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- Put economics back in the philosophy department
- ForexLive Americas wrap: Soft US growth saps USD/JPY
- Yen shorts scaled back in CFTC futures positioning data
- A little taste of cajun
- EUR/USD doing little, remains capped ahead of initial resistance
- Correct: Colombia central bank holds rates at 3.25%
- UK businesses more confident than before the start of the GFC
- Germany to agree with Spain on a program to boost growth
- Time to jazz it up
- Schaeuble says debt mutualization would lead to a German downgrade
- 5 things the Fed would rather not talk about
- AUD/NZD buying responsible for the small bounce in AUD/USD
- Has the gold bounce run out of steam?
- White house: Syrian chemical weapons case not airtight
- AUD/USD looking heavy
- Gold and oil taking a late hit, shedding $20 with oil off a buck plus
- EUR/USD continues to pause ahead of initial resistance
- European stock market close 26 April
- AUD/JPY rising daily trend line remains key to any further topside attempts
- USD/CAD catching the dollar sale bug
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Posted: 26 Apr 2013 07:06 PM PDT
Economics has been moved to the mathematics department but belongs in philosophy.
In mathematics, equations must be proven – there is a solution, a final answer.  Pie doesn't change depending on the circle – it’s a calculation that equals 3.1415 etc, a precise if infinite number. Pythagoras Theorem states a2+b2=c2 for any right angled triangle with c as its long side. The formula is at least 2500 years old and as true today as it was then. Mathematical equations give definitive answers, it’s the same with physics. The most famous equation is Einstein's E=mc2 but Newton's laws of motion will do as well: force equals mass times acceleration is absolute. There is a reason the Laws of Gravity are called Laws. This isn’t often the case with financial theory and economics. We may use equations and dress the subjects up like mathematics, but there are no definite answers in the study of finance and economics. By using the same language as mathematics and physics, we have a false sense of security and put too much confidence in the model-driven results. Reinhart and Rogoff is the latest example of such excess of faith. Intuitively what they say makes sense – excess state debt will slow a country's growth rate – but too much reliance was placed on the exact 90% debt to GDP figure initially. And now that has been proven to be in error, the whole of the study is almost disregarded. But my point is that the initial trust in the modelling was too great. This is not an exact science. Economic and financial modelling is an attempt to understand, it does not give precise rules and answers (as any GDP forecast highlights so well). Value At Risk is a particular bugbear of mine. At its most basic form banks use VAR to give a dollar value of potential losses in a given situation. For example, if a stock market falls 3% in a day (perhaps a two standard deviation move), then the model says the bank will lose $100mn. However what is exceedingly well documented is that financial market returns are not normally distributed and supposedly exceedingly unlikely events – eg market crashes – occur much more frequently than mathematical models predict. In financial jargon, tail risk is under-priced. So banks have developed much more complex models for VAR, which is not necessarily progress. In the case of the JPMorgan Whale, the reliance on a VAR risk model few understood hid massive proprietary trading positions, resulting in more than $6bn in losses. This is a multi-billion dollar example of an excess of faith placed in a financial model that completely failed to predict what occurred. So let's look at some examples to illustrate the non-precise nature of financial equations. The valuation of shares is a very non exact "science" although that has not stopped many trying. The famous but basic Gordon Growth Model, developed by Gordon and Shapiro in 1956, assumes that the value of a company (V) derives from its future dividends.  No stock ever has consistently been valued on this basis, but that is not the point – it is an attempt to model and understand a key driver of equity valuation. It may look like a definitive maths equation, but it is not. There are equations for currency valuation, interest rate parity, purchasing power parity and even uncovered interest rate parity. They are all simply attempts to understand movements in exchange rates – and they certainly don’t give answers (otherwise there would be much less trading in forex – a sad state for many of you). The study of economics and particularly finance is still relatively new and academics have advanced comprehension considerably. But avoid too much reliance on models. New research suggests Google searches could provide the Holy Grail of finance – perfect market timing. Searches such as "stocks" and "portfolio" and "economics" are correlated to falls in the stock market as investors' type in these searches more often when they are fearful. According to the report "a short term trading strategy based on searches for the word "debt" would have returned 326% between 2004 and 2011. But read on to discover that the volume of searches for "colour" and "restaurant" appear to have more predictive value in future market movements than searches for "Dow Jones". Why would the stock market be correlated to people searching for the word colour? Clearly this is another example of financial relationships and modelling gone too far. Which nicely brings me to black box or algorithmic fund managers who mine huge amounts of price data to find tiny relationships between asset prices. They then use leverage to maximise the profit from these small and fleeting correlations to make money. My view? More often than not, they work until they don't, by which time any past profits created can disappear remarkably rapidly. As an aside, a friend of mine worked at one such fund and said it had an exceedingly weird and unpleasant working environment. There were a number of teams of mathematical geniuses who worked on different parts of the black box model and were not allowed to talk to each other. Only the two founders of the fund knew how the different parts came together and as that was the secret to their multi-billion fund. They kept teams totally separate and the secret safe. The exception to all this distrust is bond mathematics, where valuation equations do truly predict prices. The genius is in knowing what rates to input. Mathematics and science deal with facts, truths and universal laws. On the other hand philosophy is the rational investigation of principles, a system of thought based on study and investigation. Remembering that economics and finance belong to the latter category and not the former will avoid costly mistakes. The illusion of supposed mathematical safety is dangerous.    |
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Posted: 26 Apr 2013 01:39 PM PDT
Forex headlines for April 26, 2013:
EUR/USD poked through 1.3000 to 1.2991, which was just above yesterday’s low of 1.2989. It created a double-bottom of sorts and the pair jumped 35 pips after the GDP release then settled around 1.3025 for the weekend. The lack of profit-taking in GBP/USD longs ahead of the weekend tells you which side of the market speculators are on. Cable rallied to 1.5499 after the US GDP numbers and wasn’t able to break the big figure but it didn’t fall much either and closes the week at 1.5477 and above the 38.2% retracement of the Jan-March fall. Who would have believed that +0.3% GDP would get the market so excited. EUR/CHF slumped as low as 1.2250 but bidders were evident there and the pair wrapped up a stellar week at 1.2285. I want to deeply thank everyone for all the support this week. The changes here have been a roller-coaster for me and there are still many improvements to come, thanks for all the feedback.  |
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Posted: 26 Apr 2013 12:45 PM PDT
Futures market speculative positioning data from the CFTC as of the close on Tuesday:
The big move was in the Australian dollar this week as speculators bail on fears about China, the global economy and fears about an RBA rate cut.  For more historical data, check out this handy tool.  |
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Posted: 26 Apr 2013 12:12 PM PDT
A little something for the people who like it spicy food and creole jazz.
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EUR/USD doing little, remains capped ahead of initial resistance
Posted: 26 Apr 2013 11:52 AM PDT
EUR/USD has traded sideways within a 25 pip range for the past four hours after initially bouncing from session lows on the weaker than expected US GDP numbers. Initial resistance remains on the hourly time frame at 1.3047 with the 1.3093 level seen as more important. Lower levels remain favoured while 1.3093 caps.
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Posted: 26 Apr 2013 11:31 AM PDT
[This article has been corrected, Bloomberg initially reported that Colombia lowered rates, the official release is here]
The move expected after three rate cuts this year. At this time in 2012, Colombian rates were at 5.25%. Part of the reason for the cuts has been to stem currency appreciation but the country also outright intervenes to keep the local currency down. The talk about currency wars is in the developed world but the front lines are in emerging markets like Colombia. And if you think Colombia is a place for drug wars, you’ve missed out on a great trade. On Thursday, S&P upgraded the country to BBB.  |
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Posted: 26 Apr 2013 11:17 AM PDT
That is according to Sir Martin Sorrell, boss of the biggest advertising agency in the world, WPP in a recent article in today’s UK Telegraph.
