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Chapter 21, Part VII. Market Response on News. Page 4

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 22, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Pipruit: Commander, I’ll try to do that, but I still have one question. Sometimes, even if the data shows an upward surprise, th market turns in the opposite direction, at least initially, but sometimes permanently also. Why?​

    Commander in Pips: There could be many reasons for that, I’ll show you just some of the more common, ok?

    1. When data surprise is insufficient, compares to consensus forecast. It usually happens, when the market prices-in a greater number than consensus forecast, because consensus could be conservative a bit. Then if market shows positive surprise, but not so significant as market expects or rumors tell – then it could lead to price movement in the opposite direction;

    2. This also could happen due to position closing of those traders who entered the market prior to data release. When the market has not confirmed their expectations – the first reaction could be opposite, but then market could start to move in a row with actual data;

    3. A bit different situation was during Japan’s biggest earthquake, when JPY has become even stronger during first 5 min after news has been released. That was due to closing of carry positions. We will speak about carry trade later. But the major idea tells us that investors borrow money with low interest rates, and invest them in currency with higher rates. Hence initially they borrow Yens, sell them and buy other currency. To payout the loan they need to buy back Yens first, because they were scared with uncertainty about perspectives of the Japanese economy. So, that “Back buying” of some part of carry positions was the reason for Yen fast appreciation.

    4. And the last reason is data revising. Very often the government statistical authorities revise previous data due adjustments and more precise calculation. Let’s speak about it a bit.
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