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Are Central Banks Functioning Properly?

By: Taipan

The extreme volatility in the forex market over the past few days is both exciting and highly dangerous. You had better visit your doctor and get a complete check up before jumping into these markets. Certainly they are not for the faint hearted or for those without brass body parts.

On the 4th of June the Euro Dollar traded as low as 153.65 against the US Dollar. Then the huge spike in oil prices and the nearly 400 point drop in the Dow weakened the dollar and just yesterday took the Euro to a quick high of 158.43. Early this morning as I write this at 7:45 AM we are back at 155.15 in the Euro.

While such extreme moves are fantistic when you are on the right side of them such violent moves with "V" reversals make it difficult to stay with the flow. All can be going well and then just a few seconds later your trade can be under water. If you don't have protective stops placed that water can be very deep water indeed.

It seems from recent statements made by the US Fed Chairman, Ben Bernanke, and the European Central Bank President Jean-Claude Trichet that they are not at all on the same page. The Dollar strengthened to as much as 153.65 Euros on Bernanke's latest comments that the Fed would be paying more attention to inflation. Forex market traders took this to mean that the US interest rate reduction cycle is over and that the Fed may even soon increase rates.

Just a day later Jean-Claude Trichet indicated that the EC may raise interest rates and the Euro zooms to as high as 158.43. Nearly 500 pip swings in Euro - US Dollar quotes over just a very few days is highly interesting but indicates that there are extreme financial stresses in the world forex markets that have even the central bankers out of step.

With oil prices spiking to nearly $140 a barrel on Friday, with the US stock market tanking 400 points only to bounce back a weakish 70 points on Monday, with the housing market in a free fall, with banks and brokerage firms still writing off billions, really hundreds of billions, of dollars of lousy toxic waste stupid mortgage and derivative instrument investments, and with the forex market popping around like a cork on the ocean in a category 5 hurricane, we are in some deep do do in the investment world.

Of course, one man's disaster is another mans great fortune in such an extreme trading environment. If trade this market you must just don't look too far ahead as to market direction. If you pick your entry points very carefully as the market reaches extremes you should be able to make nice quick profits on the correction that follows.

However, if you have a heart condition, you had best avoid these extreme forex markets. When central bankers have a hard time coordinating policies, and in fact may have different policies in mind, you can be sure of continued forex market turmoil.

Article Source: Main Articles

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