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Lesson 2: The impact of economic news on short-term fluctuations in the foreign exchange market
Among the economic news that affects the foreign exchange market's volatility, the monthly or quarterly economic statistics play the most crucial role. The main reason is that the U.S. dollar is the most critical currency trading in the foreign exchange market. From the content of economic statistics, according to the size of the role, it can be divided into changes in interest rates, increase or decrease in employment, gross national product, industrial production, foreign trade, inflation, and so on. This arrangement is not absolute. For example, the quarterly statistics of US foreign trade were once one of the most critical data affecting the trend of the US dollar. Before the mid-1980s, every few days before the release of US trade figures, various speculations and predictions appeared in the foreign exchange market, causing severe fluctuations in the foreign exchange market. However, after the mid and late 1980s, its role became smaller and smaller because the market has truly realized that the current foreign exchange market transaction volume, the proportion of international trade volume is only about 1%. Therefore, when the US foreign trade statistics are released, the foreign exchange market often does not react.
Interest rate policy
The adjustment of interest rates and the government's monetary policy trends in various countries are undoubtedly the most important among multiple economic data. The relationship between foreign exchange rates and interest rates will not be described in detail in this article. However, it should be emphasized that sometimes although the government has not expressed any intention to change monetary policy, as long as the market has such expectations, other countries have adopted similar measures. Action, then, the foreign exchange market will continue to exist. The government’s expectation that it will change its policy will cause its currency exchange rate to fluctuate significantly. For example, in the second half of 1992, Germany pursued an anti-inflationary contractionary monetary policy. The German Central Bank repeatedly stated that it would adhere to this policy. However, rumors and speculations that Germany would cut interest rates often circulated in the foreign exchange market. The reason is that German interest has already been added to the top. Although Germany did not have any interest rate cuts, after the United Kingdom, France, Denmark, Sweden, etc., successively reduced interest rates, the foreign exchange market stubbornly believed that Germany would cut interest rates. This has caused Mark's exchange rate to the US dollar to fall steadily while the interest rate differential between the United States and Germany is still significant.
The increase and decrease in the number of non-agricultural employment in the United States and the unemployment rate are essential data that have affected short-term fluctuations in the foreign exchange market in recent years. The U.S. Department of Labor announced this set of figures on the first Friday of each month. From the perspective of the foreign exchange market, it is a barometer of the US macroeconomy, and the quality of the number itself indicates the outlook for the US economy. Therefore, one or two days before the release of this set of figures, as long as there are any rumors in the market that this figure may be good, the dollar selling will come to an abrupt end. A more typical example is the movement of the US dollar against other foreign exchanges in early January 1992. Beginning in the second half of 1991, the foreign exchange market began to sell US dollars because of concerns about the possible recession of the US economy, causing the exchange rate of foreign exchange to the US dollar to rise steadily. The pound to US dollar exchange rate rose from 1.60 in July 1991 to 1992. 1.89 in early January. On January 9, 1992, the U.S. Department of Labor announced that non-agricultural employment in the United States in December of the previous year might increase by 100,000. As soon as the foreign exchange market opened on this day, some people began to sell foreign currency to buy U.S. dollars. The pound's exchange rate against the dollar fell from 1.88 to 1.86, a drop of nearly 200 points. After a few hours, the foreign exchange market began to panic buying U.S. dollars. The exchange rate of the mark, pound, Swiss franc, etc., against the U.S. dollar, plummeted, and the pound fell by nearly 600 points to 1.8050. Although the non-agricultural employment-population announced the next day only increased by 30,000, this panic changed the trend of the U.S. dollar against other foreign exchange in the next four months. The U.S. dollar rose on the premise that the U.S. economic prospects were optimistic. It was not until April that the U.S. financial situation was not as good as expected before the foreign exchange market accepted it, and the U.S. dollar began to decline again.
Other economic data
Some other U.S. economic statistics also have an impact on the foreign exchange market. These data include industrial production, personal income, gross national product, operating rate, inventory rate, leading index of the U.S. comprehensive economic indicators, new housing operating rate, car sales, etc. But compared with the non-agricultural employment population, they have a much smaller impact on the foreign exchange market. The effect of these economic indicators on the foreign exchange market also has its unique laws. Generally speaking, when the U.S. dollar is in a bullish trend, any hand that is slightly better at the time of announcement will be used by the foreign exchange market as a reason to sell foreign exchange to buy the U.S. dollar, causing the U.S. dollar to rise further, and the indicator is negative. At times, the foreign exchange market sometimes turns a blind eye to it. Similarly, when the U.S. dollar is in a “bear” trend that is declining all the way, any published economic indicator that is negative will become a reason for the foreign exchange market to sell the U.S. dollar further.
