There is more than Monetary Policy Dominating the Forex Markets

There is more than Monetary Policy Dominating the Forex Markets
by, David Frank, Economist, Bullish University

The predominate themes in the monetary policy regimes, and their direction with interest rates, has been the most effective force driving the Forex markets. Most Forex traders evaluate the direction of the Federal Reserve (Fed) European Central Bank (ECB) Bank of Japan (BOJ), Bank of England (BoE) and other main central banks as they are establishing fundamental positions. This makes monetary policy changes including rate changes a sensitive topic in the currency world. However, this theme alone does not reflect how influential it is or the only predominate driver of the Forex world.

While a Forex trader trades, monetary policy, alone, does not come from a simple course. Especially when looking at a Forex market like the USD/JPY. Here the motivation for exchange rate changes also comes from a change in policy from the authorities. The Fed is a good example here. The Federal Reserve is unique, from other central banks like the Bank of Japan, with its hawkish tone. They are mild, now, but the Federal Reserve is the only central bank in the world, out of the majors, considering and or raising interest rates. The Fed is tightening monetary policy at a time when its peers are ultra-dovish and either near zero interest rates or into the negative zone. Even with the disparity of tone from the Fed, the Dollar has not risen with this standing alone. Since early 2015, the almighty Buck has carved out a rather broad consolidative, sideways, trading range. The euro/dollar has done the same. If the Dollar is going to continue appreciating and inching higher, than the Fed will need to hasten its tightening schedule, pushing yields higher or its trading counterparts will need to lose ground faster.

Forex traders need to understand the changes in the policy spectrum and how it is important for the rise and fall of rates in the currency markets. However, there is a more systematic influence these themes carry along with a distortion with trader sentiment. This topic has had a large influence, as well, over the last several years. There has been a deflating rate of return as easy policy and low interest rates are taking its toll. This gives traders a less attractive backdrop to place trades. However, we have seen this changing as the Fed has developed a more hawkish tone. Volatility is starting to return. Once, again and another however, Fed has backed off the gas after its taper with its quantitative easing program in 2013 and rate hike in 2015. The Bank of Japan has also curbed its efforts from a steady dose of QE to one focused on one market-defined target. The Bank of Japan is focusing on Japanese Government Bonds (JGB) 10 year notes. They are keeping this rate at or near zero. It is now only a matter of time before the European Central Bank makes a change with its own monetary policy. The ECB is running out of debt assets to buy and will soon have to make a decision to loosen purchasing controls to buy periphery debt or taper its own massive QE program.

In closing, at some point, Forex traders will begin to lose confidence monetary policy of more than just the Japanese central bank to jump start disinflation and low economic growth. There is a huge vale gap that needs to be closed.

from Bullish University http://ift.tt/2eC7ntX