Dukascopy Market and Economic Research

I PM you, about an idea for solving ; right data selection issue and the fundamentals reading complexity,

Well , i couldnt PM you, but here is my idea


Well, there is a solution to data selection. If you read the news and the comments, Banks usually do (on daily basis, weekly basis, etc) speculation (Maybe just using logical thinking or something) about what's the reaction of that fundamental variable into the economy in the short run or medium term. But as you noticed as a market analyst, what you think is not what really happens in the FX market.

How to solve the main problem --> Which variables do I use? How they affect the spot price before and now? (Time series)

Well first lets do an inventory of macro models, then lets examine all the variables, now we have something to begin with, lets do an extensive analysis how this variables react (Correlation/Cointegration) within the spot price (i.e: euro spot price (eurusd)). Then lets do some statistics measuring the efficiency using multiple combinations, then more selective stuff like if A,B,C,D.... N happens with a 5% range improvement in all variables or selected variables this will affect spot price by N pips,

Then you have a great inventory of the possible fundamentals combination that will give you an edge, then you build a indicator that gauge this sentiment on monthly basis using the data you already got from that research, then you have something traders will like,

Well, that's one idea I want to work on soon, its a lot of work but i really like doing this kind of stuff, if you are interested in this kind of research i could do it for you, i do private consulting mostly on anything with numbers (Thanks to FX i learned a lot of thing that i can apply to everything related to business(financial)) , at this time I'm working on Chilean pension funds for example.

Lets keep talking, I have some serious people ready to work hard on anything related to financial research, and obviously at a cheaper rate than in your country (For us, the exiting "thing" of the job compensate the difference, here the most sophisticated stuff i saw was a Kalman filter for the energy spot price and it was pretty much a 1/2 of a kalman)

It appears that you have put a lot of thought in your model. Do you mind telling what fundamental variables or types of variables did you find to be the most influential in the foreign exchange market lately?

Of note, we appreciate you sharing your concepts with us and offering your services, but please keep your posts relevant to the topic of the thread.

In case anyone is interested, we are glad to offer you the new issue of our regular Quarterly Report, in which we aim to present all relevant to the foreign exchange market topics for the first quarter of 2013 and for the last quarter of 2012. The report covers fundamental and technical analyses, opinions from external experts, overview of the most notable trade patterns, aggregate technical indicator, as well as our latest research on statistical properties of currency pair returns.

of course, I will post what you asked over the weekend. And Yes, i''ll keep posting according the thread,

Supporting your energy comment today,

http://s5.postimage.org/j8u6vl86v/oildukascopy.jpg

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Highlights of the latest Market Research on CHF:



Events that directly involved economy of Switzerland had a subdued effect on the worth of the Swiss Franc over the last five trading days. Neither a reading on inflation nor a publication on retail sales volume elicited a notable response from the market, leaving the price of the currency largely untouched around the time of the actual releases. Nevertheless, this disappointing news defined the downward direction of the currency index for the time when it moved most actively by creating a negative bias towards the Swiss Franc, debasement of which amounted to 2%.



Depreciation of the Franc was observed throughout all of its crosses and varied from 1.1% against the British Pound to 3% against the Euro. Performance of EUR/CHF requires special attention, as the currencies that compose this pair moved in unison following a decision of the SNB to limit price of the national currency in euros, a relationship that has been broken just recently. This supports the idea that behaviour of the market is returning to normal, away from the binary understanding of the happenings, i.e. viewing them as increasing or decreasing risk appetite and affecting currencies depending on their status, such as safe haven or high-beta. This is considered to be the primary reason why the positive data on the U.S. economy did not weigh on the USD, as they did in the past, but pulled it upwards.

I do not understand what you are tying to say with this
"market is returning to normal"? As normal you mean, appreciation or depreciation corresponds only to fundamentals and not by risk? safe haven-risky (High beta) assets are a normal behavior in my understanding. For example, do you want to do something "Safe" like working all your life or do you want to take the risk and trade? Or maybe you want to do it but not now?

In trading language, do you want to buy safe haven assets like jobs or do you want to buy risky assets like trading , or maybe an equilibrium as portfolio theory mention, 49% work-day 51% trade-nite?

If Fundamentals do not lead currency behavior you may have to problems:

Fundamental Dynamics do not work same as yesterday (Like you are saying) (If this is true, then show graphically and statistically this abnormal market condition and the normal market condition)

You need a better tool to measure fundamental behavior and Risk



This supports the idea that behaviour of the market is returning to normal, away from the binary understanding of the happenings, i.e. viewing them as increasing or decreasing risk appetite and affecting currencies depending on their status, such as safe haven or high-beta. This is considered to be the primary reason why the positive data on the U.S. economy did not weigh on the USD, as they did in the past, but pulled it upwards.