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Posted: 26 Apr 2013 10:55 AM PDT
Germany is working on a bi-lateral program to boost growth, according to German finance minister Schaeuble.
He notes that unemployment must be tackled ‘fast’ but that spending money alone won’t fight youth unemployment.  |
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Posted: 26 Apr 2013 10:51 AM PDT
The ForexLive fan down in the bayou let me know that the great New Orleans Jazz festival starts today.
If you love jazz and can’t make it to N’awlins, the bands are streaming live on TuneIn radio.  |
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Posted: 26 Apr 2013 10:21 AM PDT
In one sentence, the German finance minister said that Germany benefits from the euro more than others and in almost the very next he talked about the risk of the German downgrade.
The problem with the euro is that Germany gets all the benefits and doesn’t want any of the risk.  |
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Posted: 26 Apr 2013 10:05 AM PDT
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Posted: 26 Apr 2013 09:40 AM PDT
Just looking at my screens and i notice the AUD/NZD has bounced nicely from the 1.2050 level over the past couple of hours with a 30 pip bounce in the past half hour or so. Not sure what is behind the move, could just be an order going through in a thin market on a Friday. If i find out anything else i will let you all know. Only other thing i can think of is that the 1.2050 level is the lower 21 day Bollinger band that we have been bouncing off the past couple of days. Back above yesterday’s 1.2133 high is needed to keep the 1.2050 level safe on Monday.
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Posted: 26 Apr 2013 09:19 AM PDT
There is obviously some decent selling interest in gold ahead of the 21-DMA. Gold rallied back towards the day’s highs following the GDP numbers and having failed to break through is continuing to head lower. Gold was last around 1,451. The 1,439 high from Apr 22 is the support to watch with stops expected below. A close back below this level sees immediate focus turn to the 1,405 level and then back to 1,300/20. I still expect to see a 1,310/1,525 range to define in the coming weeks.
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Posted: 26 Apr 2013 09:10 AM PDT
Some noise was made yesterday about the run up in oil coinciding with the ongoing investigation as to whether chemical weapons were used in Syria.
The White house has issued a statement that the case against Syria isn’t airtight. They also won’t be setting a timeline on how long it will take them and others to corroborate evidence of any use. Very doubtful the story has any bearing on the oil drop seen today.  |
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Posted: 26 Apr 2013 09:03 AM PDT
The AUD/USD looks as though it could be ready for another leg lower. A short with a stop above 1.0300 targeting 1.0200/10 might be worth a look.
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Posted: 26 Apr 2013 08:51 AM PDT
Gold is taking a late plunge shedding around $20 in the last 15/20 minutes.
WTI crude is also nosediving into over a $1 losss. In currencies the dollar has steadied after the GDP losses. USD/JPY ran back up to 98.00 from 97.55 and is currently at 97.85 I can’t see any real reason for the sudden drop in gold. US stocks are on the lows. but I would mainly think that some end of week profit taking may be the case given the recent weeks run up.  |
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Posted: 26 Apr 2013 08:50 AM PDT
Following the US GDP inspired bounce the EUR/USD has stalled ahead of previously identified initial resistance noted at the 1.3047 level.
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Posted: 26 Apr 2013 08:34 AM PDT
European stocks close out the week in the red
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Posted: 26 Apr 2013 08:23 AM PDT
AUD/JPY has struggled at the 102.90-00 region since the pullback from above 105. The rising trend line dating back to Nov 2012 lows comes in above the 98.72 Apr 15 low and i would be looking for a close below there to confirm a break of the trend line. I expect to see some support in the 99.90-00 region on the way down but a close below the 21-DMA today would be of concern and i think further supports a test of the rising daily trend line. We probably need to see the pair close back above the 101.50 level today to provide some hope of further tests of the 102.90-00 region but i do not expect this to happen.
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Posted: 26 Apr 2013 08:18 AM PDT
Small stops have been run down to 1.0156 but the loonie is still holding the broken trend line I pointed out not long ago.
EUR/CAD has slipped below the 200 h4ma to print a low at 1.3229  |
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