of cable and dollar/SF as well as dollar/Yen, and we had better recognise the fact, by staying out when in doubt.
Which brings us to a key conclusion about currency trading today as compared with 1991. The pulse of sentiment is not always as clear and strong as it was in those old days: therefore we need to stay out more often and trade less often, by cherry-picking more carefully; and/or widen the area of operation by bringing in other currencies that we rarely traded in the old days – the ones that fit the bill being the CAD and AUD, since we do have IMM data for these series. But most important now is to cultivate the James Rogers mindset. Remember? “I don’t play.
As I reread
Introduction to the printed edition of 1991
The breakdown of the Bretton Woods* system and the floating of the major currencies in 1971-3 transformed the foreign exchange markets. Instead of being concerned mainly with trade they came to be dominated by portfolio flows.
The effect was that a new global financial market was born, which rapidly grew to dwarf all the other financial markets. As usual, the perception of the transformation lagged behind the event. Participants only began to cotton on in the mid-1980s. And they still haven’t done much to change their thinking about this huge market.
What makes prices move? In the securities markets the answers to that question have been more or less known for decades. In the currency markets, very few participants have any idea, still.
Starting in 1981, Currency Bulletin spent the next decade analysing, proposing, eliminating. Quite early on it became apparent that the main driving forces for the price of the dollar, which is the unit in which the prices of most currencies are measured, were the same as in the securities markets.
The fundamental driving force was the urge to maximise
The analysable element in total return in currencies is the yield, of course: the price is what we wish to forecast. So the first thing to do was to see whether there are any rules governing the relationship between yield and price– like the relationship between share prices and corporate dividends
and earnings. The result is positive. There do seem to have been certain relationships that are more or less useful for prediction –perhaps
The next thing was to see what
Finally one had to see if there were other relationships which had any predictive value for currencies – like inflation, trade, money supply, oil prices, economic growth, et al. So far, the conclusion is that
So much for the basic groundwork. It allowed Currency Bulletin to evolve a systematic approach to forecasting the dollar which has worked well for several years. Because the system’s constituent parts are mostly based on human behaviour which doesn’t change, not on fashion, we can be confident it will continue to work.
The financial markets, as anyone familiar with them knows, are deeply paradoxical. They have a logic of their own which is in a way the opposite of normal logic; Hence the market adage “sell on the news” applies to good news not to bad news. Hence other bits of market lore like “a bull market climbs a wall of worry: a bear market flows down a river of hope” .Markets do whatever they need to do to confound the greatest number of people.
This happens because prices reflect expectations. If everyone expects unemployment to rise, or a trade balance to fall, or inflation to remain steady, there is no intrinsic reason why they should be wrong: the expectation doesn’t affect the outcome. But if everyone expects share prices to fall, or the dollar to rise, there is every reason why they should be wrong: because current share price levels already reflect the expectation of lower prices, and the current level of the dollar already discounts a rise.
Understanding this discounting mechanism of markets is a great help in
This book is about both forecasting the currencies
The book is intended to help you better understand Currency Bulletin as you follow it over the months and years. My chief message is this. When we understand the
Since trading the currencies ties up little of our capital (being done in the forward* or futures* markets), such systematic profits can be earned alongside of whatever returns we can achieve in the securities markets. Moreover the returns we achieve trading currencies are completely uncorrelated with returns in the securities markets. This diversification implies it is possible to run the two activities side by side to achieve higher returns at lower risk than can be achieved by either alone. Then we leave the miracle of compounding to do its own work. There are some astonishing examples of that work in Chapter Eight.