What the Heck Is the German Ifo Business Climate And Why Should I Care?

What the heck is the German Ifo Business Climate index? For starters, it’s the only top-tier report scheduled for tomorrow (at 8:00 am GMT)!

Seeing how you cool cats liked the FAQ article I did last week, I decided to make another one for the German Ifo too. Once again, each question will have two answers: The first is a straight-from-the-book and technical answer for all you economics junkies. The second is a “street answer” for my homies who wanna keep it real like Slim Shady.

What exactly is the German Ifo Business Climate report?

Formal Answer: The German Ifo Business Climate is basically a composite index, based on a survey of about 7,000 businesses across different sectors such as manufacturing, construction, wholesale and retail all over Germany. Conducted by Information and Forschung (Ifo) Institute for Economic Research, business owners are asked about the current economic conditions as well as their expectations for the next six months.

Street answer: It’s basically like ’em customer feedback forms they ask you to fill out at fast food joints. The only difference is, instead of asking peeps to rate the quality of their food and service and what they can do to keep customers coming back for more Big Macs, the German Ifo asks stuff about the economy.

How is it measured?

Formal Answer: Respondents are asked whether they think the current economic conditions are “good” or “poor” and if they think the economy will be “more favorable” or “more unfavorable” in the next six months.

The number which is reported is a balanced value of the differences between the two options. A high reading typically means that there is a general sense of optimism among Germans while a low figure is usually seen as a reflection of pessimism.

Street Answer: Think about the spectrum of film awesomeness. A high reading is pretty much like on the same level of cool as the Man of Steel. On the flip side, a low figure reflects that feeling of disappointment that you get after watching a Twilight movie.

Why do traders pay attention to it?

Formal Answer: The survey is touted by many as a reliable leading indicator for Germany a.k.a. the biggest economy in the euro zone. Many attribute the report’s accuracy to its large sample size and the wide variety of sectors that it covers. A deeper look at the report reveals which industries in the German economy are struggling and which are doing well.

Street answer: The German Ifo to market participants is like your best bro–reliable, credible, and always knows which among the chicks you’re dating has smelly feet.

Is it REALLY a good leading indicator?

German Ifo vs EUR/USD

Formal Answer: Since 2008, EUR/USD has had a positive correlation with the report. Well, at least for the most part of the last five years. There was a period in 2010 when the relationship of the pair and the report inversed which might have been caused by the euro zone’s debt crisis.

But other than that occasion, the two have shared a positive relationship, with higher German Ifo readings usually leading to a rise in EUR/USD.

Street Answer: It’s as good as Ray Allen is on taking those clutch three-pointers, man. If the German Ifo is on the rise, you may as well just book your euro longs! If not, you may want to consider shorting the shared currency.