Get a Peek Into Future Direction of Forex?
November 3, 2006 by Trader Rich
Bill contributed some good commentary on how the Iowa Electronic Markets can give you a valuable peek into the future direction of forex. Everything that follows is a quote from Bill. Thanks Bill.
The Iowa Electronic Markets …
Never heard of the Iowa Electronic Markets? Not surprised! Few have. But,
the Iowa Electronic Markets can give you a valuable peek into the future
direction of the foreign exchange market.
Here's what the Iowa Electronic Markets' homepage says about it's mission;
"The Iowa Electronic Markets are real-money futures markets in which
contract payoffs depend on economic and political events such as elections.
These markets are operated by faculty at the University of Iowa Tippie
College of Business as part of our research and teaching mission." (Go to
www.biz.uiowa.edu/iem/)
What's most interesting about Iowa Electronic Markets is that it's the only
legal place to make predictive bets on the outcome of the upcoming mid-term
elections. In past elections, with real money at risk, punters placing real
money bets on the Iowa Electronic Market have proven to be accurate
predictors of important election outcomes … which gives traders a crystal
ball to gaze into and ponder.
What does this mean for forex traders?
Kathy Lien, Chief Strategist for FXCM, writes that gridlock may not be good
for the US dollar. "Following the Republican's win of the House and Senate
in early November of 1998, the EURUSD fell from 1.1900 to 1.1450 for 450
points in only three weeks time. In the following twelve months, the
extended move accounted for 1500 points."
So, you might wonder … what outcome does the Iowa Electronic Market
predict in next week's election? By overwhelming odds, 70%/30%, the Iowa
Electronic Markets peer-to-peer exchange predicts the Dems will take the
House … giving us a divided Legislative branch.
With that forecast, traders, you're now in possession of important
statisitical information that should be used as you cobble together next
week's USD trading strategy!
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A while back, when I studied the FX mkt response to the the mid-terms, I found there was a lot of hot air surrounding the issue - the political implications for the USD were not that signifcant. If you look at EUR/USD x days after the mid-terms you may find some kind of pattern, but if you step back and see the bigger picture, you’ll see that the mid-terms were not a causal factor and that the USD price action merely represented a continuation of the trend at the time. I recommend taking a look at the charts and deciding for yourself.
These IOWA markets are great. Markets, markets everywhere. Traders may be unaware but there are also markets in the economic indicators. These ‘economic derivatives’ are traded on the CME and can be useful in gauging mkt opinion. For example the implied forecast for today’s NFP was around 103k vs the economist’s Bloomberg consensus of around 130k (I think). This time around, the derivatives auction was a better predictor. It’s good additional information to be aware of.