How Do Unemployment Rates Impact To Market Vodility?

How can successful traders predict price movements and make the right decisions? One of their secrets is the unemployment rates tool. Sounds confusing, right? Don’t worry, don’t hesitate to take a few minutes to follow the following article, I will show you its huge impact on the market and draw lessons on the right trading decisions.

Unemployment Rate Definition

The unemployment rates serves as a key metric for assessing economic well-being. When the unemployment rates is high, it means that many people are having difficulty finding work. This could cause problems in society, like poverty, crime, and riots. Conversely, when the unemployment rate is low, it shows that the economy is growing and creating many jobs, and the value of a country’s currency is also proportional to the economic development of that country.

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Types of Unemployment

Unemployment is not simply being unemployed, but there are many different types of unemployment, each with its own characteristics and causes. Let’s learn about the most common types of unemployment:

Frictional Unemployment

Frictional unemployment is a short break between jobs. When a person wants to find a better opportunity, they can proactively quit their job and spend time looking for a new job. Or a new graduate needs time to find a job that suits their expertise.
For example: Ms. Mai decided to quit her old job to find a job with a higher salary and better development opportunities.
Frictional unemployment usually does not last too long and is considered a natural part of the labor market.

Cyclical Unemployment

Cyclical unemployment is the cyclical changes in the growth and decline of the economy. Businesses are doing well, need more workers, so the unemployment rate falls. Businesses are struggling and have to cut staff, leading to increased unemployment.
For example, to prevent the spread of the epidemic, many countries have imposed lockdowns, forcing businesses to close, causing serious unemployment.

Structural unemployment

When technology changes too quickly, many old occupations are eliminated, causing people working in that industry to lose their jobs. For example, modern machines have replaced humans in many manufacturing jobs.
Structural unemployment is a major challenge for society. To solve this problem, we need policies to support affected workers, such as retraining, creating new jobs, and financial support.

Institutional unemployment

This is unemployment that occurs due to regulations, laws, or policies of the government and society. These regulations, although issued with good intentions, sometimes unintentionally create barriers that make it difficult for workers to find jobs.
For example, when the minimum wage is too high compared to the productivity of some workers, businesses will be reluctant to hire them because the labor costs are too high. This leads to a situation where many people, especially young people, have difficulty finding their first job.

How are the unemployment rates calculated?

The unemployment rates are calculated by dividing the number of unemployed people by the total number of people in the labor force, then multiplying by 100%.

For example, if there are 100 people of working age in a country, and 10 people are unemployed, then the unemployment rates for that country is: (10 unemployed people / 100 people in the labor force) x 100% = 10%.

Market Impact of Unemployment Rates

There are many factors that affect the unemployment rate. Let’s find out right away to have a more effective trading strategy:

Economic health

A high unemployment rate shows that the economy is in trouble. When people are unemployed, they will consume less, businesses will produce less, and all of this will drag down the economy.
The central bank often cuts interest rates when the economy is weak and unemployment is high to stimulate the economy. Conversely, when the economy recovers and unemployment is low, the central bank can raise interest rates to curb inflation.
When unemployment is high, investor sentiment often becomes pessimistic, leading to asset sales and a decrease in the value of that country’s currency.

The decisive influence of the central bank

Just like reducing the price of a product to attract buyers, the central bank will lower interest rates to encourage people and businesses to borrow, consume and invest more. This will help stimulate the economy and create new jobs.
The central bank can take other measures such as buying government bonds or other assets to pump more money into the economy.
When the central bank lowers interest rates, the country’s interest rates become less attractive compared to other countries. This will cause investors to withdraw capital from that country, putting downward pressure on the country’s currency.
Economic stimulus measures can lead to high inflation. High inflation will reduce the purchasing power of the currency, putting downward pressure on the currency.

Currency strength

When unemployment rates are high, investors often do not value that economy and withdraw capital from that country. This leads to an oversupply of that country’s currency, causing its value to decrease.
Investor sentiment plays a very important role in the forex market. When the unemployment rate increases, investor sentiment often becomes pessimistic, leading to a sell-off of that country’s currency.
High unemployment rates are often accompanied by reduced production and exports, leading to a trade deficit. This also puts downward pressure on that country’s currency

Interest Rates

Unemployment rates and interest rates are like two sides of the same coin, always closely related. When the economy is in trouble, the unemployment rate increases, the central bank will often:

Cut interest rates like reducing the price of a product to attract buyers. When interest rates decrease, the cost of borrowing will be cheaper, encouraging businesses and people to borrow money to invest and consume, helping the economy recover.
The central bank can buy back bonds or other assets to pump more money into the economy, helping to reduce interest rates and stimulate the economy.
When interest rates decrease, that country’s currency becomes less attractive compared to other countries. This causes investors to withdraw capital from that country, putting downward pressure on the currency.
Increasing the money supply can lead to high inflation. High inflation reduces the purchasing power of money, putting downward pressure on prices.

Investor sentiment

Investor sentiment is like a mirror reflecting confidence in the economy. When unemployment rates rise, investors tend to withdraw capital from countries with weak economies and high unemployment rates. This puts downward pressure on the currency of that country. Or investors will move money to safer assets such as gold, the US dollar or other strong currencies.

Risk appetite

High unemployment rates often make investors nervous and seek safer assets. Currencies such as the Japanese Yen and Swiss Franc are often considered safe havens. When investors are nervous, they will pour money into these currencies, causing their value to increase. Conversely, currencies of countries with struggling economies, such as the Australian dollar, are often sold off.

Global trends

Economic events in one country can affect the entire foreign exchange market. When a large economy like the US is in trouble, this affects not only the US dollar but also many other currencies around the world.
If a country exports a lot of goods to the US, when the US economy weakens, the demand for US imports will decrease, leading to a decrease in that country’s foreign exchange earnings and putting downward pressure on that country’s currency.

Trade Balance

When people are unemployment rates, they consume less, which leads to lower imports. At the same time, businesses produce less, which reduces exports. If exports decrease more than imports, there will be a trade deficit.
A trade deficit usually puts downward pressure on a country’s currency, as demand for the currency decreases. Conversely, if exports increase more than imports, creating a trade surplus, the country’s currency will tend to appreciate.

Policy Changes

When unemployment is high, governments can cut taxes, increase public spending, or implement employment support programs to stimulate the economy. These policies often increase the money supply, causing inflationary pressure and devaluing the currency.
Conversely, when inflation is too high, governments can raise taxes or cut spending to curb inflation. These policies typically reduce the money supply and can increase the value of money.

Conclusion

In conclusion, the unemployment rates are important indicators that help us evaluate the economic strength of a country. When we understand this rate clearly, we can have better investment strategies and decisions.

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