Who knows what they want?
Written by A Forex View From Afar on Monday, April 07, 2008Back to www.thelfb.com
Scenario 1; The Chairman of a Central Bank, and his Finance Ministers, complain that the volatility in the foreign exchange market supports a strong currency (their counter-party currency, that is), say that the Central Bank will closely watch the exchange rates, and also add that currency appreciation should reflect fundamentals. What opinion should we make, as Forex traders to this?
Obviously they are not supporting the current exchange rate and its trend. All this is called verbal intervention, or jawboning.
Scenario 2; The Chairman of a Central Bank says that the growth perspectives are fine, the financial markets are in a good shape saying we have outstanding credit growth, says inflation is strong in every 3rd sentence, says the IMF is to pessimistic about future growth perspective, will not even speak about the idea of a rate-cut, and says they (the Central Bank) will not support interventions over a counter-party currency.
They are sending signs that growth is good, and with so much talk about inflation they are leaving room for currency appreciation, it would seem.
Imagine all of this was said by the same people, well actually you do not have to imagine it, because it was actually all said by the same people; Mr. Trichet and his staff.
Strange, isn't it? To me it appears they are sending totally different messages. It's like they have forgotten about currency fundamentals. On one side they say: "Hey, we are doing fine here, not like others (note to the Fed). Growth perspectives are inline, the only problems we have are with inflation" and on the other side "Woooow, what have you done with the eur/usd parity??? We are in the middle of a crisis and you send the Euro up to the sky?? Bad traders, bad!!!"
What do they expect? To speak only about inflation and dismiss from the start the idea of a rate-cut at the same time that the Fed cut 300 points, and they don't expect currency appreciation and excess volatility??? The next step will be to say; switch all available Dollars for Euros, but at the same time complain about why traders are doing that.
I think they are starting to loose the ability to anchor future expectations, and by not sending a clear signal that may easily get exaggerated. At least I'll admit it; they have lost me with all of this double talk.
I can't wait for Tuesday when Mr. Trichet will speak again; about inflation. Now how will he get around this one. C'mon Claude, you were always so elegant in your delivery, please do not go down the Greenspan/Riddler path.
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