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Central Banks Drive the FX Markets

Oh! to be a central banker.

Well! There was I thinking that economic releases, trade flows, M&A flows, even good old speculative trades determine FX markets rates. Apparently for the moment we have to suspend such beliefs. Central Banks are having their day in the sun! It appears a well chosen sentence by any central banker is enough to weaken the strongest of currencies and even strengthen the US dollar.

Central Banks Drive the FX Markets

The first to discover their new found power was the Swiss Central Bank, 1.2000 they determined was a floor for the Eur/Chf and lo & behold the market concurred. Next up was Japanese Prime Minister Shinzo Abe (I know he is not a central banker, but a little poetic license is allowed, the Bank of Japan after all is helping implement government policy), he had to only mention his three arrows – massive fiscal stimulus, aggressive monetary easing & structural reforms to engineer a near 20% depreciation of the Yen. Not to be outdone Ben Bernanke, Chairman of the Federal Reserve with a well chosen word (tapering) strengthened the soggy Dollar (it was approaching 1.3500). 1.3500 was also a concern for Mr Draghi, Head of the ECB, what could he do to help his exporters, AH! How about some forward guidance, ”interest rates will stay low for an extended period and could go lower” – that should knock the wind out of the Eur. The new head of the Bank of England, Mark Carney, well known for his use of unconvential methods to stimulate the Canadian economy was not going to be left out of the ” depreciate your currency” party, if forward guidance could work for Mario, it could also help debase the pound. All he had to do was copy Mario’s script with a few minor amendments and hey presto Stg is testing 1.4850 against the Usd.

So have economic releases been consigned to the statistical dustbin? Are trade & speculative flows of no consequence? I think not! For sure the policy makers & central bankers have got currencies moving in the right direction, that was the easy bit! The economic data will enevitably have to support their stand point, if not speculative flows will turn against them, trade flows will improve and currencies will again reflect fundementals.

Short to medium term the current trend is your friend, so expect 1.2000 to hold in Eur/Chf but for sellers to emerge above 1.2600. Eur/Jpy is comfortable for the moment trading around 130.00 with 125.00 finding Jpy sellers and Jpy buyers waiting above 133.00. Mario has the toughest task, despite well chosen words, even as we lurch from one crisis to the next in Europe, the Eur/Usd finds welcoming bids between 1.2650 and 1.2700 with sellers stacked above 1.3350. Stg is unloved, but against the Eur it struggles to break above the .8650 resistance although it finds a wall of sellers between .8450 and .8500 – Mark Carney may have to delve deeper into his unconventional toolkit to get significant Stg weakness (above .8800).

Ulster Bank, doing it’s bit for our International Trading customers

In truth our central bankers are full of good intentions, they want to stimulate global trade but not at the expense of their exporters. We in Ulster Bank share this sentiment. We want to help our International trading customers and we have done so by removing outward FX transaction fees for standard payments for all our Republic of Ireland customers across all our delivery channells.

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