I pretty much have my own view on this, but it's always good to get it confirmed from everyone else. Plus I'm rather bored at work today. Let's see, how do I phrase this properly... News or market movements? Which comes first? What I mean is, it seems to me that many times, the news is tailored to the "why" of the market. The EUR will shoot up, and the news will claim "The price of oil is pushing people out of dollar longs". Yet, same time in a given week, oil will be at record highs and the EUR will be dipping and analysts will go "Interest rates are coming back into focus." Seems to me the market does whatever the hell it wants, and then the analysts try to make up the story. It is certainly not the other way around. -Ivan
News provides the "when" answer. The "why" answer doesn't really matter except to "journalists" who make up news after the fact to justify a move. As you state the "what" answer is the wildcard - whichever direction the money flows at the news time - price will follow. I'm sure some big firms spend a lot of time getting ready for major news announcements with their buy or sell programs. They choose when to hit the execute button on their programs, but most are probably just tied to the news release time or set to execute if price jumps so that they get a favorable fill on their program. If the news is a surprise, or outside the bounds of what the firm is expecting, they may pass on hitting the execute button altogether. Just my opinion.
Ivan, your observation and comment is only the tip of the iceberg. Clearly, on a daily basis, the news is interpreted to fit the market action and not vice versa. However, it is my contention that even in the big picture, the so-called "economic fundamentals" are shaped by market movements and certainly opinions of fundamental conditions are shaped in the context of market movements. As Soros points out in Reflexivity, the movements of the market and economic fundamentals have a deeply intertwined relationship. I argue that the market movements cause the fundamentals which runs contrary to popular belief that fundamentals make market movements. If we assert this hypothesis, what in fact makes market movements? Answer, the physics of a living, breathing organism and the laws of nature. Think about it.
I would have written about the "Reflexivity" theory, but trade-ya beat me to it The "newsnoise" transmitted via the mainstream media is nothing more than noise. I remember in Schwager's "Market Wizards" book, he wrote that the reporters would have a list of two columns: bullish and bearish "news". And depending on the price action, they'd pick the appropriate ones. I don't watch equities much, but I think nowadays it's a complete casino, without any connection whatsoever between valuations and underlying funnymentals. In bonds and currencies things are supposed to be a little more "rational", but not much from my experience (hence the "conundrums").
What in fact makes market movements? "the physics of a living, breathing organism and the laws of nature" ? What about "They", the people who run the markets. Players who have the power to strong-arm the markets, regardless of funnymentals or newsnoise.
The players are just a component of the market at large being a living breathing mass subject to the laws of physics and nature. A similar analogy might be to examine each cell of the body as a market participant with the whole body moving in accordance with the laws of nature and physics even though each individual component or cell has it's own agenda similar to each market participant. Not very eloquently stated on my part, however, I think you get the idea.
I understand what you gentlemen are saying. But what about an event where currently US rates continue to rise, offering more yield between vehicles in the US vs. their counterparts around the world. Doesn't that technically make institutions want to hold these assets, and purchase them with US dollars to obtain the yield? Thereby causing a higher buying of dollars than other currencies? At least, that's the thought.
I've never found a real relationship between interest rates and currency rates/movement. Dollar has uptrended/downtrended during both periods of increasing interest rate differentials and vice versa. Of course, interest rate differentials are arbed out in the forward markets which would otherwise allow for a free arbitrage between high yielding/lower yielding currencies.