Sample Statistical Fundamental Analysis;

Gino32, in the previous issue we have been referring to the tendency that is most likely emerging in the market, i.e. better-than-expected data is more likely to benefit the U.S. Dollar (pre-crisis behaviour) rather than boost demand for riskier currencies at the buck's expense (the latter pattern we have been observing over the last few years). I concur that we do not currently possess sufficient data and quantitative arguments to predicate this, but at the moment we simply warn of such a possibility, given the figures we have at the moment. Certainly, this topic is very interesting and complex and we will definitely consider it as a theme for one of our next issues of Economic Research that was specifically designed to analyse similar issues. Lately we have been looking at patterns in returns of the currency pairs.

In order to measure fundamental behaviour and risk we plan to create a Surprise Index, but it currently is in a development stage. We will post here once it is ready.

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Highlights of the latest Market Research on EUR:



ECB’s decision not to encourage lending in the Eurozone by keeping the key interest rate unchanged has lost its relevance over the weekend. The Euro thus slowly weakened amid softer data on the bloc, while the market was awaiting another strong signal, absence of which accounts for a standstill until Jan 17. The consolidation phase of the prices was then disturbed by corroboration of the implied by the Japanese PM easing measures, announcement of which is most likely to take place during the nearest publication of the BoJ monetary policy statement on Jan 22.



Yen’s precipitous depreciation has created a favourable for the Euro’s value environment, being that demand for the single European currency was also spurred by a successful bond auction in Spain and an increased chance of Portugal returning back to open international debt market. However, the other major currencies remained impervious to these events and traded sideways during the whole week.
Surprisingly, even U.S. unemployment claims and building permits failed to evoke strong changes in exchange rates that remained relatively still. The only notable event was a detachment process of the Euro and Swiss Franc values, lower correlation between which is expected to become a new characteristic of the market.

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Highlights of the latest Market Research on USD:



The U.S. Dollar has ended the period of the last five trading days on the bullish side, on average appreciating 0.31% relatively to its major counterparts. However, the currency did not move towards this point in a straight line and at some point, on Jan 18, was 0.82% above the initial level of 100. These gains were subsequently trimmed by the BoJ monetary policy statement, possibly the most awaited event this week. Judging by the price action in the foreign exchange, the Japanese monetary authority was unable to meet expectations of the market, initiating a rally of the Yen on all fronts.



Nevertheless, the outlook on the greenback remains bullish, as the action of the BoJ on Jan 22 was an isolated case and is thereby likely to have a subdued effect on further development of the trend in USD crosses. Accordingly, appreciation of the buck seems to be a logical scenario, considering latest facts, as the data on the United States economic performance is consistently positive. The only factor that currently impedes growth of the Dollar’s value is a rapidly approaching issue of the debt limit, auspicious resolution of which should relieve the pressure on the U.S. Dollar and, as a result boost demand for it. Until then any rallies in USD currency index are anticipated to be shallow, but should still overpower dips in the near future.

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Highlights of the latest Market Research on GBP:



Before Jan 18 the Great Britain Pound had already showed some signs of weakness, but remained buoyant nevertheless, as its value continued to exhibit resilience and unresponsiveness to economic events in the world. The latest data, e.g. retail sales, however, have undercut the Sterling, which proved to be unable to benefit from improving readings on the labour market, conditions where are in fact ameliorating. Presumably the market participants were convinced that the GDP numbers published today will not surprise to the upside. As it turns out, the pessimists were right to expect disappointment, which largely erases all of the optimism amid positive statistics published lately.



Accordingly, instead of paring the accumulated during the last month losses (-1.7%), the Sterling has accelerated debasement and declined 0.87% during the last five trading days, calling into question its ability to stay afloat in the future, as investors obviously are not willing to give the United Kingdom the benefit of doubt any longer.
The only currency that was even more heavily sold than the Pound was the Canadian Dollar, since the Bank of Canada sounded quite dovish in its latest statement, announcing the plans to prolong the period of low interest rates. In the rest of its crosses the GBP has fallen from 0.26% (against AUD) to 1.84% (against CHF).

