Asset Classes and Textbook Responses to Data & Events- Limitations

[Purple Brain]

Although I think I am almost totally cured of expecting textbook responses to global events and scheduled data releases, this morning’s (02:30 BST) slew of Aussie data was a case in point as to why I should ignore it completely, other than for handling/avoiding spread widening from brokers during these times..

The ‘normal’ response to a cut in interest rates is for selling of the currency - in this case AUD. The standard rationale being that funds are not best employed in a currency where the underlying base rate is coming in and therefore bonds will underperform (over simplification) . So even though the consensus was on the RBA dropping its rate by 25 basis points and it did exactly this, the Aussie rose by around 100 pips against the other majors, with the exception of the NZD which I presume piggy-backed the other good news coming out of Oz. I say presumably as there was no listed data release for NZD nor any significant exogenous event to explain its strength at that time.

The other Oz data was a mixture: House prices up (should generally be bullish), but trade balance was below expectations (bearish), exports were down (bearish) but so were imports (bullish).

I admit to being a poor student of the markets and I’m sure the pros know to the pip what each of these individual pieces of data will do, but following the textbooks seem to be a quick route to nowhere.

Are these apparent limitations to textbook responses introduced by my own failure to comprehend and/or interpret correctly the data and its impact on the various asset classes – especially FX, or has the fundamental nature of the markets changed to the extent that the textbooks no longer accurately reflect what goes on in reality?

 

[chaselancaster]

From a technical point of view - you just have to trade what you see not what you think - which is useful as very often what I think should happen based on past history and logical reasoning (ie your so called ' text book) doesn't ! ...this can make it hard to take a trade even based on what I see because my mind is saying this is not right it should be going the other way - but of course in saying that I am basically saying that I am right and the market is wrong - which can't be - because as we all know the market is never wrong.

Since 2008 crash though we are 'through the looking glass' black is white and white is black or can be ..risk on/risk off changed everything really and turned normal expectations of market reactions on it's head...ie re-wrote the textbook as it were.

I think even if you trade from tech analysis you still have to be aware of these event risks and their potential impact on the instrument (s) you trade....but trade what you see not what you think....or sit them out / manage open trades in accordance with the greater probability if it is clear (it isn't always.)

I'd be interested to hear others' opinions.

Although I think I am almost totally cured of expecting textbook responses to global events and scheduled data releases, this morning’s (02:30 BST) slew of Aussie data was a case in point as to why I should ignore it completely, other than for handling/avoiding spread widening from brokers during these times..

The ‘normal’ response to a cut in interest rates is for selling of the currency - in this case AUD. The standard rationale being that funds are not best employed in a currency where the underlying base rate is coming in and therefore bonds will underperform (over simplification) . So even though the consensus was on the RBA dropping its rate by 25 basis points and it did exactly this, the Aussie rose by around 100 pips against the other majors, with the exception of the NZD which I presume piggy-backed the other good news coming out of Oz. I say presumably as there was no listed data release for NZD nor any significant exogenous event to explain its strength at that time.

The other Oz data was a mixture: House prices up (should generally be bullish), but trade balance was below expectations (bearish), exports were down (bearish) but so were imports (bullish).

I admit to being a poor student of the markets and I’m sure the pros know to the pip what each of these individual pieces of data will do, but following the textbooks seem to be a quick route to nowhere.

Are these apparent limitations to textbook responses introduced by my own failure to comprehend and/or interpret correctly the data and its impact on the various asset classes – especially FX, or has the fundamental nature of the markets changed to the extent that the textbooks no longer accurately reflect what goes on in reality?