What Moves the Currency Mkts?

H

hcour

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I'm currently studying a strategy that analyzes the mkt, any mkt, based on how it reacts to news. This is not the same as trading on the news. Instead one is trying to determine who is doing the buying and selling, the "smart money" or the "public", that is, the quality of the supply and demand, based on price/vol action relative to whether the news is "good" or "bad". This is a cumulative, ongoing process, not determined alone by one day or one economic report. I will not go into further detail here, I wrote a bit about it in the latter part of this thread:

http://elitetrader.com/vb/showthread.php?s=&postid=1211069&highlight=kerr#post1211069

What I'm asking here is: What exactly constitutes good or bad news in this respect? Do I have the right grasp of it? From what I understand, currency mkts are mainly influenced by 3 important factors:

1) Interest Rates.
2) Interest Rates.
3) Interest Rates.

Ok, sorry for the variation on the old real-estate joke, but that really seems to be what it's all about. I've been following the daily commentary on TradingEducation.com for the GBP. Every economic report, I mean every bit of it, is viewed relative to how it will effect whether the BOE will or will not raise interest rates. For instance, inflation is a bad thing for the economy, right? OK. But, it's actually good for the currency because the BOE (or U.S. Fed, or whatever for whatever country) will likely raise interest rates to curb that inflation.

Would ya'll agree w/this? Any thoughts or comments appreciated.

Second question: Since the U.S. dollar moves inversely to pretty much every other currency, and certainly the GBP and EUR, could one say that that which is good news for the U.S. is bad news for the other currencies and should be taken into account? I realize this is a more complex issue, but generally, wouldn't this be true?

Thanks for any comments,
H
 
I pay little attention to fundagenitals so I'm no expert, though we have several members who sure seem to be. I do know enough to know that while interest rate differentials are important, they are not the only catalyst.
 
I pay little attention to fundagenitals so I'm no expert, though we have several members who sure seem to be. I do know enough to know that while interest rate differentials are important, they are not the only catalyst.
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TL,

First, let's be clear that I'm not looking at economic data from the traditional fundamental pov. Some people, and I'm not suggesting yourself, simply don't get that. They see "economic report" or "fundies" and they think Warren Buffet. In fact I don't really care what econ report it is or what it "really" means, the relevance for me is in understanding how it is perceived and acted upon by the various players in the market.

And yes, I'd like to know, what are those other catalysts? And which of these are not viewed relative to interest rates and how so?

H
 
if u want to go to the next step, and think beyond intra-day, the question u want to ask yrself is: what moves interest rates? IRs are a currency's P/E, buying a currency pair is similar to what a L/S equity hedgie does... how do the different categories of players form their expectations?
 
Todays european open and all the local papers papers were feeding stories like these:

http://www.theaustralian.news.com.au/story/0,20867,20630593-31037,00.html

"inflation up, Aussie strong again, interest rates going up, ra, ra, ra "

Just when mums and dads are finishing work here in australia (time of european open - crucial time in fx) and they read these stories that are hot off the presses, the aussie is slowly rising and they figure "Duh, yeah I buy". Price was at .7600. Well in the next 7 hours the Aussie didn't stop going the other way. It just hit .7570 - most probably just enough to take out many peoples stops who were going long after work. By bed time they have already been screwed. It may indeed swing around and go up - but the damage has been done.

Now if mum and dad investor had a look back they would have seen that price level exhaustion was at these levels. Middle of last week aussie started its move up from .7520 to .7552 ----> 1.618 of that = .7603. At this level there were a shit load of sell stops just waiting to pounce on unsuspecting Fundy trader.

Point of all this is that in fx:

"The news moves to where T/A is @"
 
2cents sort of touched on it, but I'll restate.

Currency markets are not moved by interest rates. They are moved by the perception or expectation of future interest rate movements. This perception, whether right or wrong, drives the emotional variant in the market, and you can therefore manipulate this if your expectation is more "real to the ground" than the market is currently behaving as.

Let's take an example.

The current rate differential between the US and the EU is two points. This range existed this summer when the Euro was on the rise. Had nothing to do with the fact that there was a two point differential. Holding EUR against the USD meant you were paying interest the whole time, and this reverse carry didn't prevent the Euro bull from loading up. Why? Because of the expectation that rates were going to rise in the EU. The rhetoric by the ECB was hilarious to watch. I say "hilarious" because my belief was that it was all talk, and I was right.

However the market takes politicians for what they say because the market believes that the "other guy" will listen and act based on this commentary. So if Joe Trader is out there and hears Trichet say "Inflationary pressures have increased substantially as of late", he knows the market will believe the ECB is indicating it's intent to raise rates. Therefore, he wants to be a part of the rise in the EUR and goes long. One Joe Trader doesn't accomplish much on his own. A hundred thousand of them makes a move.

You can capitalize on intra-day movements when you follow the Joe Trader philosophy. But when I read your post, I see you're more interested in longer term (like myself), and therefore you must identify what the ECB really will do, not what they indicate they will do. At that point, you need to figure out when the market will come to terms with the fact that it was wrong. When that happens, your fade is perfectly timed.

Right now, as I type this, the market has just gotten done with the feeling that it misjudged the Fed on cutting rates first quarter of next year. Hence, a massive bail out of stale longs. Rates haven't changed a bit.

Only the perception has changed.

Read the tea leaves and find where rates are going, then follow the sentiment, only to take advantage of it.

-Ivan
 
The shorter the time frame you are investigating, the less you can pin down the "reasoning" behind buyers/sellers. The only consistent reason for movement is profits and losses. Above all the market is a discounting mechanism, and a fully discounted piece of "news" will tend to result in a move opposite to that which one would assume, so that can really mess up any "study". But even in the longer time frame, interest rates, or even expectations for future rate changes, are just one piece of the puzzle, although an important one.
 
Guys,

Many great responses, I appreciate it. I will study them and try to respond in time. There's some great stuff there I can use. In the meantime, nobody thus far seems to understand completely what I'm saying. Here is an example, from Ivan's excellent post:

But when I read your post, I see you're more interested in longer term, and therefore you must identify what the ECB really will do, not what they indicate they will do.

How can you say that when I just wrote:

In fact I don't really care what econ report it is or what it "really" means, the relevance for me is in understanding how it is perceived and acted upon by the various players in the market.

Kerr doesn't care whether or not interest rates will really be raised or what the current economic data indicates, except as far it relates to and is perceived by the professionals and public and how they will act upon it. I'm not trying to read economics, I'm trying to read how traders react to the economics and trade on what that means to them.

H
 
they trade as ivan was kind enough to try & explain... quoting him the way u do doesn't look particularly grateful, just my view... but perhaps i don't understand what u say ;-) kidding aside, country default risk / sovereign rating up/downgrade risk is another proximate factor...
 
they trade as ivan was kind enough to try & explain... quoting him the way u do doesn't look particularly grateful, just my view... but perhaps i don't understand what u say ;-) kidding aside, country default risk / sovereign rating up/downgrade risk is another proximate factor...
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Yeah, that's a pretty damn good post. My apologies if I was remiss.

H
 
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