The effect of US macroeconomics data

[figdrac]

Hello!

I want to understand why the effect of US Prelim GDP q/q news was the largest on EUR/JPY pair, instead of any USD pair.

I have noticed this also after other US macro news, for instance, yesterday US Home Sales...

Hope you can help me with this!

Regards

Originally Posted by figdrac

I want to understand why the effect of US Prelim GDP q/q news was the largest on EUR/JPY pair, instead of any USD pair.

The EUR/JPY pair moves very closely with the major stock indexes around the globe, not because currency is flowing in and out of each of the stock markets, but because of traders' willingness to get into or out of the markets in general.

Therefore, if investors feel confident that the markets are rising around the globe, they begin to invest. In such cases the EUR/JPY rises.

If investors are not confident and are taking their money out of the markets the EUR/JPY falls.

So what happend after the news was that investors are not confident because of the numbers. That's why stocks stayed flat and the EUR/JPY fell.

The USD stayed flat because there was some rebound in Treasury yields. However that looks to be brief. We just have to wait and see.

[figdrac]

[quote=cas;130443]The EUR/JPY pair moves very closely with the major stock indexes around the globe, not because currency is flowing in and out of each of the stock markets, but because of traders' willingness to get into or out of the markets in general.




Can you please elaborate a bit more on the mechanics... Let's say traders want to invest into markets in general. Why does it make EUR become stronger than JPY? Doesn't such move in currencies imply that Euro stocks are more preferred than Japan stocks?

Originally Posted by cas

The EUR/JPY pair moves very closely with the major stock indexes around the globe, not because currency is flowing in and out of each of the stock markets, but because of traders' willingness to get into or out of the markets in general.

Originally Posted by figdrac

Can you please elaborate a bit more on the mechanics... Let's say traders want to invest into markets in general. Why does it make EUR become stronger than JPY? Doesn't such move in currencies imply that Euro stocks are more preferred than Japan stocks?

Major stock indexes are a broad basket in stocks listed on the stock exchange.

These stocks have to be purchased in local currency.

So as foreign money pours into the market because the market is rising, lets say into Europe from Japan, the JPY needs to be converted in EUR in order to purchase the stocks in Europe.

When the market is falling the stocks are sold an investors converting their money from EUR back to JPY.

You could imply that there is a preference for stocks in EURO and a bias against stocks in JPY. But there is also the factor of risk tolerance involved and that factor got to do with confidence. If confidence in the EURO area is higher than in Japan and the US investors are more willing to invest their money in the EURO area.

[figdrac]

I have been thinking a lot about what you have written, and I have been looking for some more info around the web; however, some things still seem rather strange. I feel comfortable with the idea that good/bad news in US macroeconomics influence overall confidence of traders, and that they start purchasing stocks in other markets also. But I still do not understand, why would it correlate with EUR/JPY, as that basically says that "when things go good in US, it goes good in Europe, but goes bad in Japan" and vice versa... But it is not so, DOW correlates with NIKKEI very much. So to my mind, there must be another reason why EUR/JPY correlates with large indeces, and why US macro news influence EURJPY that much.
I started thinking that it might be connected with carry trades...as FED rates in US are low right now, they are using eur/jpy pair more. But after good news in US, traders tend to cancel their carry trades and prefer investing into markets. However, from my calculations then the effect of good news in US should be downswing in EUR/JPY, but that is the opposite of what usually happens.

So I am again quite lost...

Originally Posted by figdrac

But I still do not understand, why would it correlate with EUR/JPY, as that basically says that "when things go good in US, it goes good in Europe, but goes bad in Japan" and vice versa... But it is not so, DOW correlates with NIKKEI very much. So to my mind, there must be another reason why EUR/JPY correlates with large indeces, and why US macro news influence EURJPY that much.

Next time observe the following instruments...

EURJPY
GBPJPY
CHFJPY

FTSE
DAX
NIKKEI
S&P500

Forget the DOW.

A lot of times observation is very benefical for understanding...