The contrast between qualitative and quantitative guidance.

After you’ve been trading the news for a while you will notice situations where there is an economic event on the calendar, it comes out positive, which should make the currency go up, yet it goes down.
Or vice versa
The figure comes out negative, which should be negative for the currency, yet it goes up,

there is an explanation as to why this is happening

The reason for any market move is based on the market’s expectation of how the central bank will act.

Central banks generally tend to be very clear about what they are thinking, they will share their thoughts, goals and outlook with the market, traders will then use this information to trade each currency.

A common way that each central bank communicates to the market is; we will look at taking this action …………. once we have hit this goal…………..(quantitative guidance) . So for example we will look at raising rates should inflation exceed the target of 2.0%(quantitative guidance) or vice versa we will consider cutting rates should inflation fall below 1.0%(quantitative guidance).

This remains very simple for us as traders when it’s the case that each target or level referenced by the central bank is far from being achieved.
If for example we know the central bank is concerned about inflation dropping below 1.0% and the figure is well above that level we can continue to trade the currency knowing that there is no immediate fear of a cut as their quantitative guidance has made it clear that clear to the markets .

Complications can occur when figures start coming out close to a targeted level.

If for example a central bank has stated that they will consider raising rates once unemployment drops below 7% (quantitative guidance) and the figures released are getting close to and edging closer to the target, this can cause the market to speculate.

This can of course cause volatility in the markets as traders place speculative bets as figures approach the targeted level, to reduce volatility in the markets the central bank will then switch from quantitative guidance to a qualitative guidance.

In this example (Unemployment below 7%) the central bank will generally state once figures are close to their target that they are interested in the quality of employment.

Now that they have increased the amount of people in work, they will focus on what quality of work that is (qualitative guidance). This means they will focus on the whether the jobs added are simply part time positions, zero hour contracts and whether the measured average earnings are improving.

Once the central bank has made the shift from quantitative to qualitative you can have situations where a headline figure that was previously positive for the currency is now negative, as the central bank and market are now focussed on figures behind the headline figure.

So for example unemployment goes down yet average earnings are weaker, this will cause what appears to be a positive data point to be negative for the currency – this is an example of why the headline figure doesn’t always paint the full picture and as traders we need to understand the difference between quantitative vs qualitative guidance.

The post The contrast between qualitative and quantitative guidance. appeared first on Jarratt Davis.

Source:: The contrast between qualitative and quantitative guidance.