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A Central bank intervention? Now?

Written by A Forex View From Afar on Friday, March 14, 2008

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The Trade Screens were flooded this morning with messages from the news-wires of a Unified Central Bank intervention over the Dollar value in foreign exchange markets. At this time, where the markets are right now, it would need a Divine Intervention, not a CB! We cannot totally dismiss a CB intervention, but do question its timing. Why would CB's intervene now?

• We just had the CPI release, showing inflation had flatten in the last month (strange, but this is what numbers are saying), allowing more rate cuts to come on Tuesday.
• Bern Stern required the intervention of the New York Fed and JP. Morgan, sending the sub-prime to a new level.
• According to a WSJ poll, most analyst see now the US is actually in a recession in all but name.
• The Cleveland Fed, Fed Funds Futures are pricing in, either a 50 or 75 points rate cut, sending the Rate differential even higher.
• Insurance agencies say sub-prime losses approach Hurricane Katrina losses, and will soon overtake that number.
• Most Central Banks have expressed their concerns over inflation, sending their currencies higher, in the last weeks. Such rhetoric does not show major concerns over currency valuation

The opinion is they could not have chosen a poorer time do have such an intervention. A good time maybe would have been when all the majors' pairs were caught in a range, with the Euro struggling to break 1.50, in a period when the US cut its interest rate. Most of the majors pairs are now oversold (although nobody is rushing to liquidate them in the current environment), so a pull-back, or at least a consolidation, would be something normal. It is a "healthier" move for the markets to retest previous Resistance areas, which now have become Support.

It is also something normal for central banks to protect their holdings too, the majority of all CB Reserves are held in US dollars, so a falling dollar will send Reserve values lower; something not wanted in most cases as that imbalances the local currency values as well. An alternative to try to fight the market would be to either realign Reserves to gold and other currencies, or at least try to curb the dollar fall.


WSJ: Morgan Stanley: Odds of Dollar Intervention Are “Rising”
Bloomberg: Insurer Losses From Subprime Approach Katrina Claims
FT: Emergency funding for Bear Stearns
WSJ: Most Economists in Survey Say Recession Is Here

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Fundies and Trading
There is a constant question from some traders as to why anybody would ever need to consider the ‘F’ word when trading. Fundamentals: what is so damaging at looking at both Technical charts and having a Fundamental filter to gauge how many Lots to put on? Why is it that accepting that Technicals give us price points to trade, but Fundamentals determine the direction that we travel is so difficult for some traders to accept? Without a Fundamental Filter very few pure Technical traders would have seen this Dollar move coming today.

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