The changes in the monthly wholesale and retail price indices published by the United States and Germany also impact the foreign exchange market. Still, the magnitude of the impact depends on specific conditions. Generally speaking, when the market expects a country’s central bank to cut or raise interest rates, its monthly price index is susceptible to the foreign exchange market. For example, in November 1992, the Australian dollar exchange rate against the US dollar had hit its lowest point in recent years. Many people in the foreign exchange market believed that the Australian dollar was nearing the bottom and might start to rebound. But there are also some people in need based on the forecast of the dim outlook for the Australian economy, rumors that the Central Bank of Australia may adopt interest rate cuts to stimulate the economy. The Australian government announced that the wholesale price increase rate in October was only 0.1%, the lowest level in the past ten years. The foreign exchange market seemed to have found a basis for its interest rate cut expectations. The Australian dollar was thrown on the same day, making the Australian dollar at a trough. Hovering.
In addition to economic statistics, other reports on financial activities will also significantly impact the foreign exchange market. To a large extent, changes in foreign exchange prices reflect people's expectations of foreign exchange fluctuations in the foreign exchange market. In other words, if people expect a specific long-term equilibrium price of foreign exchange, then the changes in spot prices will move in the direction of this price. Mobile. And this kind of expectation is subjective, and it will inevitably be affected by the objective economic environment. Therefore, in the absence of data on the distribution of financial activities for several consecutive days, a speech by an official of the monetary authority of a country concerned, an influential article in the Wall Street Journal on the foreign exchange market, a research institution, or a large company on the trend of foreign exchange Research reports, etc., may cause violent fluctuations in the foreign exchange market on a particular day. This phenomenon seems to be difficult for those outside the foreign exchange market to understand. Why does an official’s speech make the dollar soar or soar by 2 to 3 cents (that is, 200 to 300 points)? If people's subjective expectations are taken into account, this phenomenon is not difficult to explain. An important article on foreign exchange in an official's speech only provided a specific signal, acted as a catalyst for people's reasonable expectations, and finally caused volatility in the foreign exchange market. The magnitude of the fluctuations is determined by the importance of the catalyst effect of these signals in a reasonable expectation.
If the market does not consider it a signal, no matter how much such talk, people in the foreign exchange market will turn a deaf ear. A more typical example is the decline of the British pound at the end of 1992. Since the European currency system crisis in September 1992, the foreign exchange market has seen quick dumping of the British pound. The reason is that the British economic prospects are bleak, the British monetary policy is uncertain, and the United Kingdom is expected to cut interest rates. To stabilize the exchange rate of the British pound, the United Kingdom, The Chancellor of the Exchequer Lamont, has made speeches many times, expressing the need to stabilize the exchange rate of the pound sterling and may even raise the exchange rate of the pound by raising interest rates. But every time, only weak and short-term support was given to the exchange rate of the pound. After the pound rebounded slightly, more people in the foreign exchange market would sell the pound.
Political factors affecting short-term fluctuations in the foreign exchange market
Compared with stocks and bonds, the foreign exchange market is much more affected by political factors. When a major international event occurs, the fluctuations in the foreign exchange market will often exceed the changes in the stock and bond markets. The main reason is that foreign exchange, as an internationally mobile asset, faces more significant risks than other assets in a turbulent political landscape; the rapid flow of the foreign exchange market further causes the foreign exchange market to fluctuate more violently when the political situation is rough.
Political risks in the foreign exchange market mainly include changes in economic policies caused by political instability and nationalization measures. In terms of specific forms, there are general elections, wars, coups, and border conflicts. From the perspective of capital security, since the United States is the world’s most significant military power and its economy is still in a leading position, the US dollar will act as a “haven” after general political turmoil and will immediately strengthen. . Political events are often unexpected events, which are beyond the expectations of the foreign exchange market. This, in turn, causes the spot prices in the foreign exchange market to fluctuate extremely violently, and their fluctuations greatly exceed the long-term volatility of foreign exchange prices. The following selects the Soviet Union 8.19 incident, the 1992 election in the United Kingdom, and the United States’ "desert storm" plan to attack Iraq to illustrate some of the rules of the impact of political events on the short-term trend of the foreign exchange market.
The impact of the Soviet Union's 8.19 incident in 1991 on the foreign exchange market
Since the second half of 1991, the U.S. dollar has been weak against almost all major foreign exchanges. However, the August 19 incident in the Soviet Union completely disrupted this trend. After the failure of the incident, the movement returned to its original state. The dollar weakened all the way, and it stopped falling and rebounded in January of the following year.
