Economic Releases and Event Risk

Market pricing of consensus expectations

In advance of every significant release, a consensus forecast is compiled from the estimates of economists and published on economic calendars. Market participants position themselves according to this forecast, and the prevailing price at the moment of release already reflects it. When the published figure matches the consensus, the release contains no new information and price frequently moves little. When the figure deviates from the consensus, the market reprices, and the magnitude of the movement is broadly proportional to the size of the surprise.

The relevant analytical question before a release is therefore not what the figure will be, but what the market has already assumed and what deviation would materially alter that assumption. A strong figure that had been widely anticipated may produce a decline in the currency concerned, as participants who positioned for the outcome close their positions once it is confirmed. This behaviour, in which the anticipated event is sold once it occurs, is a regular feature of release trading.

Liquidity and execution conditions around a release

In the minutes preceding a high-impact release, liquidity providers reduce the size they are prepared to quote or withdraw from the market, since they are unwilling to hold exposure across an event whose outcome is unknown. The depth of the order book declines and spreads widen, sometimes to several times their normal width. On the Onys Kapital platform, spreads on both the Standard and Pro account types are variable and will reflect these conditions.

At the moment of release, price frequently moves across a range of levels within seconds, with few transactions occurring at the intermediate prices. Orders are executed at market, and a stop-loss order resting within that range will be filled at the first available price after the stop level is reached, which may be materially worse than the stop price. Slippage under these conditions is routine rather than exceptional, and a stop-loss does not guarantee execution at a specific price when the market gaps. The initial movement frequently reverses within minutes as the detail of the release, rather than the headline figure, is assessed.

• Spreads widen before and during the release and may remain wide for some minutes afterwards.
• Slippage on market and stop orders is routine under release conditions.
• The initial price movement frequently reverses once the full release is assessed.
• A stop-loss order limits loss under normal conditions but does not guarantee the execution price across a gap.

Approaches to managing event exposure

Two approaches are consistent with sound risk management. The first, and the more conservative, is to hold no position through the release and to trade the market structure that forms in its aftermath. The period following a release, once the initial volatility has subsided, frequently produces a clear directional move on normal spreads, and offers a more favourable balance between reward and execution risk than the moment of release itself. This approach is recommended for traders at the intermediate stage.

The second approach is to hold or take a position through the release with a deliberately reduced size and a stop-loss placed outside the range of movement the release is expected to produce, accepting a lower potential return in exchange for participation in the volatility. Under this approach, the position size is calculated from the widened stop distance in the usual manner. The approach that is not consistent with risk management is to hold a position of normal size, with a stop at normal distance, through a high-impact release; the stop is then likely to be executed with substantial slippage on movement unconnected with the trading idea.

High-impact release categories

Central bank interest rate decisions and the accompanying statements and press conferences carry the greatest impact, since they directly determine the return on holding a currency. Inflation data, principally the consumer price index, is closely watched because it informs the expected path of central bank policy. Employment data, and in particular the United States non-farm payrolls report published on the first Friday of each month, produces some of the largest routine movements in the foreign exchange market.

Unscheduled communications from central banks, including emergency decisions and unexpected statements, carry high impact by definition, since no consensus exists in advance. Beyond these categories, gross domestic product, retail sales, purchasing managers' indices and trade balance data carry moderate impact. Equity indices and commodities are affected by the same releases and, in addition, by sector-specific data such as inventory reports for energy products. The overnight financing charge applied to positions held past the daily rollover, and the three-day adjustment applied once a week, should also be considered when a position is held across an event that falls outside the trader's normal session.

Use of the economic calendar

The economic calendar on the Onys Kapital website lists scheduled releases with their time, the currency affected, the consensus forecast, the previous figure and an impact rating. It should be consulted at the beginning of every trading session and again before any position is opened, so that no position is entered in ignorance of an imminent release. The trading plan should specify, for each impact level, whether positions are held, reduced or closed in advance.

The calendar is also consulted when the trading hours for the session are set. A trader whose plan specifies a particular session will find that the character of that session differs on days containing a high-impact release, and may specify in the plan that trading is suspended for a defined period before and after such releases. Consulting the calendar requires little time and prevents a category of loss that is otherwise entirely avoidable.