Lowered expectations
As a long-ago MadTV skit illustrated, lowered expectations can be the key to happiness – in dating, and in life. Something similar applies in the currency markets, where – to paraphrase the behavioural investing expert Michael Mauboussin – traders need to assess the level of expected performance embedded in exchange rates and then assess the likelihood of a revision in expectations. If expectations seem poorly aligned with future results, volatility is likely ahead. Our turnover-weighted measure of economic surprise indices, which represents the gap between consensus forecasts and official data across the major currencies relative to the United States, suggests...