Economic analysis

[novice]

Purpose

To discuss how economic and political events would affect the forex market.

Also to show how different market (e.g. interest rate market) may affect the forex market.

Any comments or ideas would be welcome!

[neil4x]

Novice
I came on line looking for just such a discussion, in particular the effect of interest rates, both actual and rumoured, on a currencies relative strength.
Speaking as a novice on this subject, my impression is:

Intrest Rates Up=Currency Value Up.. and vice versa

Is that right?
Do you know of a charting site that displays interest rate movements?

Neil

[Stringmine]

On the one hand, Otmar Issing (whilst relating to the Euro) warning about the dangers of rapid movements in exchange rates and on the other hand, stressing there are few signs of Eurozone exports being affected.

No doubt they are satisfied with the results of last weeks verbal intervention in the market which began with Trichet warning of "brutal" movements in foreign exchanges. I'd say that right now they are rubbing there hand together - "keep going".

I see see any USD bounce as short term.

[eternalfuture]

Novice,

Here's my thought about the effects of the news on the market.

Unexpected news and economic figures have more effect on the market than more expected ones.

That includes interest rates. True that raising a currency's interest rates should also increase the value of that currency. But if such move has already well anticipated before, then by the time the central bank confirms the rate hike, the effect may have cease to exist. It could even results in adverse effect, that is, instead of propping up the currency, it pressurize the currency.

Stringmine,

Those ECB guys are surely some jolly good fellows right now. Sure, their verbal intervention has been successful. But, for how long? Japan threw REAL-NON-VERBAL interventions, yet USD/JPY still at the risk of dropping now. This will work the same for EUR/USD. First the verbal intervention works, then after the market 'got used to' such actions, the effectiveness of the verbal intervention will be reduced... until the ECB mean what they say, that is, by conducting real intervention. If I'm not mistaken, ECB's monetary policy doesn't aim for specific FX level, but aiming at price stability (that means inflation rate, not EUR/USD level).

Cheers!

[novice]

neil4X

I think with interest rates it is important to look at the real interest rates i.e.

real interest rates = nominal interest rates - inflation

There a plenty of developing nations with high interest rates but they also have high or higher inflation rates. Thus negating any exchange rate advantage.

Nominal interest rates are well known and easy to find.

http://www.fxstreet.com/nou/continguts/centralbanks.asp

How to measure inflation? I don't think the CPI or related measures really give a good measure. Do any American's believe that the cost of their life are only increasing as fast as the CPI numbers? Maybe a better measure would be to look at the increase in money supply. M1 money I feel would be the best measure not M3 etc.

M1 money basically notes and coins in circulation + cash deposits
M3 money basically M1 + loans and other form of credit

Due to fractional reserve banking M3 is going to be much larger than M1.

Stringmine

I feel that the USD was technically oversold. The comments by the ECB and the trade balnce data were just the catalyst for a technical correction not the cause IMHO.

Longer term the USD still looks like a sell both technically and fundamentally IMHO.

eternalfuture

I would agree that the markets price in advance (to a large extent) expected news and thus unexpected news will have a greater effect.

But I feel that it is more useful to look at news in light of current market setiment. For example if the market setiment is bullish the market may well react to bullish news. But if market setiment is bullish it may well largely ignore bearish news.

This quote sums it up much better than I could:

http://www.gold-eagle.com/gold_digest_04/hamilton010404.html

(Chapter VI) … “The bull forces were at work, and the public never is independently responsive to news. You see that all the time. If there is a solid bull foundation, for instance, whether or not what the papers call bull manipulation is going on at the same time, certain news items fail to have the effect they would have if the Street was bearish. It is all in the state of sentiment at the time.”

Boy, if this was true in Jesse Livermore’s day, imagine how much more so it is today in the frenetic Information Age! News alone is not all that important, it is only when news is filtered through the currently prevailing sentiment that it will have a material impact on the markets. If sentiment is bullish then bad news is ignored, and if sentiment is bearish then good news is disregarded. Sentiment is king for short-term trading!

[eternalfuture]

Novice,

I couldn't agree more that market sentiment is also a significant factor in FX market.

As a matter of fact, I believe that analyzing the market sentiment should precede TA and fundamental assessments.

Do you recall when US GDP rose at 8.0% plus in Q3 2003? Instead of climbing to new heights, USD succumbed to Euro's pressures.

Even if fundamental figures are excellent, there's no way to beat souring sentiment.

However, accumulation of good economic figures and external developments outside the economic factors could build a good sentiment. Only continuous flow of good news could reverse bad sentiment.

Good Luck, Good Trade!

[novice]

eternalfuture

How to measure market sentiment? The problem is that any measure would be very subjective.

Long-term fundamentals do influence market sentiment but I feel that is not the whole story. For the market sentiment to be derived solely from fundamental (or for that matter technical) it would assume that the "market" is rational and makes sound decisions based on those fundamentals. But I feel the "market" can be largely irrational for long periods of time in defiance to the underlying fundamentals.

Polls of market participants may shed some light on market sentiment but this would still be very subjective. Even though it is highly subjective the trader would likely have to take in as much of the information as possible (i.e. fundamental, technical, “market noise”) and "best guess" at what the prevailing market sentiment is. Anybody have a better method?

[robsky]

howdy over there!

You opened a very good topic.
It’s great to be aware of upcoming economic events and what affect they’ll have. This gives you a view on a possible direction of the market you are trading. However, as for trading itself what you trade is the price movement and not the actual event. Sometimes events are priced into the trend long before it occurs (buy on gossip, sell on fact kind of thing). I think if you wanted to trade FX on “news” and “events” alone you’d need a very unique system IMHO.
As you said, it’s all very subjective (sentiment) and most of economists and other market “experts” are most bullish at the top end of the market and most bearish at the bottom.

Since you trade the price movement you should have a system, which will allow you to capitalize on opportunities presented by the market. You don’t know what the market is going to do tomorrow but you should know what you are going to do. I don’t think saying that market is rational or irrational is 100% correct. I think the market is RIGHT at all times and us trying to figure out why this and not that is happening is rather an energy draining experience. The market can stay “wrong” longer than you can stay solvent.

TRADE WHAT YOU SEE AND NOT WHAT YOU THINK