It has nothing to do with short-term data, Fed policy, conventional economic models or other factors most economic commentary focuses on.

Instead, it has to do with the "trilemma," identified in the 1960s by economist Robert Mundell.

Mundell identified three critical policy variables that nations face:

the central bank policy rate,

the exchange rate,

and open capital accounts.

He said that nations could control any two of these variables, but not all three at once.

If you want to control the policy rate and the exchange rate you can, but you have to close your capital account. Otherwise, if your policy rate is high and your capital account is open, capital will flow in and make your exchange rate higher than you want.

Or if you have a set exchange rate and open capital account, you have to let your policy rate float along with other central banks to avoid the exchange rate pressure.

In the first case, you control the policy rate and have an open capital account, but you lose control over exchange rates. In the second case, you control your exchange rate and have an open capital account, but you lose control of your policy rate. The only way to control the policy rate and the exchange rate is to close the capital account.

As Mundell explained, you can control two of the three factors, but not all three.

If you try, you will fail — markets will make sure of that. A country that attempts to have all three will fail in one of several ways including a reserve crisis, an exchange rate crisis or a recession.