Finally - A Concerted Central Bank action
| 30 November 2011
When was the last time you remember a concerted effort of central banks in the market?
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For central banks aim for a joint intervention is simply to calm the markets. This is exactly what happened in the year 2000,
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And of course it could happen again whenever the real need arises. Intervention occurs when a central bank steps into the open market in an attempt to strengthen or weaken its own currency just like the intervention in 2000 was a concerted effort by the Group of Seven (G7) nations to stabilize the Euro.
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The Federal Reserve, the European Central Bank, the Bank of England and the central banks of Canada and Sweden effectively reduced primary lending rates by a half percentage point. Switzerland also cut its benchmark rate, while the Bank of Japan endorsed the moves without changing its rates. This occured in October 08, 2008. And apparently, the Chinese central bank joined the effort — without explicitly saying it was doing so by reducing its key interest rate and lowering bank reserve requirements to free up cash for lending.
Taken together with these moves in the United States, Britain and Continental Europe in the last few days, is part of a broader, global strategy that would help banks with wider exposure to the European Debt crisis on both sides of the continent and avoid a spillover to the rest of the global financial market.
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve and the Swiss National Bank decided to come together with force today the 30th of November, 2011 and cut the dollar rate swaps by 50 basis points that prompted a rapid selloff for the USD in the early trading hours of the American Session.
The purpose of these actions is to ease the strains in financial markets and simply avoid the ill-effects of such strains on the supply of credit to main street and businesses to provide and foster economic activity. An intervention watch index, which currently suggests an 18% chance that central bank policy makers will step into the market to influence exchange rates but in this case a reduction of 50 basis points on the dollar rate swaps. Any reading above 10% suggests the risk is elevated. However, increasing volatility to the next level.
An extraordinary increase in volatility we’ve seen recently in the forex markets is quite common now. Currency volatility is at its highest point since the year 2000, as the markets swing wider and rapidly while absorbing news from both sides. The wild fluctuations and market sentiments have driven the Average True Range, also known as ATR, of the major currency pairs to levels that are unexpected and reached at a shorter period of time-frame within the trading session. The indicator does not provide an indication of price direction or duration, but simply reveals the degree of price movement and volatility especially in this case of a concerted central bank intervention. Where it created notable short term corrective bounces or even spikes that run against its current trend.
Nevertheless, the underlying trend that initially prompted the intervention usually tends to subsequently reestablish itself once the central bank is eventually forced to move aside as its efforts are ultimately dwarfed by the prevailing market sentiment. That is also why, Intervention might simply smooth a Trend but rarely reverses and most professional Traders and experienced strategist would just position themselves against the Central Banks. Some may & may not agree; however, some would just do it! Or the smarter way to go is let the market settles-down, observe the market behavior and not get carried away or be enticed to trade with the market movements. A point of equilibrium of prices would be made and a continuation of the major trend prevails thereafter. A confirmed trend and price reversal does not necessarily occur overnight.
