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Central Banks

Bobbys Corner-Open Market-Jan.20.2010

bob-slade-forex-trading-3-150x200Good Mornings:

The USD and JPY rose as speculation that China’s curbing of bank lending may slow the global recovery.
Trouble in Greece are still weighing very heavily on the Euro, and straining the Euro Zone’s economy in general.
Comments from the IMF stating that Greece’s budget woes are “a serious problem”, and comments that China will pare lending after record amounts of new loans were processed in 2009 drove the FX markets to the safety of the JPY and USD .

All Eyes on Central Banks

While Central Banks have always featured heavily in the minds of forex traders, their actions have taken on a whole new significance of late. Financial reporters have also been generous in doling out space to stories about Central Banks, writing stories with headlines like “Central bankers add to equities’ momentum” and “Currency Traders Hold Fire, Await Central Banks.”

Brazil Real Edging Up, Despite Efforts of Central Bank

The Brazilian Real has been one of the world’s best performers in 2009, having risen by a solid 25%. The currency is now close to pre-credit crisis levels, and is even closing in on an 11-year high. When you consider that only six months ago, most analysts were painting doomsday scenarios and predicting currency devaluations and bond defaults for the entire continent, this is pretty incredible!

Korean Won Rebounds Strongly

Last year the Korean Won was one of the world’s weakest currencies- and that’s saying a lot when you you consider how many currencies tanked at the onset of the credit crisis. The Won lost nearly half of its value, driven by concerns that Korean creditors would be unable to pay their foreign debts. Since March, however, the currency has rebounded by an impressive 25%, as the government took action: “To avert a crisis, South Korea forged a dollar-swap agreement with the U.S., pumped money into the banking system, boosted fiscal spending, set up funds to replenish bank capital and cut rates.”

Fed to Hold Rates for the Near Term

Over the last week, the markets have been abuzz with chatter about how the US recession will soon come to and end, followed by a quick and healthy recovery. According to investor logic, the result would be a rise in inflation and interest rates. This optimism was partially deflated today, as the Federal Reserve bank conducted its annual monetary policy meeting.

British Pound due for Correction, Thanks to BOE

The British Pound’s rise since the beginning of March has been nothing short of spectacular: “Improving economic data have helped the pound advance 14 percent against the dollar this year and 12 percent against the euro.” Due primarily to a recovery in risk appetite and the concomitant belief that the Pound had been oversold following the onset of the credit crisis, investors began pouring hot money back into the UK. As recently as two weeks ago, one analyst intoned that, “Longer term, we are in part of an uptrend for the pound. I don’t think this is over.”

Dollar Reverses Course

A recent WSJ headline reads, Good Economic News Threatens the Dollar, and summarizes the Dollar’s trading pattern as follows: “Demand for the U.S. currency continues to erode amid a tide of more encouraging economic data and corporate earnings that have fed a thirst for riskier assets such as stocks, commodities, and growth-sensitive currencies.”

Bank of Israel Steps up Intervention on Shekel

Over the last year, Israel has quietly amassed one of the world’s largest repositories of foreign exchange reserves. On average, the Central Bank of Israel has purchased $100 million worth of Dollars every day since July 2008, bringing its total reserves to $52 Billion. The Bank’s goals are twofold: to sterilize the inflow of speculative money pouring into Israel in order to mitigate inflation, and to stem the appreciation of the Shekel.

Towards this latter, the Bank received a boost by the credit crisis, which caused an outbreak of risk aversion and sent investors rushing to shift funds into so-called safe haven countries/currencies. As a result, the Israeli stock market tanked, and the Shekel plummeted 30% in a matter of months.

Canadian Dollar Volatility could Spur Intervention

Since the Forex Blog last covered the Canadian Dollar - on July 29 - the Canadian Dollar appreciated another 2% against the US Dollar, reinforcing the perception that the currency is both too volatile and appreciating too rapidly. This concern is harbored by the Central Bank officials and policymakers, which fear that the rising currency represents the proverbial wrench in the Canadian economic recovery.

Central Banks’ Mandates Expand to Include Asset Price Stability

There was never much doubt about the underlying causes of the credit crisis. Basically, combination of low interest rates and lax regulation fueled a leveraged credit expansion, which exploded spectacularly last fall. The main issue has always been how to ensure such a crisis doesn’t ever happen again- at least not on the same scale. Towards that end, policymakers around the world have been busy over the last few months conducting hearings and soliciting expert testimony, and are now close to passing sweeping overhauls of their countries’ respective financial systems.

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