Forex economic indicators: long-term TIC transactions

TIC (Treasury International Capital) is an economic indicator that measures the net flow of financial assets within the US economy. These financial assets include treasury bills and government securities, corporate bonds and shares of companies.

The "net" in the net long-term TIC transactions is the difference between gross purchases and sales of US financial assets by foreigners. This data provides a very clear picture of the participation of foreigner investors in the US financial and money markets.

When the data on long-term net TIC transactions is positive, it means that foreign investors are buying more US economy assets than those who are selling them. Likewise, when this same data is negative, it means that foreign investors are leaving the US economy.

The TIC report is published monthly and quarterly; it details the capital flows in the sale and purchase of US financial assets.

According to TIC reports, the classification of foreign investors does not necessarily mean people and companies based abroad. In this context, foreign investors also include foreign branches of US companies. For example, if a Californian bank has a branch in Paris, that branch is considered a foreign entity.

Using long term transactions of the US TIC network in the analysis

The main point of the US TIC net long term trading report is to show the demand for USD-based equities and investor sentiment towards the US economy. Let's break down the TIC net long-term transactions in the United States based on the market.

If the report on long-term net TIC transactions in the United States indicates that US Treasury bills and US bonds are in high demand, it is possible that there is a strong demand for these securities. First of all, you need to know why investors want more US Treasury bills. Bonds and US Treasury bills are considered risk free. The reason is that investors are guaranteed to receive a fixed coupon rate amount at maturity.

In addition, US Treasury bills also come with an inherent guarantee that the American government will pay interest and that investors will receive their principal when due. In addition, US interest rates are relatively higher than those of other developed countries, which means that investors in US government securities are more likely to make good money by investing in the United States.

The level of buying long-term net TIC transactions in the United States also says a lot about expected inflation. In the long run, most traders fear that their profits will evaporate if the inflation rate rises rapidly. Thus, traders prefer to invest in a country where inflation is stable, which would ensure that their returns are not negatively impacted.

Therefore, when net long-term TIC transactions are on the rise, it means that foreign investors expect the US economy to be relatively stable in the long term. The US Federal Reserve is considered to be confident in its ability to control inflation over the coming decades.

Source: St. Louis FRED

Conversely, if the long-term net TIC transactions in the United States are negative, this implies that there are more sellers than buyers. This scenario could imply that foreign investors believe that the long-term rate of inflation will exceed the rate of return they can get on their investments. If their expected real returns decline, they will instead opt to invest in other economies.

TIC long-term net transactions in the United States can also be used to show impending recessions and optimism about economic recoveries. Take the example of the Covid-19 virus epidemic. During the first quarter of 2020, long-term net TIC transactions in the United States fell to historic low levels. This means that more foreign investors fled the US financial and money markets and likely invested their funds elsewhere. This net outflow was the result of uncertainty over what the virus situation might bring.

Source: Trading Economics

In the second quarter of 2020, long-term net TIC transactions in the United States returned to positive territory, implying that foreign traders are once again inveting in the United States' financial and money markets. It should be noted that this net inflow coincides with the adoption of the $2 trillion stimulus package. We can therefore say that the net inflow of long-term transactions into the US TIC sector was a vote of confidence by foreign traders who believe that the US economy is headed for a long term recovery from the virus-induced recession.

Impact of net long-term TIC transactions on the USD

The impact of long-term net TIC transactions on the USD is fairly straightforward. In the international market, foreigners are forced to convert their currencies into US dollars. Therefore, an increase in net long-term TIC transactions means that demand for the USD is also increasing. Therefore, the increased demand for the USD causes it to appreciate against other currencies.

Conversely, when net long-term TIC transactions show net outflows, the USD depreciates against other currencies. Indeed, when foreigners sell U.S. financial securities, they convert dollars into their national currency when they repatriate their money.

Source of data

The US Treasury Department is responsible for gathering and publishing long-term net monthly and quarterly TIC transactions in the United States. Trading Economics has detailed historical data on long-term net TIC transactions in the nation.

Comment the publication of TIC net long-term transactions affects the currency markets

The latest monthly publication of long-term net TIC transactions in the United States was released on 16 October 2020 at 16:00. Moderate USD volatility is common when the TIC Net Long-Term Transactions report is released.

In August 2020, long-term net TIC transactions in the U.S. stood at $27.9 billion, up from $11.2 billion in July. In theory, this increase should be positive for the USD.

Source: Economic calendars

Let's examine the impact of this release on the GBP/USD currency pair.

Prior to the release of the US TIC Net Long Term Trading report on 16 October 2020, just before 16:00, the GBP/USD was trading within a moderate bullish trend. The 20 period moving average was nearly flattened with candles forming just above.

After the release of net long-term TIC report, the pair formed a 5-minute bearish candle. Subsequently, the 20 period moving average fell sharply and the GBP/USD adopted a downtrend showing that the dollar has strengthened considerably against the GBP.

Conclusion

This analysis shows that the publication of net long-term ICT transactions has a significant impact on the forex. The report demonstrates investor confidence in the US economy and demand for the US dollar.