Sunspots in Forex

Sunspots in Forex

Sunspots, an increasingly reported solar phenomenon are solar storms that can affect the weather, the ozone layer, and some people even think global warming. These sunspots come and go in approximately eleven year cycles, and some analysts have attempted to draw parallels between sunspot cycles and business cycles. In fact, this is not as ridiculous as it might sound. In the early nineteenth century it was noted by William Herschel the famous astronomer that there was a direct correlation between grain prices and sunspot activity.

This was taken further during the latter half of the nineteenth century by an economist, named William Stanley Jevons, who believed that he had discovered a causal connection between sunspot activity and the business cycle. His work, though interesting, failed to survive later critical scrutiny and largely was dismissed, however it did lead to the term ‘sunspot’ being adopted by economists. ‘Sunspot’ is a term that has been coined by economists to refer to minor disruptions that logically should not impact significantly on the markets, but given a suitable set of conditions, may do so.

This ‘suitable set of conditions’ refers to a set of expectations which can arise from either real news or rumour. Often they can take the form of a self-fulfilling prophecy. For instance a newspaper might publish a speculative article on the Euro, which might create a sentiment that the Euro will fall against the dollar, speculation will turn to action as speculators sell their Euros, and as a consequence the Euro really does fall.
Separating out reality from rumour is not a simple task, particularly considering how rapidly rumours can spread online. Numerous experiments have been carried out that have demonstrated how rumour can bring about major market shifts, and one economist, Eric Fisher, has demonstrated statistically that there is very little correlation between reality and market movements.

During recent times of market uncertainty, sunspots have occurred more frequently than usual and the result has been a level of volatility in Forex that has not been experienced before.  Despite this volatility, it seems that the markets are beginning to settle down and equilibrium is being restored.

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