30 August 2010

Central Banks and Forex Valuations

The problem with risk on/risk off analysis is it becomes like trying to call the market, a random event with therefore no information content. What happened today in the market was perhaps even predictable. It was showing in USD/JPY, as I tweeted over the weekend, based on the analysis this blog discussed in earlier posts.

Money flow simplifies. Essentially forex is focused on what this valuation of Yen forced by the Fed refusal to value dollar implies about central bank inputs. Yen is at a critical level of valuation, reaching back to a probe in the 90s. I believe this makes it appear that EUR/USD and USD/JPY and markets are in sync, but they are not really.

The action of the Fed on Friday restored USD/JPY as an indication of money flow ebbs, until the Japanese central bank spoke on Sunday. Now this blog does not believe in predictability thus why am I saying this. Well, the market itself is not predictable, but the markets reaction to very powerful inputs is reasonably predictable. It is how you can make money in news trading. The powerful input was the Fed.

Now for me, as this blog discussed, this was good news, not because of more liquidity, but because the Fed now believes strongly in a recovery. But the market reacted with a huge surge of money flow partly as a relief that economic collapse is not about to happen but more precisely because it seems the source of money flow is being maintained.

The Fed has been very able at managing liquidity, but this is not a positive source of liquidity in an economy. But a closer reading of the Fed would suggest perhaps they believe a recovery will be able to take over from them as a source and management of liquidity, in the not too distant future.

There is no better source and management of liquidity in an economy than companies earning revenue from selling quality goods in a competitive market and employing people to do so, that is the very core of a successful economy and makes logical sense of service industries, banks and Fed policy.

There has been a long term issue of America's ability at selling overseas, but it is true the way technology companies work, is redefining this issue probably positively for America. A belief has been expressed by many economists that reducing the deficit will effectively make more traditional industries more competitive and Obama has expressed his intention to do so.

The effect of a Federal government not pulling in vast amounts of cash would probably be vast and beneficial. From a forex perspective it would allow $ to find a valuation less focused on money flow and more focused on the competitive power of the United States, which is not in question.

Its capacity to print money and the consequences of keeping dollar cheap on the other hand is being questioned in the forex and stocks markets and probably was this Monday, notwithstanding the Yen issue. The decay of the conduit is probably showing in EUR. In all events, money flow rallies tend to ebb.

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