Sentiment in the Forex Market: Indicators and Strategies to Profit from Crowd Behavior and Market Extremes

P1: PIC/b P2: c/d QC: e/f T1: g

c02 JWBK195-Saettele May 31, 2008 11:19 Printer: Yet to come

18 SENTIMENT IN THE FOREX MARKET

From March of 1991 to December 1992, GDP growth increased from

−1 percent (contracting economy) to 4.1 percent. The DXY actually de-

clined during most of that time, from 96.06 in June 1991 to 78.87 in August

1992. From December 1995 to June 2000, GDP and the DXY exhibited a

strong correlation as GDP growth increased from 2 to 4.8 percent and the

DXY rallied from 84.76 to 106.84 during the same period. From June 2000

to December 2001 (after the stock market bubble burst in March 2000),

GDP growth plummeted from 4.8 to 0.2 percent. However, the DXY con-

tinued to rally during the same period, from 106.84 to 120.25. Interestingly,

GDP growth rebounded strongly from the December 2001 low of 0.2 to

4.5 percent in June 2004. During that time, the DXY plummeted from 120.25

to 88.80. Since June 2004, the DXY has rallied and declined while GDP

growth has mostly declined. Aside from December 1995 to June 2000, when

GDP growth and the DXY moved together, the two have actually exhibited

a negative correlation.

TRADE BALANCE

A country’s trade balance is the value of its net imports subtracted from

the value of its net exports over a specific time period. Naturally, the U.S.

trade balance is reported, or valued, in U.S. dollars. A country, such as

China, that exports more than it imports ...