How do we tell when the regime changes? Can we create a model that tells us that attention in the market is about to shift from a focus on interest rate differentials to a focus on structural imbalances? The FT suggests that such a shift is about to take place.
Market Insight: Dollar could suffer for US imbalances
It could be right, but can we look for systematic factors that signal a change. The low focus on the current account appeared to come to an end in December 2004. At this point, US interest rates moved above those in the euro area and it started to cost money to bet against the US dollar. With expectations all one way....
I need to look to see if there are factors that suggest that we have a current account focus (how do we define this...) or an interest rate focus. Can we idenfify news that affect bilateral exchange rates. Consequence of trade or interest rate news. Is is significantly different? Does it change?
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