you are on the right path in your thinking of intermarket analysis alongside fundamentals. Before diving into economic data you need to have a firm grasp of the relationship between asset classes. By understanding this will help you avoid taking the wrong trades and give you a basis to make the right ones.
All markets are linked in some way. Interest rates for example influences equities. This week the anticipation of the Fed raising rates this month caused selling in equities. Bonds move opposite to interest rates although can break correlation in deflationary environments (inverse relationship). You can gauge market sentiment for interest rates by looking at government bond futures. SNP500 futures contracts can be influenced by treasury futures contracts so you can view bond futures as a sort of leading indicator for equities. Bond futures are also influenced by commodity trends for inflationary expectations. So you can think of commodity prices as a leading indicator of inflationary trends and typically move in the opposite direction to bond prices.
here is a high level representation of a relationship:
USD -> commodities -> bonds -> equities
Your first point of research needs to be central banks. They dictate policy which drives medium to long term trends. You need to be looking at what they look at in terms of economic data points and you need to be digesting their statements and any speeches. Get to know who the typical doves and hawks are on the boards so that you can pickup when they give clues. Central banks are not in the business of surprising markets, not all of them at least. They tend to prepare markets for policy changes so you need to get a handle on this.
in terms of fundamentals, you need to draw up a list of leading, lagging, and anecdotal indicators to track. Also categorise them according to the cycle:
(expansion ->[jobs, inflation] -> peak [interest rates rise, momentum drops] - > contraction [interest rates fall])
Central bank policy at its most basic form is to maintain a target level of inflation. Yes they also serve a function in keeping markets stable through intervention such as bank capital requirements and through regulation but this in a broad sense isn't information you can trade off. Do keep a close eye on QE programs though as they heavily effect the strength of a currency. Investment banks, hedge funds, and professional retail traders spend a lot of their time fussing about economic indicators. These after all are the data points central banks use to drive policy and intervention. The institutions have analysts that quickly dissect data into something they can trade but you and I need to do this or subscribe to services that help us. Get a good news feed, I use Eikon which you can get through metastock for $99 a month for the fx subscription. I also use a gem of a site called tradingeconomics.
The other element of economic data that drives short term trades are unexpected numbers. In a good news terminal you have expected numbers based on an average consensus and a upper and lower boundary. If a data point is outside of expectations and outside the boundaries then you could have a short term trade on your hands. i say could loosely because it doesn't apply to every data release only the ones that contribute to policy decisions.
Focus on the monthly and not weekly or revised. Here are the main data point areas
- GDP (real,nominal,productivity)
- interest rates (actual and voting spread)
- Labour (employment, earnings, hours worked, costs) = indication of economic cycle
- spending (retail sales, producer prices,wholesales, durable goods, producer prices,personal and disposable income, consumption) = gdp and inflation
- manufacturing (new orders, capacity, utilisation ,index,inventory) = indication of economic cycle
- consumer and business confidence = anecdotal indication changes in conditions
- housing starts, completion, sales = indication of construction activity, consumer demand, employment, demand for durable goods
- imports and exports of goods and services, trade balance, prices = indication of gdp and local manufacturing, cost pressures, changes in competitiveness
Counties that are commodity driven have other factors at play. Oil for example affects CAD, metals affects ZAR and AUD, milk affects NDZ. Also note that when the market is "risk off", the yen will appreciate at least in the short term (trading opportunity)
Studying these give you a good understanding of where an economy is and you can trade short term and\or long term. I use this to open long term positions where i get in\out\in\out in a specific direction against weaker economies. I also trade unexpected data points which on their own don't affect the overall bias but offer short term opportunities. anyway it's late at night and i am off to bed. I hope this is somewhat helpful.