The volatility of the foreign exchange market before and after the Soviet Union's 8.19 incident fully illustrates the role of the US dollar as a "haven" currency. Before the August 19 incident, news of the political instability of the Soviet Union had been circulating in the foreign exchange market. The US dollar rose slightly for seven consecutive days, but no one expected an emergency. By August 19, when the computer screens of all traders in the foreign exchange market typed the words "Coup in the Soviet Union," there was a panic buying of US dollars immediately. Take the pound sterling as an example. The pound sterling exchange rate to the U.S. dollar plummeted from 1 pound to 1.6633 dollars to 1.6130 in just a few minutes, a drop of 3.1%. The next day, the foreign exchange market fluctuated with the continuous emergence of news that Yierbachev lost contact and that the person who initiated the incident seemed to be unable to control the situation. The August 19 incident was declared a failure on the third day, and the foreign exchange market immediately sold US dollars. Also, take the pound sterling as an example. The pound sterling exchange rate against the dollar rose from 1.6363 to 1.6915, which was a 3.4% surge. Together with other foreign exchanges, the pound sterling began to rise in exchange rates against the dollar.
The foreign exchange market trend during the Soviet Union's 8.19 incident shows that the changes in foreign exchange prices have their inherent flaws. Short-term emergencies will cause the spot price of foreign exchange to deviate significantly from its long-term equilibrium price. However, after the event, the foreign exchange trend moved toward its long-term equilibrium price. Generally speaking, short-term price changes will most likely correct the direction of the long-term foreign exchange equilibrium price. Still, it is difficult to change or completely reverse its long-term fluctuation trend.
As for the limit of the foreign exchange market's volatility when political emergencies occur, it is always a question of controversy. It is generally believed that when an emergency event occurs, the fluctuation of foreign exchange prices is entirely determined by the psychological factors of market participants and depends on people's ability to withstand the event. This explanation is not very convincing in practical application. However, technical analysts believe that how much foreign exchange against the U.S. dollar rate can fall during emergencies is completely rule-based. Take the Soviet Union’s 8.19 incident as an example. The reason why the pound-dollar exchange rate fell to 1.6130 and stopped falling and rebounded is entire that this is the bottom of the moving average of the pound-dollar exchange rate in the past five years, and the pound-dollar exchange rate is unlikely to happen once. Just crossing this line, the subsequent failure of the Soviet Union's 8.19 incident further illustrates the supporting role of this point.
The impact of the British general election in April 1992 on the foreign exchange market
More than a month before the British election, the foreign exchange market began to be affected by the election. Before the general election, the Conservative Party candidate, the current Prime Minister Major, has been behind the Labor Party candidate Neil Kinnock in the polls. The British Labor Party insisted on implementing a nationalization policy when it was in power before the 1980s, which led to capital outflow. After the Conservative Party, Margaret Thatcher took office as prime minister in 1979; it took nearly ten years to implement the privatization policy. Central continued to implement this policy after taking office. Therefore, if Kinnock wins the general election, it may mean a change in British government policy. Although Kinnock, a worker, is a conservative in the Labor Party, people still worry that Britain may return to the era of nationalization. Since Kinnock is ahead of Major in the polls, two phenomena have appeared in the financial sector in the UK since March. One is the gradual outflow of capital, and the other is the gradual decline in the pound sterling exchange rate. Take the exchange rate of the pound to the mark as an example. The pound's exchange rate has been falling since mid-February, gradually falling from 2.96 prints to 1.96 effects at the end of February to 2.83 on April 6.
The pound sterling is a member currency of the European Monetary System. Its exchange rate to the mark is determined by a fixed but adjustable exchange rate system. The upper limit is 3.1320 marks, the lower limit is 2.7780 marks, and the central exchange rate is 2.95. However, since the British pound joined the European Monetary System in 1990, the foreign exchange market has always believed that the exchange rate of the British pound is overvalued, so it often throws the British pound when the pound strengthens. When the British election came, Major fell behind in the opinion polls, which naturally made the foreign exchange market believe that the prospects of British policy were unstable, which further inflamed the market’s sterling turbulence and made the exchange rate of the British pound against the mark to the bottom of the European monetary system. Approaching.
On the day of the general election, the pound sterling fluctuated sharply in the foreign exchange market. From the perspective of the exchange rate of the British pound to the mark, the volatility is 2%, reaching 600 points, which is six pfennigs, and the fluctuations throughout the day are very dramatic. Two days before the general election, after hearing the rumors that Major was close to Kinnock in the opinion polls, the foreign exchange market had already begun to buy British pounds and sell marks and other foreign currencies. On the day of the general election, Kinnock’s votes and poll results were still ahead of Major at the beginning, causing the foreign exchange market to dump the pound by a large margin. But it didn't take long for Major's votes to rise steadily, and a whirlwind of selling foreign currency to buy the British pound immediately blew up in the foreign exchange market, causing the exchange rate of the British pound to the mark to rise rapidly, from 2.8477 marks to 2.9053.