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Highlights of the latest Market Research on EUR:



Throughout the last week the single European currency has enjoyed an inflow of positive economic data, such as improving economic expectations and consumer sentiment, which was only tainted by a worse-than-expected German PPI numbers. Nonetheless, the investors remained cautious and therefore unwilling to accumulate exposure to the Euro, reflected by the unchanged currency index until Jan 24, which in turn has brought news that largely assured of the positive tendencies in the bloc’s member states. Ifo business climate reading the next day has even further reinforced the conviction that Eurozone is moving in the right direction.



As a result, the average appreciation of the common currency since Jan amounted to 1.43%, although this result was achieved only due to the last two days. None of the Euro’s counterparts were able to match its performance, losing from 0.18% (SEK) to 2.65% (CAD). The similar reaction, but to a slightly greater degree, was observed after the European Central Bank has stated its willingness to hold the interest rate unchanged, so that there would be no risk of excessive inflation. Then JPY, CAD and USD lost the most relatively to the Euro, whereas the Swiss Franc and Swedish Krona followed the currency closely, without falling far behind.

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Highlights of the latest Market Research on USD:



Since the directions the U.S. Dollar has been taking were different the last and the current weeks, up and down, respectively, the change of the currency index for the observed period amounted only to +0.15%. Such behaviour of the U.S. currency was well-justified, as, against the background of improving economic statistics, such as unemployment claims, the housing market stood out in the bad sense, spoiling the elevated mood and weighing upon the worth of the greenback in the foreign exchange market.



Nevertheless, the nearest readings on the well-being of the U.S. economy, including the statement of the FOMC on the monetary policy, are largely anticipated to meet expectations, thus having a subdued effect on the Dollar, which thus should continue to stay relatively stable on the whole. Consequently, as it was observed previously, the deviations in USD crosses will be mainly invoked by the counterparts of the U.S. Dollar, rather than by the buck itself.
Starting from Jan 23, the U.S. Dollar has gained 2.4% against the Japanese Yen, but at the same time it has lost 1.25% and 2.1% relatively to the Euro and Swedish Krona, accordingly. Variations in the rest of the analysed currency pairs, on the other hand, did not exceed 1%.

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Highlights of the latest Market Research on JPY:



Behaviour of the Japanese Yen over the last five trading days was strongly bearish, perfectly reflecting the underlying fundamental reasons that are driving the currency lately. All of the most recent news releases, such as the retail sales, industrial production and unemployment rate, came in worse-than-expected, meaning that the latest measures implemented by the Japanese government and the Bank of Japan have not yet shown themselves and it will take more time for the actions to have a notable effect. Also debasement of the Yen was associated with a speculation that the next governor of the BoJ will be more inclined to ease the monetary policy further than the current head.



On average the Yen has declined 2.4% in value during the analysed period, losing the most against the Swedish Krona—3.7%. The Swiss Franc and Euro have appreciated 3.5 and 3.2%, respectively, relatively to the Asian currency. However, a fall of the Yen in relation to the currency of the main Japan’s trading partner, the United States of America, was substantially less and amounted to 1.4%.
While the Yen has weakened 7% throughout January, since July of 2012 the Japanese Yen has plummeted by nearly 20%, encouraging producers to focus on satisfying foreign demand and increase the scale of manufacturing. Nonetheless, the gap between exports and imports remains exceedingly wide, while macroeconomic indicators constantly fall behind the target figures.

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Highlights of the latest Market Research on EUR:



Despite the contrary data, the 17-nation currency was inclined to appreciate the previous week, gaining on average 0.85% relative to its major counterparts. While decelerating increase of M3 money supply, contracting retail sales and less-than-expected inflation would normally negatively affect the value of the Euro, bulls had the upper hand nevertheless. The sentiment improved, the unemployment rate fell and the secondary sector of the bloc’s economy started to show positive tendencies. At the same time, neither USD nor JPY were is position to advance, being weighed upon by the monetary policies of their respective central banks.



The Swiss Franc and Swedish Krona have benefitted even more than the Euro from the risk-on sentiment, as their currency indices have risen 1.6 and 2 per cent, accordingly. However, in a longer term perspective (one and six months), the common currency is still greatly outperforming all of its peers (+4% and +10%).
Going forward, recent bullishness of the Euro is expected to fade, as the risk of the ECB cutting the rate persists, though the likelihood of such a move is deemed to be low due to the upbeat data. One of a few real threats to the recovery of the Euro and potentially even to the whole zone is political instability, signs of which are currently seen in Spain and Italy.

