the last of the 4 decimal places in their price quotes.

The spread which represents the charges of the broker is measured in pips, too. For instance, a EUR/USD quote of 1.2031/1.2033 indicates a spread of 2 which is the broker’s gain.

Lot Size

Forex brokers, intermediaries between Forex traders and the Forex market, provide three types of lot size. These are the

  • Standard lot
  • Mini lot
  • Micro lot

This classification is based on the number of currency units in each lot. For example, the standard lot contains 100,000 units of the base currency. A mini lot has just 10,000 units of the base currency while a micro lot, on the other hand, has 1,000 units of it.

Why is the lot size important? It is because it influences your potential for profit or loss. When you trade a high lot size account, you stand a higher chance of making higher gains or losses. That is, the larger your lot size, the greater your potential for a significant profit or loss.  

For example, in a standard lot, a change of 1 pip is equivalent to $10. For a mini lot, one pip is just $1.

Forex Trading Session

Although the Forex market is on for 24 hours, there are specific times of the day during which it is most active. In fact, these specific times have been grouped into the:

  • European,
  • Asian, and
  • The North  American sessions.

This categorisation explains why certain currency pairs are most traded during certain sessions.  For example, currency pairs based on the USD are expected to be most active during North American session.

Overview

There you go, the basics of Forex trading. Although the discourse here is not in any way, exhaustive, it is aimed to get you familiarised with the Forex market and its basic lingo. From here, you can take it up and get deeper into the technicalities. And trust us, we have a lot to teach.

crosscityfx currency traders
An Introduction to Forex Trading

Meta description: Forex traders buy and sell currencies. They use fundamental, technical, and sentiment analyses to make their trading decisions.

Introduction

Of the financial markets in the world, the Forex market is the largest and most liquid. It is a financial market whereby traders buy and sell currencies and attempt to profit from fluctuations in their exchange rates. Approximately $5 trillion is traded in it every day.

The highly liquid financial market is on 24 hours every day and for five days in a week. However, in the day, there are specific sessions during which traders in different parts of the world are active in it. These sessions are the European, Asian, and North American sessions.

Here are the important details to know about the most dynamic financial market the world has got.

What is Forex?

Forex is the short expression for Foreign exchange. It is the global market—not restricted to a single country—where currencies of different countries in the world are exchanged for one another. The market has a massive daily trade volume of $5 trillion.  

People exchange currencies for different reasons all the time. If you have been to another country before, you would have had to change the currency of your home country to that of your destination. There are currency desks at airports to help with this.

Depending on the rate at the time, you could have got more or less in exchange. When you did this, you were participating in the Forex market. In Forex terms, you traded currencies: bought one and sold the other.

Who Trade Forex?

The Forex market has different kinds of participants. There are the banks, pension and hedge funds, corporations, and retail traders. Banks trade between themselves via the interbank foreign exchange market which, because of its volume and net worth, drives most activity across the entire market.

Pension and hedge funds pool capital from clients and trade large accounts on their behalf. They, however, do not trade just currencies; they invest in stocks and other liquid assets, too. Finally, retail traders are individuals who trade Forex from diverse locations all over the world just with internet-enabled computers.

These different categories of traders have different shares of the $5 trillion daily trade volume. However, the banks, pension and hedge funds, collectively referred to as institutional investors, have the largest. Retail traders, on the other hand, account for the least: a meager 5-6% ($300-400 billion) of the overall daily trade volume.

How to Trade Forex

There are many strategies for trading Forex. However, all of them are based on the three popular methods of analysing the Forex market. These are:

  • Fundamental analysis
  • Technical analysis
  • Sentiment analysis

Fundamental analysis is the tool Forex traders use to understand nations’ economies and how they fare in relation to one another. Consequently, they use economic indicators such as interest rate, inflation, public debt, and geopolitical news and events to make their trading decisions.

Technical analysis, on the other hand, uses resources such as charts, patterns, indicators, and other similar tools to assess the market and form opinions about it. To them, the price is the most important detail to note so they devote themselves, using aforementioned tools, to analysing it.

Sentiment analysis attempts to gauge, at every point in time, the direction of the market. It seeks to know if it is bullish or bearish, that is, the prevailing trend of it, and then profit from it. However, it is important to note that these methods do not have to be mutually exclusive and so can be successfully combined.

eur usd quarter support crosscityfx
What the EUR doesn’t say about the USD

Support holds strong in the face of uncertainty. There is strength in ingenuity. Interest rates, a subject matter of great importance proves that even through a shift in economic policy risk can approach a yield worth execution. Our assessment through the quarter shows that underlying guidance in EUR/USD will lead to provide a consistent return on position in benefit of the relative risk.

Rigorous Assessment on Each & Every Trade

Our firm spans across a subset of currencies in the Forex Market. We assess each mark with a tier level degree of risk as part of our overall trade process assessment. Volatility matters in a market driven by macroeconomics and as such, risk is built into our objective summary.

Currency is King

We develop our own system for the currency market. Over $1 trillion daily is traded in Forex and we work to follow the volume. Liquidity matters and we understand the volatility involved in such a market. By creating a connection CrossCityFX.com is prime for pursuing long term returns at a rate that achievable quarter after quarter. To Reduce Risk is our Mission

Tier Risk Allocation Guidelines

CrossCityFX.com distributes across a class of risk assessed trades that provide diversity in our execution system. We segregate our trading agenda based upon the risk metrics provided by our in house team on each and every trade. Trust Matters and our focus on preservation and long – term growth will lead us to achieve our goals.

Forex and the Marketplace

Why does the marketplace matter? We exchange currency domestically that reflects a global market. Opportunities to exchange based upon our guidelines give us the capability to thrive in an ever changing ecosystem. It’s huge and plentiful in the shallow waters where we allow our process of trade execution to bring us the data we need to analyze each purchase.