Three types of fundamental events

The “fundamentals” are real economic data, developments in related markets, and “institutional” changes, such as central bank policy decisions. Very little of what passes for “news” is actually new. In nearly every case, we know the news is coming — usually to the exact minute — and we also know the likely range of the data or the expected content of the announcement.

It is a triumph of the electronic age that we have so much information and can usually slot it into context, to boot. Newspapers and newswires tell us, for example, the current quarterly GDP growth rate vs. the previous quarter, the annualized rate, the last time it was so high or low, how it compares to the growth rate for the same period in other countries, and so on. Traders in the foreign exchange market keep track of about a dozen of these “factors” and gird themselves for action if the news varies significantly from the consensus forecast.

News encompasses three types of events. The first is economic data and developments, which rotate in importance over time. Sometimes trade balance is important, sometimes it’s not. For the past few years as we have all puzzled over the jobless recovery, the U.S. non-farm payrolls report has been a zinger, causing one-day price spikes, sometimes in both directions on the same day. The short list of newsitems that move the forex market includes:

• GDP

• Inflation (various forms — PPI, CPI, PCE, GDP deflator, ECI)

• Trade balance and current account balance

• Capital flow reports

• Payrolls

• Institute of Supply Management (ISM) Index and regional indices (Chicago, Empire State)

• Leading indicators, business confidence, and consumer confidence

• University of Michigan consumer confidence

• Durable goods orders

• Housing starts and existing home sales

• Retail sales

Notice that money supply growth, bank lending, and other financial sector information is not of much interest today for evaluating the U.S. economy and the dollar, although it was the only thing traders looked at in the early 80s (it is still watched today in Europe and Japan).

Truthfully, traders are bored by this type of news. They respond to it in the expected ways — buying, grudgingly, if a number surpasses the upper limit of an estimated range.

And while a few points can be made by responding swiftly, the period surrounding a news release hardly ever delivers a real change in the direction of a price. You don’t get a trend reversal from “ordinary” fundamental data, at least not from a single news release, although sometimes you get a break of support or resistance from a single release. As we have seen with the breakouts caused by spikes on the payroll news, those breakouts usually fizzle. It takes a buildup of additional releases pointing in the same direction as the breakout release for perception to shift and a new trend to form.

It is tedious to keep track of the economic releases. Often, one-time nuggets of information, such as the Research and Development “Scoreboard” of the world’s largest 1,000 companies released in October by the UK Department of Trade and Industry, are more interesting than the same old data series. U.S. companies increased R&D by 7 percent in each of the past four years, while European companies spent only 2 percent. The Lisbon accord said Europe would aim for R&D spending of 3 percent of GDP per year by 2010 to become the world leader in high-tech, bio-med, and other areas. Now that is a lost dream. Returning to capital investment in R&D, Japan spent 4 percent. (The surprise was South Korea, with a spectacular annual growth in R&D investment of 40 percent.)

If you are trying to predict where global equity capital will flow based on success in R&D, assuming success is a function of spending, you’d have to pick the dollar over the Euro and the yen over the Euro, too. But, as you no doubt already know, you wouldn’t buy dollars for this reason for a long-term holding period any more than you would sell dollars for a long-term holding period because of the current account deficit.