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Highlights of the latest Market Research on USD:



The macroeconomic data from the United States continue to disappoint, showing weakness in the recovery of the world’s biggest economy. The GDP posted a negative figure, unemployment claims and unemployment rate proved to be higher, while services PMI and factory orders numbers also took away some of the optimism. Notwithstanding, the U.S. Dollar has demonstrated its resilience, being that the news did not undermine the conviction of market participants, who remained confident these events will not recur and the main tendency should stay largely unchanged. As a result, the value of the buck returned to its starting point after a shallow decline.



Such immovability of the buck is not observed only in the short term, but is also present in an entire six-month perspective, as at the moment the currency is merely 0.6% below the levels seen 130 trading days ago. For a comparison, debasement of the Japanese Yen for the same period amounts to 21%, while the Euro has already advanced 10% on average relatively to their major counterparts.
Due to stability of the greenback the changes in USD crosses were minimal and generally were not surpassing 1%. The only exceptions were USD/JPY and USD/CHF currency pairs that did not lose their momentum and posted a 3.07% rally and a 1.58% dip respectively.

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Highlights of the latest Market Research on CHF:



The five-day change in the currency index of the Swiss Franc amounted only to 0.15%, but looking solely at this figure would be somewhat misleading, since the swissie has been fairly volatile over the observed period, maximally exceeding its base value by 0.9%. Initially the Franc followed the footsteps of the Euro, when is was benefitting from the improved sentiment and positive data. However, once the political situation in Spain and Italy was destabilised, the two currencies decoupled. In the end, the Swiss Franc outperformed the Euro by 0.63%, the third largest gain after returns of CHF relatively to JPY (+1.15%) and AUD (+0.68%).



Still, the Franc did not manage to maintain its tendency to appreciate and fell precipitously along with the Euro on the comments of the ECB governor, in which he expressed his concern regarding the recent rally of the single European currency that could in turn impair the brittle recovery of the monetary union.
Unfortunately for the Swiss exporters, overall the Franc is becoming more expensive, having gained 6.5% over the last six months. On the other hand, we see the evidence that the SNB has nevertheless achieved its primary goal, since the pace of Euro’s appreciation is notably higher, as it is now 9% more expensive than it was half a year ago.

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Highlights of the latest Market Research on EUR:



During the last week the common European currency has pared a considerable part of its previous gains, falling 1.4% since Feb 4, a move opposite to the tendency we were observing for the past 130 days. Until Feb 7 the Euro was subject to speculations that dominated the market then, namely about the ECB meeting and political distress in Spain and Italy. Anticipation of the former event benefitted the Euro, being that the recently published data on the bloc were promising and thereby implying less incentive for the ECB to loosen the monetary policy. On the other hand, the latter happening had a negative impact.



The Euro has underperformed comparatively to all of its major counterparts except for the Swedish Krona, behaviour of which is strongly reminiscent of the 17-nation currency, hence no change in EUR/SEK currency pair. The general sell-off was mainly initiated by the ECB governor Mario Draghi, who stated that the rally of the Euro has overshoot expectations and may thus pose a notable threat to a fragile recovery of the Eurozone that barely escapes a recession. Accordingly, it would be reasonable to assume that European leaders will attempt to curb strength of the currency. However, given the current policies of major central banks, i.e. expansion of their balance sheets, the Euro appears to be well-positioned to carry on surging, at least against the U.S. Dollar and Japanese Yen, as the ECB is doing the opposite at the moment.

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Highlights of the latest Market Research on USD:



Since the U.S. Dollar was lacking its own momentum, the value of the buck was mostly driven by comments of officials on other currencies, in most cases on the Japanese Yen and Euro. Towards the end of the last week the greenback was propped up by a decrease in the price of the common currency, which was sold off amid concerns raised by the Eurozone officials over the exceedingly high levels reached by the Euro and potential dangers this might entail. This week a softening Japanese currency provided substantial support, as the U.S. Treasury approved of the current Japan’s way of fighting deflation.



In the very end, however, the gains of the U.S. Dollar were trimmed by half, resulting in a 0.44% advancement for the last five days, whereas the highest point reached by the Dollar’s currency index was 101.1. The main contributors to the currency’s appreciation were its crosses with the Euro and Swiss Franc that periodically return to being strongly correlated at some time intervals, but are becoming less interdependent with the course of time, as we are getting farther and farther away from 1.20.
In the longer time perspective, the average price of the U.S. Dollar exhibits stability, being 0.9% above the level seen a month ago and merely 0.22% below the level seen a half a year ago.