Thursday, December 3, 2015

More of Draghi's open mouth operations

So the ECB made some comments and the Euro exchange rate jumped. OMG the FT is onit! Here's data from Bloomberg:


Well, actually, the exchange rate is now where it dropped to back in October when it was considered a loosening monetary policy:

So monetary policy is now as loose as it was on October 22 ...

The thing is that the exchange rate should fall on bad economic news (evaluated relative to the US for the Euro-dollar rate) since bad economic news should mean lower AD (relative to the US continuing along its path). The Euro-dollar exchange rate could also fall if the US was doing better than the EU.

Chalk it up to another case where markets are operating under a mistaken theory.

Update:

Here's the IT model using M2 (in the footnote) (today's move is in black):


Nice Gaussian residuals ...

3 comments:

  1. Nice residuals, indeed! This is one series to watch- especially if one would be interested in the investing/speculation possibilities of ITE. Based upon the IT model using M2 above, one should be able to make a nice profit predicting an increase in the Euro-Dollar exchange rate. Ready to start a hedge fund, Jason? ;)

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    Replies
    1. I don't quite have the initial capital for this. Unfortunately you only make a few cents on transactions of thousands of dollars.

      Best to just put your money in a savings account and accrue interest :)

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    2. Well if you place some future options bets and get the timing right you can make lots of $$. Timing's the hard part. However, this gets me thinking about information transfer investing. I am going to look at your older posts in this series more carefully and see if there is a potential application to stock prices. IOW, perhaps the market being too far away from a stock (or stock market) information transfer rate would be a sign that there will be reversion to the "correct" pricing at some point in the future.

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Also, try to avoid the use of dollar signs as they interfere with my setup of mathjax. I left it set up that way because I think this is funny for an economics blog. You can use € or £ instead.