How To Compare Inflation Expectations In Tradingview?
A quick video on how inflation expectations can help you find trading opportunities.
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How we can compare inflation expectations for various countries and how that can affect the overall currency trend?
As you know, inflation is one of the key driving forces for monetary policy. And one of the first key areas where markets turn to, to try and establish the next moves that central banks will make. Obviously there are many other considerations at any given time, but as far as priority goes, inflation is right up there in terms of importance.
Now, looking at basic economics we know that as an economy grows, the result of that increased output should theoretically increase inflation as well or increase prices. And when we have inflation rising steadily, that usually brings about expectations of tighter monetary policy or hiking of interest rates or performing quantitative tapering, which is usually considered as a positive for the currency.
However there can be times when expectations of inflation rise for other reasons, such as reflation as you know, unconventional monetary policy is introduced when things are so bad that conventional policy tools like lowering interest rates just isn't enough, and the recession brought on by the coronavirus pandemic as well as the global financial crisis, has being so tough on economies that central banks had to resort to unconventional policy tools like quantitative easing, and many other stimulus measures.
Now, with the onset of these types of recession, central banks have relied heavily on the governments to provide additional fiscal stimulus, to try and help the economies recover.
Now, the unprecedented and extra ordinary huge amounts of monetary and fiscal stimulus usually tilt markets to think that growth is going to pick up and as growth picks up, it should bring rise to higher prices, high inflation and of course, when inflation expectations start to rise, you usually see investors rotate out of safe haven assets, like the U.S. dollar in bonds and into things like equities or even Treasury Inflation-Protected Securities like TIPS and gold, which is a classic inflation hedge.
One way that we can try and track possible currency moves is basically by looking at the inflation expectations of two different countries. Doing so it's best to look a little bit further out of the curve, so let's say the next two years, or the next five years, or the next 10 years to get a sense of where markets think inflation will go next. And that usually gives us a good measure to see where the markets expect growth to be either higher or lower for individual countries and that can create some trading opportunities for us.
Now, for example, if the markets think that growth of economic output of one country will outpace the growth of another, then we should be able to track that by looking at the spread or the difference between the two countries inflation expectations. And the challenge for as traders, is finding adequate sources of inflation expectations. But luckily we do have access to a few of them on something like trading bureau.
For example, the ones that I use to look at something like the Euro or U.S. dollar is two of them, the first one is called EUIF, which is basically like those 10-year inflation expectations for the Eurozone, and then you also have UINF, which is like those 10-year inflation expectations for the United States. And the way that you can go about to basically add that spread to the chart is basically just gonna add the two ones and subtract them from each other.
So in gold here we have the Euro versus the U.S. dollar. And if you wanna add the inflation expectations or the spread, rather we just go to compare and under add symbol we just going to add in EUIF, and we're gonna subtract the UINF. So the first one is the Eurozone inflation expectations over 10 year, and the other one is the U.S. inflation expectations over 10 year and if we add that to the chart, just give it a second there. You can see how closely, the two inflation expectations or the spread rather and tracks the Euro versus the U.S. dollar. So it's a very handy tool to have.
But at least we can use it for the ones that we do have access to. So if you wanna play around with it, just go to your search by and just type in inflation expectations and you should be able to find a few permeations in trading view that we can work with. So hope that helps Asanka and any other questions, don't hesitate to let us know.
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