The Canadian dollar’s persistent strength continues to drive speculation that the Bank of Canada will intervene in the currency markets in an effort to support economic growth. The currency’s elevated value is already having a substantial deleterious effect on the Canadian economy, and fears are rising about whether the nascent economic recovery may be delayed as a result.
The Bank is specifically mandated to keep inflation within a target band. Because the general level of economic activity often predicates the inflation rate, the Bank is empowered to influence the currency’s value when it threatens to affect growth. However, Bank policymakers have frequently said that they see direct currency intervention as being futile, and prohibitively expensive. Therefore, while officials have repeatedly issued veiled threats against the currency’s rise over the last few months, the markets have routinely dismissed these threats as “jawboning” and have discounted any possibility of currency intervention. Because much of the Canadian dollar’s recent rise has been driven by speculative flows against the U.S. dollar, we also don’t see a strong likelihood of short-term intervention.
Saturday, Oct 3rd, 2009
I will be joined by the distinguished and entertaining Ashraf Laidi in a webinar this Saturday, Oct 3rd, where we will both present. Kindly visit the following link for details.
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Despite the lack of high-profile policy meetings or summits this week, officials within the G10 are clearly expressing some displeasure at the state of exchange rates in the current environment, and the complaints are almost uniformly against currency strength. Switzerland and Japan are in the spotlight, where the threat of explicit action is very real, while other commodity bloc central banks may also continue to voice displeasure. The ECB has joined the chorus with both Trichet and Nowotny speaking in favour of a stronger dollar.
The SNB used very forceful language in a series of speeches last week and even defended their intervention measures as necessary for the economy and not a "beggar-thy-neighbour" policy. This week's Eurozone events and current levels in EURCHF have also raised the stakes. The ECB will hold its second 12-month refinancing operation this week and the SNB's last round of (suspected) major intervention occurred on the same day as the previous operation. It is possible that investors in need of CHF-liquidity have been borrowing from the ECB for a preferential rate and using the proceeds to sell EURCHF, and the SNB will need to enter the market to offset any currency swings. We are watching EURCHF and CHFJPY closely.
Saturday Oct 3
Which trend is your friend? Daily? 4hr? 2hr? 60min? 34min? 18min? 3.5min? Yesterday, Greg Crisp and I covered the oft asked subject in Pro Traders Club. The answer lies in your trading model. OK, then what is a trading model? If you don't have a trading model, you shouldn't be trading. Let's get back to the trend question. There is a course at Pro Traders Club titled "Inside the Banks", which runs about 6hrs and covers only one component of my trading model, the fundamental aspect which is used for position trades. The focus is on Interest Rates and Interest Rate spreads, which is a common driver of macro trends as investors and traders seek yield. I use this information to determine the root and potential for long term trends/movements of currency pairs and use the information to discern shorter term trades on my intraday strategies. In my own trading, I am far more attentive to the macro drivers of the macro trend than the shorter term trends driven by short term shifts and reactionary movements. When trading intra-day, I certainly consider the macro trend in determining probabilities of short term movements, because the funds will have preferred levels of buying within the macro trend where we look for intra-day entries.
In many trading models, the trend does not have any significant impact on trading decisions. What is most important is to be clear on your trading model and strategies within the model. How do you trade? Are you a quant, technical, system, fundamental or price action trader? What parameters do you use in your trading model? Some models will consider the trend while others have no use for the information. The question should be raised; what is a trend vs. momentum? Again, it depends on your trading approach and your use for such information. Therefore, it is impossible for us to offer you an answer, since we do not know your trading approach.
The Quantitative Easing Binge
This week, one of our readers wrote in to ask about the long-term implications of quantitative easing programmes on currency and financial markets. This is a great question—the world economy has been on a monetary policy binge for the last year, and while we don’t have a lot of historical precedent to help us understand the consequences, the impact is likely to be large. Even in this day and age, numbers in the trillions are very substantial.
With fear and uncertainty dominating financial markets last year, investors and lenders around the world collectively put their money under their mattresses. Without any money circulating, there was a very real danger that the global economy would slow catastrophically. In response to these rapidly deteriorating conditions, governments started the printing presses and threw money into bailouts and infrastructure projects to support the underlying economy. In addition to these efforts in the real economy, central banks began putting money into the financial system, dropping interest rates to near zero and implementing the measures that have become known as quantitative easing. Read More...
The USD fell heavily overnight against every other G10 currency pressured, at least in part, by the continued advance of equity markets both in Europe and in Asia. The EURUSD-equities relationship had appeared to weaken over recent weeks, but has now firmly re-established itself. In the short term the dollar faces significant downside risks inspired by funding ccy attraction as indicated in this Bloomberg article.
Resurgent equities continue to defy expectations of their imminent decline. Overnight, ECB Executive Board Member Gonzalez Paramo felt compelled to caution that markets might be reacting over-optimistically to improved economic data, and pointed out that recent economic growth is not necessarily sustainable. I feel the market is grasping at hope and almost willing equities higher to deny previous errors and omissions they must face on some dark day. They must also hope that the CB's continue to cover the trillions of dollars on "at risk" derivatives set to implode. They can cover their sins for months and years, so we will work to remain connected to current sentiment.