Monetary Adventures

“You LOT! – (£ ¥ € $ ?) – Don't stop. Give it all you got.”

Makes The World Go Round

Only a moderate amount of transformation here. A simple “register” shift to four of the six currency pairs in this chart helps extricate them from the other busy squiggles.  Four of the data sets are making repeat appearances and will likely serve as a thematic backdrop for future work in varying degrees. They are: Spot Oil Price, Effective (ha! – that's rich) Federal Funds Rate, Gross Domestic Product and the Unemployment rate ... as measured by the Fed anyway.

There's a lot of noise in the Fed's data, and not just from the measurements. The Bureau Of Labor Statistics and The Federal Reserve have been working together for more than twenty years to over-analyze and under-report the inflation that anyone with a checkbook and a pulse confronts when dropping gelt. Seriously, they don't “shop” like the rest of us.

Shifting Registers and “Hedonic Adjustments”

Nevertheless, as dubious as the Fed's data may or may not be, it's still data, and as my No. 1 Cuz' would say “Data is good.” It may not be a Bloomberg terminal, but it still describes a tremendous amount of activity: the relative values of some very important currency pairs against the managed perturbations of the FMOC's interest rate, the increasingly psychotic vacillation for the price of a barrel of crude, and concurrent measurements of GDP and un/employment.

This isn't the best framework for critically actionable analysis. Besides the lack of granularity, the Chinese Yuan/Renminbi and the Japanese Yen should each be inverted (ie:1/x, or something) relative to the US dollar and therefore exhibit the same directional relationship as the other currency pairs. (Click the image above for the scalable view in a new window.) Our inscrutable Asian “couple” are the purplish ones toward the top, and they show a stronger relationship to each other than to the four currency pairs shifted “down scale” and into the clear.

I can (have and do) look at  these types of charts for hours, reading – or at least interpreting – the fascinating stories they tell of innumerable human interactions and parallel events. One of the relationships that jumps out for me is the recent, stark symmetry between unemployment (in white) and GDP (colored red). At this scale the correlation coefficient between the two appears to be very nearly 1, but I never took statistics – fair bit of Calculus, but no statistics.

It's also pretty clear that the (orange) Swiss Franc and the (dark blue) British Pound were until the financial crisis of '07-'08 mirror images relative to the dollar, and that the (light blue) Euro tracked the Pound very closely as well. The City of London's shady pools of liquidity have distended their Pound (of flesh) from the Franc since the crisis, but the two still run in rough parallel. Given the way the (yellow) Brazilian Real trades compared to the Renminbi I wonder if maybe we shouldn't swap Indonesia for China and call it BRII. Now that's a hedonic adjustment. Who's hungry?

The Better Legend

	$	Series		FX(€ £ R$ CHF ¥ CN¥)  Oil FF GDP Unemployed	(Scale) Size		Period	ƒ(x)
1		OILPRICE		Spot Oil Price: West Texas Intermediate	1	Solid	M	% Chg fYA
2		FF		Effective Federal Funds Rate	2	Dotted	W (w)	%
3	€	DEXUSEU		U.S. / Euro Foreign Exchange Rate	3	Dotted	D	us$ to € -4.5
4	£	DEXUSUK		U.S. / U.K. Foreign Exchange Rate	3	Dotted	D	us$ to £ -5
5	R$	DEXBZUS		Brazil / U.S. Foreign Exchange Rate	2	Dashed	D	R$ to us$ -4.5
6	CHF	DEXSZUS		Switzerland / U.S. Foreign Exchange Rate	2	Dashed	D	CHF to us$ -5.5
7	¥	DEXJPUS		Japan / U.S. Foreign Exchange Rate	2	Dashed	D	¥ to us$
8	CN¥	DEXCHUS		China / U.S. Foreign Exchange Rate	2	Dashed	D	CN¥ to us$
9		GDP		Gross Domestic Product, 1 Decimal	2	Dashed	Q	% Chg fYA
10		UNEMPLOY		Unemployed	2	Dashed	M	% Chg fYA