After the general election, the pound seemed to have reversed its weakness and became a strong currency. The foreign exchange market always talks about the good economic prospects of the UK, the capital flowing overseas will return to the UK, Major’s victory indicates the stability of the UK political situation, and so on. Major was still the former Prime Minister, and statistics on the economic downturn in the UK often appeared for some time. But the pound continued to rise in the next two months. Many forecasters and technical analysis experts have predicted that the exchange rate of the British pound against the mark will increase to 3.10 to test the 3.13 upper limit stipulated by the European monetary system. From a graphic point of view, the pound's exchange rate against the mark has remained high after the general election, but it bounced back at 2.9500 every time it rushed higher. After nearly two months of hovering, the pound's exchange rate against the mark finally reached 6. The month began to fall.
The movement of the British pound before and after the British election shows that excessive fluctuations in foreign exchange prices in the short term may be sustained for a more extended period due to the support of market expectations. Before this expectation is broken, the market sometimes thinks that the short-term equilibrium price is reasonable. Still, the long-term equilibrium price in the forecast is considered to be biased. However, if the foreign exchange market's expectations are not confirmed, the foreign exchange price trend distorted by unexpected events will return to the original movement or even go further. Since June, the exchange rate of the pound to the mark has been falling. When the foreign exchange market confirmed that the outlook for the British economy was not very optimistic, the pound's weakness became the general trend. Even after the European monetary system crisis in September, the British pound exchange rate against the mark plummeted, as if free-falling, forcing Britain to withdraw from the European financial system. The exchange rate of the pound against the mark fell to 2.40 marks in October.
The impact of the US "Desert Storm" plan to attack Iraq to liberate Kuwait on the foreign exchange market
The "Desert Storm" plan also typically reflects the role of the U.S. dollar and gold as a "haven" for funds. The turbulence of the world situation will cause the U.S. dollar and gold to rise sharply. It should be what people said before that "when a cannon is fired, gold is ten thousand taels."
Many investors in the foreign exchange market believe that the trend of foreign exchange prices has specific laws. However, before and after the "Desert Storm" plan, the price movements of the foreign exchange market fluctuated up and down, which seemed very messy. The United States attacked Iraq on January 17, 1991. In the previous month, the foreign exchange market had fluctuated around speculations about whether the United States would fight or not, which demonstrated the above characteristics. Whenever the U.S. government officials make a harsh speech stating that they will take military action, the U.S. dollar will rise sharply in a day. When the foreign exchange market hears rumors that Western European countries have come forward to mediate, it seems that a peaceful settlement is expected to be achieved. The dollar will fall once. On the day of the outbreak of the war on January 17, the U.S. dollar also rose sharply at the beginning. Judging from the trend of the pound against the US dollar in Figure 4-4, the pound has fallen to 1.8990. However, it didn’t take long for the press to report that the United States had quickly controlled the situation. When the US dollar’s “haven” function disappeared immediately, the market began to sell the US dollar. The price of the British pound against the US dollar soared to 1.9353 within a month. Up.
Based on the analysis of the military strengths of the United States and Iraq and the tendency of international public opinion, any reasonable conclusion would be that the United States will achieve the military goal of driving Iraq out of Kuwait. However, the foreign exchange market does not accept this logical judgment but searches for prices based on first psychology and expectations. Only after people get the fact, the market price will suddenly return to the original trend. The dollar price of gold can illustrate this point even more. After the United States attacked Iraq, the cost of gold unexpectedly rose to $410 per ounce, but after the news that the U.S. military took absolute advantage, the gold plummeted to $373.70. The decline was as high as 9.7%, which was far beyond people's expectations. Small investors in many markets were immediately "trapped" in it, and because gold continued to fall in the future, these investors suffered heavy losses.
From the 10-year chart of the exchange rate trend of any significant foreign exchange against the US dollar, people can find the changes in the international political and economic structure in the past ten years. Due to every emergency, every crucial economic statistic will cause violent fluctuations in the foreign exchange market every day, concluding that the history of an exchange rate rise and fall has become the epitome of the history of international political and economic development. When investing in the foreign exchange market, we must pay more attention to its short-term fluctuations when grasping the long-term trend of foreign exchange trends. Only by recognizing its short-term fluctuation laws can we be invincible in the foreign exchange market.
Continue to study the following article: Forex intermediate Course: Lesson 3