What is the Citigroup Economic Surprise Index?

What is the Citigroup Economic Surprise Index?

Reading time: 7 minutes

The Citigroup Economic Surprise Index (CESI), a proprietary indicator developed by Citigroup and designed specifically for foreign exchange trading (Forex trading), attempts to show traders and investors whether, on aggregate, the outcome of economic data releases has been beating (often referred to as a ‘beat’) or missing forecasts (sometimes referred to as a ‘miss’, as data misses or falls short of the estimate).

Monetary policy is one of the key drivers of the Forex market, and economic indicators, particularly inflation, growth (Gross Domestic Product [GDP]), and employment, are also drivers of monetary policy. Market participants, therefore, use these economic statistics to help determine how monetary policy may react in the future. For example, when a country’s economy exhibits stronger growth and inflation, it often leads to increased expectations of monetary policy tightening (increased interest rates) and, subsequently, higher currency values for that country.

However, it is important to understand that the Citigroup Economic Surprise Index does not highlight whether an economy’s growth is good or bad; it simply gauges economic performance by measuring how actual data released compares to market expectations.

Important Values on the Economic Calendar

Most know that economic calendars offer three key values for economic indicators released worldwide. Below is the commonly used economic calendar provided by Forex Factory. From its easy-to-read interface, you can see – from right to left – the economic calendar provides investors a Previous value (this is previous data for a specific indicator), an Estimate/Forecast of the event’s outcome (generally offered through a poll of economists and presented in the form of a median estimate), and the Actual value (the result of the event). You must understand these values to help interpret the Citigroup Economic Surprise Index

Forex Factory Economic Calendar

How is the Citigroup Economic Surprise Index Constructed?

Citigroup compares the forecasts to the actual data when it is released. The Citigroup Economic Surprise Index is constructed through weights applied to economic statistics based on the influence that particular statistic has on the financial markets. For example, the release of non-farm payrolls from the United States (US) is an eagerly awaited event each month and tends to increase volatility when released.

What is good about the Citi indicator is that there are individual Citigroup Economic Surprise Indexes for specific countries, and they are available for most of the major economies, like the US, the UK and Europe. One is also available for the Global economy, which is particularly important for US dollar (USD) traders given the greenback’s safe-haven appeal.

The Index is constructed using ‘weighted historical standard deviations’ of the surprises – the difference between the outcome of an event and the survey estimate (the Bloomberg poll or Reuters poll). In essence, the Index captures the element of surprise in economic data by highlighting how reality deviates from forecasts. The index also incorporates a time decay function to reflect markets' diminishing memory. Economic data from the distant past carries less weight than recent releases, ensuring the index focuses on the most up-to-date information and reflects the current economic climate.

A positive reading above zero means that the data have generally been stronger than expected, and a negative reading below zero indicates that data have primarily been worse than expected.

Below is a chart showing the Citigroup Economic Surprise Indexes for Global, the US and the Eurozone:


How Do Traders Use the Citigroup Economic Surprise Index?

The first and most apparent way traders use the Citigroup Economic Surprise Index is to help gauge market sentiment, helping them adjust their strategies accordingly. This will usually involve looking at the individual Indexes for a specific country and attempting to find a bias. You can do this in a number of ways, such as by looking at an individual country Index cyclically. As market expectations get excessively eager and pessimistic on data, the Index will reach a point where it rebounds and can influence a currency’s value. Now, it is important to be aware that a rebound from a trough in the Index, for example, does not necessarily mean that the economy is doing better; it could just mean that as the market expectations reach extreme pessimism and data falls short of estimates and consequently causes a rise in the Index value.

Another way traders and investors use the Citigroup Economic Surprise Index is by looking for divergences between the spot prices of an exchange rate and the Index. An example might be the AUD/USD currency pair, which has continued to rally despite notable movement lower in the Citigroup Economic Surprise Index. This does not offer an immediate trading opportunity. Still, it tells us that taking long positions (buy) in the AUD/USD may not be the best way forward and that a short position (sell) in this market that is backed with technical and fundamental catalysts could be the way forward and offer more ‘bang for your buck’.

Traders also use the indexes to help locate potential policy divergences between central banks. Let’s imagine the UK Citigroup Economic Surprise Index points strongly to the downside, clearly below zero. In contrast, the US Citigroup Economic Surprise Index points to the upside, comfortably north of zero. It is imperative to understand that the level or value of the index is not that important here; traders are more focused on the direction, or the gradient, of the line.

Citigroup Economic Surprise Index FAQs:

1. What is the Citigroup Economic Surprise Index?

The Citigroup Economic Surprise Index helps investors visually illustrate whether economic data is beating or missing economic forecasts.

2. How can I use the Citigroup Economic Surprise Index in trading?

The Citigroup Economic Surprise Index can be used in several ways in trading. The most popular approaches involve using it cyclically and looking for divergences between countries and central banks.

3. Where can I access the Citigroup Economic Surprise Index?

Unfortunately, the Citigroup Economic Surprise Index is only available through premium providers such as Bloomberg, Reuters, and MacroMicro.

Start Trading
in Minutes

bullet Access 10,000+ financial instruments
bullet Auto open & close positions
bullet News & economic calendar
bullet Technical indicators & charts
bullet Many more tools included

By supplying your email you agree to FP Markets privacy policy and receive future marketing materials from FP Markets. You can unsubscribe at any time.

Source - cache | Page ID - 40380

Get instant Updates in Telegram