Once upon a time central banks intervened in the markets to keep currency exchange rates in line. Even the hint that one of them was in oftentime was enough to get rates jumping. That’s become less and less frequent of an occurance over the years, though. The Bank of Japan probably has the most active record of intervention and got quite good at timing it.
These days the perception is that the markets are too big – that the central banks just don’t have the resources (especially working alone) to move exchange rates the way the did in the past. To push prices around these days requires concerted intervention.
Well, maybe not always.
The Swiss National Bank (SNB) has decided to take the bull by the horns (so to speak) and intervene in the CHF. It did so a while back, mostly in EUR/CHF if I remember correctly. Today, though, the target was USD/CHF. They were said to have been in early in the US session and then around midday, the end of the European session. The intraday chart below shows the result.
Most retail traders don’t really focus on the CHF, so it’s quite likely that many never saw what happened. The SNB action, though, played a big part in driving the USD higher early today, which showed up in places other than USD/CHF, and then again around noon. The moves in EUR/USD, USD/JPY, etc. were not of the same magnitude, of course, but perforce when a lot of USD buying is happening in one pair it’s going to impact others.
TraderMark at Fund My Mutual Fund has a good write up on a proposal that’s been made to require mortgage originators to retain at least 5% exposure to the loans they make. This is one of those regulatory ideas which on the face of it at least seems to have a lot of merit. A contributing factor in the housing bubble was rampant mortgage origination by those who weren’t taking any on any of the risk of the loans they were writing. Such a rule as that proposed would certainly put a clamp on that sort of thing.
I’m a bit uneasy about this particular plan, though. I can’t peg exactly what bothers me, but I see the potential for unexpected outcomes here. For sure, there would be less origination, and I should think that mortgage brokerage would suffer very badly.
Maybe the thing that bothers me is the impact on competition. I think this type of play would tend to mean higher mortgage rates because by taking on more direct credit risk the lenders are going to be more inclined to want to offset with higher rates of return. Plus, less competition probably means the types of rates we are used to seeing would be a thing of the past. Maybe that’s not a bad thing, though.
From a trading/investing perspective, the implication is that mortgage spreads over Treasury rates (or LIBOR) would probably move higher, suggesting shorting a mortgage ETF like MBB against a Treasury one like TLT.
Adam at the Forex Blog posted some stats on currency trading popularity. In it he cited an article by my employer (the news side of it, anyway) - Small investors flock to forex trading amid crisis - which talks about how retail traders have flowed into the forex market of late. The credit for this migration is being given to the volatility (especially to the downside) in stocks, emerging markets, and all those other places folks have liked so much until recently. Some of the figures noted in terms of account and transaction growth among forex brokers are quite sizeable.
Those of us who have been around for a while recall the same sort of thing happening in the post-tech bubble period, which is when retail foreign exchange trading really came into its own. At that point ETFs weren’t nearly as popular as they are now, so there were few alternatives to small traders outside individual stocks. Forex became the place to go for those who no longer wanted exposure to corporate misdeeds and such.
Of course forex also has its own cycles. There were a lot of forex traders who were quite happy and successful during the middle part of this decade when volatility was low and falling. They had developed strategies based on ranges and mean reversion types of strategies that worked well in low volatility environments. The forum sites has loads of discussions about “grid” and “hedge” systems.
As you can see in this weekly EUR/USD chart, that low volatility went away in a hurry in 2007. (Red line shows Normalized Average True Range, a measure of period range volatilty – higher levels mean wider period ranges).
If you frequent the trading forums these days those “grid” and “hedge” type strategies are barely mentioned any more. It’s pretty easy to come to the conclusion that those who were using them fell victim to the increased volatility and more directional market moves. At this point we seem to be shifting from a high volatility environment back toward something lower once more. It’s going to be interesting to see what sort of implication that has for the current new generation of retail forex traders.
There’s a report on the Reuters wire that Secretary of State Clinton and the State Department have rather embarassed themselves.
   GENEVA, March 6 (Reuters) – U.S. Secretary of State Hillary Clinton presented Russian Foreign Minister Sergei Lavrov with a red “reset button” to symbolise improved ties, but the gift drew smiles as the word “reset” was mistranslated into the Russian for “overcharge”.
  “I would like to present you with a little gift that represents what President Obama and Vice President Biden and I have been saying and that is: ‘We want to reset our relationship and so we will do it together,” said Clinton, presenting Lavrov with a palm-sized yellow box with a red button.
  Clinton joked to Lavrov: “We worked hard to get the right Russian word. Do you think we got it?”
  “You got it wrong,” said Lavrov, smiling as the two pushed the reset button together before dinner at a Geneva hotel.
  He told Clinton the word “Peregruzka” meant “overcharge”, to which Clinton replied: “We won’t let you do that to us.”
Do we really not have the language skills at State to get one little word right? And people wonder why stocks keep going down when the Obama administration keeps having all these little incidents. It doesn’t exactly help breed confidence.
One more reason not to take things you read in the press on faith…
An article on the CNN Money site has the title Reality check on Obama’s deficit plan. As the title implies, it’s a discussion of the President’s proposals regarding the budget and cutting the deficit. The problem, though, is in the subtitle:
The administration laid out several key approaches to whittling down U.S. debt. Whether they pan out as the president hopes is a question mark.
Do you see the error?
The article author has confused the deficit with the national debt. The former contributes to the latter, but they are not the same thing. The only way the U.S. debt can be reduced is if there is a budget surplus to allow for it’s paydown. Best I can tell, there are no surpluses in Obama’s budget projections.
Any time the Fed chief goes to Capitol Hill it’s great theater. The questions – and in some cases rants – the Representatives and Senators through at Bernanke are highly entertaining. Well, in some cases you could call it sad since these are the folks making the decisions impacting our lives.
Speaking of our friends in Congress, it’s worth chiming in on the subject of the so-called Trader Tax that has been proposed. I wrote about it myself in the post Trader Tax proposal in Congress. Others have posted their thoughts as well:
Now we really know how bad things are. The British have begun cutting back on the pints. According to this CNN story, pubs in Jolly Old sold about 1.8 million fewer pints per day in the last quarter.
This would seem to go contrary to the idea that in bad times people drink.
I’ve been hearing all week about the Anna Schwartz piece in the Wall Street Journal and how good it was. I finally got around to reading it today. Definitely very interesting. Check it out for yourself here.
Actually, the article is mentioned a number of times somewhat indirectly by Jim Rogers in a recent CNBC appearance where he gets rather uppitty.
Here’s some more interesting online media. It’s a joint interview of Nassim Taleb and Benoit Mandebrot done by PBS. It runs about 10 minutes. Listen here (thanks to Paul Kedrosky). Alternately, you can watch the video or read the transcript from here.
I read something interesting on a note that came out this morning from the head of my Thomson Reuters group. He was commenting on how things are going and pointing out some of the better performers in our business. The market volatility has been a boon to the transactional elements of what we do. In particular, he said September was the best month ever for forex. I presume that’s speaking of the Reuters dealing system. Interesting.
I’ve just started reading Fooled by Randomness by Nassim Taleb. The author has garnered a great deal of press in recent years and has become something of a lightening rod for his views. I’m reading the second edition. The introductory comments suggest a good read. When I’m done I’ll post a review, as always.
