First, the significance of the forex market as a force in world capital flows and market moves became apparent when the USD/JPY pattern started sliding. Its vibrations caused a remarkable synchronicity, as if both markets were dancing to the same beat. The Japanese yen, in effect, became the leading indicator for the equity markets (see “Market drops”).

What influences short-term gyrations the most are the perceptions involved in sizing up the outlook for the two economies, and perception evolves slowly, feeds on itself, gathers momentum and goes from one extreme to the other. In the process, it causes prices to fluctuate around the slow and steady progress, or lack thereof, between the economies and the inflation adjusted rate differentials.

In the last few years, only verbal expressions of displeasure can be heard when excessive moves occur in one currency or another. Otherwise, nothing is said other than the usual statement from U.S. officials stating that the U.S. adopts a “strong dollar policy.”

At times, nominal interest rate differentials take center stage due to short-term influences in the flow of funds that are looking to capture a small carry. At other times, traders are pre-occupied with deficits and fiscal policies.

HEART OF THE MOVE

However, those who closely follow currency markets can attest to curious currency moves, especially, for example, those occurring immediately after meetings of the G-7 finance ministers. Lately, after such gatherings, a statement of policy is usually issued and no intent for action is pronounced. That’s in stark contrast to two noted meetings that took place in the 1980s.

Feb. 27 also reminded equity investors that markets are not linear and can suddenly enter into chaotic patterns. Forex traders, particularly carry traders, had a rude awakening.

The second important change that took place relates to how central banks’ participation has evolved. The currency market is the only financial arena in which governments can openly influence the direction of prices by acting to reverse or enforce a trend.

In fact, long-term currency trading may be considered a misnomer. A better term would be long-term investing. As in stocks, long-term currency investing may last several months to several years. The core driving forces causing the ebb and flow of any currency pair are dependent on the relative state of the two countries’ economies. These may include many factors, such as fiscal policies, inflation, interest rates and deficit/surplus comparisons. Most of these factors move at a glacial pace and rarely affect trends contemporaneously.

In the last 10 or so years, such activities have all but disappeared. They have been replaced by periodic rumors of central bank involvement. No official statement is made by any government relating to changes in policy of their central bank’s intervention activities.

posted by Administrator at 2:19 pm & filed under Dollars |