When European Central Bank President Jean-Claude Trichet said the magic words — "strong vigilance" — the euro immediately spiked. Fine. But why the code?
Jean-Claude Trichet does it. So did Alan Greenspan, better than most. Ben Bernanke is a pro, as is the Bank of England's (BoE) Mervyn King. They're all highly educated gentlemen with extensive public-speaking responsibilities. But for some reason they feel compelled to speak in code.
Greenspan was renowned for what Michael Kinsley called his "oracular obscurity." Bernanke has carried on the tradition at the Federal Reserve, including at his vaunted press conferences. At the BoE, so-called Mervynologists dissect pronouncements from Governor King. And Thursday brought us Trichet, making investors wait with bated breath to hear precisely what words he would use to describe his position on inflation.
"Chaos breaks out when he either says 'strong vigilance' or when he doesn't," says Amelia Bourdeau, director of foreign exchange at Westpac Institutional Bank. "When he uses 'very close monitoring,' it really moves the euro quite a bit."
Rebecca Patterson, chief markets strategist for J.P. Morgan Asset Management, Institutional, describes Trichet as having "developed this James Bond-like code language."
True, it must be tough monitoring all that dry-as-dust data, and maybe central bankers just want something to spice up their day.
A Fed spokesmen did not return calls seeking comment on central bankers' curious speech patterns.
But Steven Englander, chief G10 currency strategist at Citigroup, told me the indirection may be deliberate. "Thirty years ago, the idea was that you get the biggest impact from surprising the market" with a direct, unexpected pronouncement. Over time, that changed, he says: "In the past, when they were unexpected, these moves would really shock the market more than you'd want." Central bankers nowadays "would rather have the news dribble out and become more of a process than do the shock and awe thing."
Fair enough. But Trichet's pronouncement on Thursday didn't exactly dribble for the market pros — they knew exactly what "strong vigilance" meant. Similarly, if and when the Fed ends quantitative easing, the omission of a few key words from an FOMC statement will be clear as day to sophisticated investors.
But really, is Mrs. Watanabe, or Joe Smith, supposed to know the difference between strong vigilance and very close monitoring? And if they don't, and PIMCO does, is that really fair?
Englander argues that serious investors in the currency markets are on top of all this terminology — and that in any case, what matters is understanding where the surprises lie, regardless of the specific language used. "The more relevant information for retail investors would have been that the market was really expecting a high probability of a July rate hike," he said.
Point taken — but in trading Thursday, the euro quickly turned and gave back ground after its initial rise. An individual trader who needs a little time to figure out what exactly is going on could get burned in a situation like that.
Just a thought.
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