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What Will Get The Forex Market Out of Its Funk?

16 Years ago | July 09, 2014 7/3/22, 12:00 AM

We have developed a new analytical that could give you a leg up on when forex trading will return to normal. Since forex movements come as a result of DIFFERENCES between economies and interest rates, the ZIRP (zero interest rate policies) of virtually every major central bank have driven volatility to zero as well. There is no compelling reason to move from one currency to another if interest rates are al the same. 

The chart features two key interest rates for key economies, the key short-term central bank target policy rate and the two year government bond rate. The benchmark rate tells us what policy is now and the 2-yr government bond provides the current market assessment of where rates are headed.  If the two year is rising above the benchmark rate, a policy tightening is being priced in (Example:UK). If the two are roughly the same and there is no trend in the two year, no policy change is foreseen for the next year or so (Example:Japan). If the 2-yr is below the benchmark rate and falling (Example: EZ), then a policy ease is being priced in.  

In our opinion, the chart below illustrates a developing trend that marks the start of a move in the direction of monetary policy "normalization" on selected economies, Namely theU.K.and U.S.The GBP has been responding positively to these developments. The outlook for Japan is neutral as it struggles to emerge from  deflation and  the outlook for the Eurozone is worsening because of its inability to clear the deck when  in 2008 when everyone else did after the global financial crisis.. 

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