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Trading the News: UK GDP

Discussion in 'Market Predictions and Reports' started by Huskins, Mar 28, 2012.

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  1. Huskins

    Huskins Former Special Consultant to the FPA

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    Nearly all of us think we understand what the GDP is, of course we do we have studied it in school: Gross domestic product (GDP) refers to the market value of all officially recognized final goods and services produced within a country in a given period.
    The Formula used to derive the GDP is
    GDP (Y) is a sum of Consumption (C), Investment (I), Government Spending (G) and Net Exports (X – M).
    Y = C + I + G + (X − M)
    The above is the definition of what Nominal GDP is, however we are not interested in the Nominal GDP, we are interested in the inflation adjusted GDP. Now what the heck is Inflation adjusted GDP you may ask? Good question Nominal and real used to confuse me too, however I grasped the concept using a basic example
    Lets Say a country produces only Widgets, lets say 100 Widgets for the entire year.
    So the GDP of the Country is 100 Widgets, of course we cannot use the widget as the currency to measure the GDP, if the country produces more than one product, hence we compute the GDP as the Widget * Price per Widget , so now lets say each widget was sold for £ 1, the real GDP of the country would now be £ 1 * 100 Widgets = £ 100. Now to continue with our example let us say the next year the country produces 100 widgets , however increases the price of each widget from £1 to £ 1.10 ; the Nominal GDP of the country would increase from £ 100 to £ 1.10 * 100 Widgets = £ 110 ; yipiee time to celebrate the GDP grew by 10% !!!! but not really the country still produced the same amount of widgets i.e. so the Real GDP is still hundred.
    Since countries cannot measure the GDP in real Quantity of goods produced terms, they introduced a concept called Inflation adjusted GDP; their thought process is let attempt to measure the GDP in Real terms by inflation adjusting the value of the currency. Have I lost you there ?
    Lets understand this using our example:
    1st year
    Widget Produced: 100
    Cost per Widget : £ 1
    Real GDP base year: 100
    2nd Year
    Widgets produced: 100
    Cost per Widget : £ 1.10
    Nominal GDP: £ 1.10
    Inflation: 10%
    Real GDP: Nominal GDP/ 1+ inflation: 100

    In theory their approach seems correct this is the best way to approximate real GDP, however in real life its what they use to measure inflation is what I have a major disagreement with; most governments use core cpi as their inflation adjustment measure, core CPi disallows the volitilty of inflation caused by fuel, besides using the incorrect inflation matrix, the way the CPI is calculated is very suspect. This would call for a whole new article however I will give you just one example: If lets say the CPI measures a basket of goods and in that basket of goods lets say we have the IPod 1 which cost say £200; now if a new version of the iPod is released which cost the same £200; the CPI would measure that as Deflation. So you now understand my beef with the way CPI is measured, like I said CPI measurement and manipulation is worthy of a whole new article.
    Now where were we? Yes…. GDP , now you know the Difference between Real, Nominal and inflation adjusted GDP, now lets get to the meet.
    We will have the United Kingdom release its GDP Third Estimate, National Accounts. There are 3 versions of GDP released a month apart – Preliminary, Revised, and Final. The Preliminary release is the earliest and thus tends to have the most impact; this should have the least impact or deviate the least from consensus. The second estimate of GDP growth for the fourth quarter of 2011 remained at -0.2 per cent. Compared to the fourth quarter of 2010, GDP grew by 0.7 per cent and during 2011 as a whole GDP grew by 0.8 per cent. So over the four quarters of 2011, GDP grew by an average of 0.2 per cent. This compares with an average quarterly growth during 2010 of 0.5 per cent for 2010 as a whole compared to 2009.
    All of the above information is based on “Inflation Adjusted” parameters, like how I had mentioned I am not a big Fan of the Inflation Adjusted GDP specially when we are coming out of an economic downturn. Why is that ?
    Lets recall: Y = C + I + G + (X − M)
    so government spending is added to the inflation, now what do governments usually do during an economic downturn? Print money and spend to “increase economic activity” what does the print money part do to the purchasing power of the currency? It dilutes the purchasing power, now this dilution of purchasing power should technically be captured by the CPI but its practically not captured, the result Real GDP being much lower than the inflation adjusted GDP.
    Now given the amount of influence the government has on the way the numbers are calculated if the numbers still fall short of “Growth” i.e. less than 0% then the economy would be in a rather bad state.
    This is where the trade idea comes in. I would be looking to short the GBP against a stronger fundamentally based currency like the CAD or AUD if the number is anything less than 0, this would be a strategic longer term trade. Perhaps heading into a couple of months.

    To get a specific trade plan visit: Trading the News: UK GDP | Professional Forex News Trading Services ; the post on the website includes specific trade ideas along with previous month examples.
     
  2. Huskins

    Huskins Former Special Consultant to the FPA

    Joined:
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    GBPCad-Short-after-the-UK-GDP-news-release.
    Went Short on GBPCAd based on the trade plan; at 9:33 AM ESt on March 28th Floting profit of 42 Pips; Target 300 to 500 Pips; duration 1-2 Months
     

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