The chart above shows what happened
with the Single Currency on the occasion of the release of the
Reuters/University of Michigan Consumer Sentiment Index last Friday, May 15th.
The Mandelbrot algorithmic routine was lying in wait for the event. As usual,
it was indifferent as to the direction that the exchange rate would take, if it
moved at all. It was only necessary that it was configured to be in the market
when it happened.
The Reuter/Univ of Mich index is
released in two parts each month. Around the middle of the month we get the
preliminary reading and then, towards the end, comes the revised version. Both
deal with the current month. The chart above shows the preliminary release.
In the event, the outcome last Friday
was quite a disappointment to the Forex market, and the US dollar suffered
accordingly (The EURUSD pair rose on the news).
The market is not always so
responsive to this indicator. For example, the chart below shows the
corresponding index for April, which was released on the 17th. of
that month.
Here, the movement was somewhat more
muted (but present nevertheless). It is likely that US Consumer Price Index (CPI)
numbers, which were released ninety minutes earlier, had captured the attention
of market participants at the time. This variability in effect is common to all
market moving events. The best we can do is to talk about the probability of there
being a reaction, based on the statistical study of a large number of the same
events. OmiCronFX also gathers and analyses this data in order to determine the
kind of reaction that is likely for any given market moving event. Is it often
chaotic, will it normally show short-term bi-directional volatility, or does it
tend to move the market in one direction only? There are dozens of these events
each month. They are scheduled in the economic calendar, which is freely
available from most Forex brokers.
As an aside, it is also instructive to
note the behaviour of the exchange rate in this period when it coincides with
the 200 period Exponential Moving Average (EMA) above.
Known
unknowns and unknown unknowns
The former US Defence Secretary,
Donald Rumsfeld, was taken to task for telling a news briefing about his ideas
around the fact that there are things we know we have to strive to understand,
and other things that we do not even know we are ignorant of, just as there is
knowledge of which we are confident (known knowns) .
Rumsfeld did not invent this concept.
It was used previously by Nicholas Taleb’s (of “The Black Swan: The Impact of
The Highly Improbable” fame. We wrote
about that book here). The Secretary of Defence got some
stick over his statement, probably because the appearance of the syllable
“known” a total of six times in his short statement was too much for some of
those who heard and / or read it.
Anyway, the piece at the top, about
scheduled market moving events, represents an example of a known unknown. We
are aware that it is coming up but we do not (or at least should not) know what
the release is going to contain. On the other hand, the performance of the
EUR/USD pair at the London open yesterday, Tuesday May 18th , represented a
response to an unknown unknown. Some few hours earlier, no less than two
members of the European Central Bank (ECB), Benoît Coeuré (Executive board
member) and Christian Noyer (Governor of the Banque de France) made unscheduled
remarks, respectively to the effect that the central bank would be accelerating
its purchases of euro-area bonds in advance of expected thin trading conditions
in the Summer months (front running) and that it would take extra measures to
increase inflation if QE failed to work as expected.
Mandelbrot is always ready, so long
as it is switched on. The effect of these remarks, which were likely to weaken
the Euro, were not fully felt until the London open, although traders at the
open in Frankfurt an hour earlier had made tentative steps to get the ball
rolling. The outcome is as seen in the chart above.
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