Quote:
Originally Posted by John Kicklighter
Perhaps if you were working with neural networks or something else that can process many different variable at once, you could perhaps get a good forecast for price action (if we could, it would certainly be exploited by banks and traders to the point that it wouldn't work anymore).
The problem here is that the response in price isn't necessarily to the rate hikes or cuts, but speculation of rate hikes and cuts over time.
You also have to consider that these are benchmark lending rates we are talking about. Banks aren't even able to access these optimal lending rates (except for those large lenders that deal with the central banks). Big banks lend to each other at the overnight Libor rate. Regular retail traders have access to a rate that is well above the Libor rate as their credit worthiness is much lower. So you end up getting a much lower rate than 7.00 percent holding the Aussie and have to pay much worse than 2.75 percent for borrowing francs.
Then, there is still the issue that there are other market dynamics to take into account for fundamental price action.
So, while we could theoretically measure the impact this shift in rates could have on price action in a vacuum; in the real world its impossible. Therefore, its best just to approximate. Of course, since price adjusts on rate expectations rather than the actual hike or cut itself (unless there is a surprise), it requires you to be on top of things and take some discretion of your own - (are these expectations reasonable and while they grow more or less aggressive with time?).
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John,
Very interesting to see what has happened with the AUD/CHF pair since your last reply to my questions. On 23rd September it was trading at 0.91 and now it's touched 0.73; a 20% depreciation in 2 weeks!! Historically has there been any move has big as this in such a short period of time and can it really continue downwards at such a rate?
You mentioned, that "price adjusts on rate expectations .. (unless there is a surprise)". Well we got the surprise earlier in the week when RBA surprised the market and agressively cut interest rates by 1%.
This 1% cut must be a factor in the continueing decline of AUD/CHF but are we also witnessing here the "death of the carry trade" in general?
Due to the financial turbulence across the world and the deleveraging of assets are people moving out of high risk assets/strategies? There is talk of coordinated interest rate cuts across the markets which may give the AUD/CHF, and others a large reactionary bounce. Will these be enough to stabilise the markets and lead to more of an appetite for risk and thus give life back to the carry trade or can we say that 2008 has seen the end of the carry trade?
Interested in yours and anybody elses views on this?
