Currencies Should Reflect Fundamentals, I love Mom, and Apple Pie

Who can disagree with such platitudes? And yet officials appear to think they are saying something substantive when they say foreign exchange prices should reflect fundamentals. Of course they should. Can they do anything but reflect fundamentals? The issue is not fundamentals versus something else, but which set of fundamentals.

Knowing the Known

Over the past six weeks, foreign exchange and short-term interest rate markets have made significant adjustments. The way that prices have responded to the latest economic data warns that this adjustment process is largely complete. This suggests a period of consolidation likely lies ahead, during which some of the recent trends may retrace. At the same time, though a consolidative phase is still conducive for selective carry trades.

Central Banks, Surprises and Otherwise

In our age of transparency, monitoring the signals from the major central banks is not a full time occupation. Wall Street used to hire people whose sole job was to mine the data and official comments for clues into policy. Such people now are among the endangered species. When one wants to contemplate the Federal Reserve’s next move, one can consult the Fed funds futures contract, where the accuracy of the front month contract is well known especially as an FOMC meeting draws near.

Poor Conjugation: US Economy and the Dollar

The U.S. jobs data caps a string of impressive data that should but probably won’t silence the pessimists. Already the unseasonably warm weather is being cited by some to dismiss the recent stability of new and existing home sales and the stronger than expected employment data. It is unlikely that one of the biggest bond fund managers will change his call for 100 bp cuts in the Fed funds rates this year. Nor will many of the more aggressive economists at some of the investment houses who make their mark by their unceasing ability to find a cloud in every silver lining change their tune.