This is the second part of my discussion covering my fundamental analysis techniques. Even though I started with COT Charts, I think Key Interest Rates affect the direction of currency more than anything else. IMHO understanding Interest Rates and what makes them change is the first step in understanding what creates long term trends. I will list other factors that affect currencies movement after posting a couple of graphs.
Here is a graph of the USD/CHF starting around 1979.
http://forexfactory.com/attachment.p...1&d=1206850622
Here is a chart of the 10 yr. US Gov't Bond
http://forexfactory.com/attachment.p...1&d=1206850705
Here is a chart of the Federal Funds Rate
http://forexfactory.com/attachment.p...1&d=1206850705
I am only interested in the USD/CHF chart and the FED Funds Rate chart. The 10 yr. chart given to show how the Fed Funds Rate affects the financial markets. The Feds Fund Rate is the tool the FOMC uses to change the price of money and credit. Note how closely the graphs line up.
Here are a few points to think about. In 1998 Long Term Capital Management went under and the Federal Gov't stepped in to bail out the Hedge Fund and save the economy. During that period investors sold dollars and dollar denominated assets. The assets were transferred abroad and one of the recipients was Switzerland. Switzerland traditionally has a negative Net Capital Flow except during periods of political and fianancial turbulence. In 1998 Switzerland had a positive Net Capital Flow which caused its currency to appreciate substantially. During the late 1990's while the Fed Fund Rates remained stable and the 10 yr. rates declined the dollar continued to appreciate. During this same period the US had fantistic GDP numbers.
In understanding Key Interest Rates we have to think about the current role of Central Banks. They have stated their duty is to maintain growth (GDP) and to keep inflation under control (CPI). The US and especially China has pretty much ignored inflation in oder to concentrate on growth (you gotta keep the masses employed). Recently China has turned its attention to inflation (Food in the emerging asian countries is starting to get expensive).
Understanding what the Central Banks are most concerned about will help in determining which way the interest rates, and therefore currencies, will go. The trick is being patient and waiting for market conformation.
Here is a graph of the USD/CHF starting around 1979.
http://forexfactory.com/attachment.p...1&d=1206850622
Here is a chart of the 10 yr. US Gov't Bond
http://forexfactory.com/attachment.p...1&d=1206850705
Here is a chart of the Federal Funds Rate
http://forexfactory.com/attachment.p...1&d=1206850705
I am only interested in the USD/CHF chart and the FED Funds Rate chart. The 10 yr. chart given to show how the Fed Funds Rate affects the financial markets. The Feds Fund Rate is the tool the FOMC uses to change the price of money and credit. Note how closely the graphs line up.
Here are a few points to think about. In 1998 Long Term Capital Management went under and the Federal Gov't stepped in to bail out the Hedge Fund and save the economy. During that period investors sold dollars and dollar denominated assets. The assets were transferred abroad and one of the recipients was Switzerland. Switzerland traditionally has a negative Net Capital Flow except during periods of political and fianancial turbulence. In 1998 Switzerland had a positive Net Capital Flow which caused its currency to appreciate substantially. During the late 1990's while the Fed Fund Rates remained stable and the 10 yr. rates declined the dollar continued to appreciate. During this same period the US had fantistic GDP numbers.
In understanding Key Interest Rates we have to think about the current role of Central Banks. They have stated their duty is to maintain growth (GDP) and to keep inflation under control (CPI). The US and especially China has pretty much ignored inflation in oder to concentrate on growth (you gotta keep the masses employed). Recently China has turned its attention to inflation (Food in the emerging asian countries is starting to get expensive).
Understanding what the Central Banks are most concerned about will help in determining which way the interest rates, and therefore currencies, will go. The trick is being patient and waiting for market conformation.
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