Whats behind the moves in Foreign Exchange markets?

JULY, 2009Forex

Since August 2007, sporadic volatility and price turbulence witnessed by FX markets in the ‘established’ global market place have seen conventional wisdom & perceptions consistently challenged in unpredictable fashion, with wild swings in daily currency trading ranges raising questions on whether the giant pools of liquidity traditionally offered by the G-10 countries are of sufficient depth & maturity to withstand such constant barrages that may lead to more actual and potential systemic financial shocks.

These ‘major’ markets have always been perceived to be ostensibly positioned, able and more importantly willing to pave the way forward for the future growth of other vital yet (relatively speaking) peripheral markets of Latin America, at least from the standpoints of market pricing and available orderliness-it seems clear that any further jeopardy to overall stability is both counterproductive-and risky-for all involved.

Past perceptions of mainstream markets much like many traditional economic views are now (perhaps rightly) being challenged by evolution and hard evidence that all is not as well as previously thought. Importantly, with the permanent era of ‘global village’ economics & co-operation now entrenched in modern psyche, the weightier issue for LatAm is that the lurking threat that negative implications caused by slowdown and systemic failure in established economies may not yet have run their full course globally. This potential contagion factor & danger manifested itself in recent currency fluctuations, with LatAm currencies bearing the brunt of much pain, fear and concerns for continued global economic weakness. Most traded LatAm currencies were ultimately hit negatively by around 50-60% against in their best-to-worst valuations over the past year or so.

Such price action, severe both in the reality of its emergence & eventual voracity, does in turn raise questions of the extreme market valuations & their ultimate validity, given that markets always overshoot; can such negativity be truly justified and consequently is it of any use as a material guide to the future outlook for continued progress and economic expansion in the Latam region? If the markets are simply too negative, there are some great opportunities on the horizon for currency plays, assuming a level playing field. If the markets are right and we have had only a brief taste of the fireworks to come, then being prepared for a wild ride ahead could be a wise course of action.

Whichever way the USD or other major currencies affect LatAm currencies, one constant is that no matter how buoyant or impervious economies appear to be, no cur.....




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