Same old same old

None of this is new. Many analysts have been making these points for several years now. So why did the market allow itself to get snookered by the reserve diversification scare last fall? And why does the market continue to flail around on rumors and threats rather than hard facts and data? It is a peculiarity of the foreign exchange market that it is attracted to the unknown and unforecastable. Everyone can get economic data and political news, and thus most databased trading is routine. If a release is expected at X and comes in at X minus 30 percent, the dollar is sold off, at least briefly. If it comes in at X plus 30 percent, it will be bought. How boring. At any one time, we have three or four factors in the market and a delicate balancing act as to what aggravates or offsets something else.

The one big exception is the payrolls report — the least forecastable member of the forex data pantheon. No forecaster ever predicts this report correctly, which makes it more exciting. The payroll report is the darling of the bond market, too, which partly accounts for the fascination of forex traders.

And it doesn’t matter that Fed officials and normally respected economists alike are declaring that an unexpected change in payrolls will not affect policy or the real economy.

Whatever the payrolls release turns out to be, the forex market is going to spike on it, sometimes in both directions on the same day. The one time you should be sure not to have a position in currencies is the morning of the first Friday of each calendar month when payrolls is released.

You can’t win even if you did forecast the correct number.

In fact, according to analysis by S.A. Johnston, on the payroll date each month from January 1999 to September 2005, the Swiss franc delivered up days (close higher than the day before) 40 times and down days 40 times. The maximum spike up during the day was 166 points; the maximum spike down was 179 points. In the Euro, 42 payroll date-days closed up, while 36 days closed down. The maximum spike up was 240 points and the maximum spike down was 249 points. For all the major currencies, the number of up days and down days is about equal, and the amount of the biggest spike in either direction is about the same, too. In short, trading the payrolls release is a waste of time unless you are trading in terms of minutes and can exploit the spikes as they are happening.

This is presumably why the market is so enamored of this release—but for traders looking to incorporate fundamentals into their trading, it’s not a worthy piece of data.

At a guess, the reserve diversification story, which has so little meat on its bones, is like the payrolls story, only more glamorous because it contains a tinge of high-stakes, highlevel, secret politics, and the illusion of history-in-the-making.

It is not an unimportant question whether Europe will take over the mantle of world financial leadership from the U.S., as the U.S. took over from Great Britain after the war. But is it an immediate, real-life prospect on which to trade today? No.