Sue Trinh, senior currency strategist
at Royal Bank of Canada and a stalwart of Bloomberg TV, CNBC and others, has
pointed out that it is not the role of central banks to manipulate currency
exchange rates. Rather, when rates are changing for one reason or another, it
is their responsibility to try to ensure that this happens in an orderly manner
so that it does not negatively impact the national economy for which they are
responsible. We also know, of course, that central banks are mandated to
control inflation and, as in the case of the US Federal Reserve, to support
employment levels. An important tool for enabling them to carry out their
functions in all these cases is to lower or raise the core interest rate.
Because of the importance of the Carry Trade and its global search for yield,
changes to the cost of borrowing do, indeed, affect the currency.
Now the former chairman of the
Federal Reserve, Mr. Ben Bernanke, has taken the opportunity afforded him by
the initiation of his new
blog, under the aegis of the Brookings Institute, to
provide us with another, related, insight: This is that responsible central
banks do not arbitrarily raise and lower interest rates, no matter what the
circumstances. Instead, they use the economic research resources at their
disposal to calculate what the equilibrium interest rate is, taking into
account all the relevant forces that bear on the economy at any particular
time, and set this as the rate to be used. Getting this wrong, in either
direction, will result in distress to the economy in question.
How
they might help Forex trading
According to Jonathan Hilsenrath,
writing in the Wall Street Journal, Janet Yellen, the current chair of the Fed,
strongly supports Mr. Bernanke’s approach in this matter. It therefore behoves
those of us with an interest (no pun intended) in the subject to acquaint
ourselves with the factors that might contribute to the equilibrium rate in the
US and use this data, as it is released, to possibly inform our Forex trading
decisions.
The next question we have to ponder
is the stance on this matter that might be held by other central banks. Mario
Draghi has often had to defend his and his colleagues’ actions in respect of
how they affect the currency exchange rate. He continuously refers to the ECB
mandate, which is solely concerned with inflation expectations.
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