Forex Investment and Currency Trading

On 16 December the Federal Reserve took the target funds rate down to a range of 0%-0.25% and said that “weak economic conditions are likely to warrant exceptionally low levels for some time”. The Fed also said that it would “employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability”. Hence, quantitative easing measures are now the main focus such as the purchase of agency debt and mortgage-backed securities. Market expects the Fed to maintain the target fund rate at 0%-0.25% in 2009 and maintain the quantitative easing policy for as long as is warranted. Given that the Fed has not before adopted such low interest rates and pursued a quantitative easing policy we are in uncharted territory. Hence, there is not a clear comparison with earlier periods. Still, the best comparison is earlier Fed easing cycles. During Fed easing cycles from June 1989 – September 1992 and from June 1995 – January 1996 many AXJ currencies were still pegged to the USD. Asian monetary policy was therefore more correlated with the U.S. at that time. Care is needed in interpreting this data for several reasons. Firstly, Asian currencies were mostly pegged until the Asian financial crisis in 1997 and 1998. Thereafter, they underwent maxi-devaluations that had little to do with Fed policy. Secondly, it should be remembered that the Malaysian ringgit (MYR) and the Chinese yuan (CNY) were pegged until 21 July 2005. Thirdly, the 2001-2003 Fed easing cycle was stop-start, stopping in January 2002, re-starting in November 2002, stopping again in December 2002, ending in one last rate cut in June 2003.