Forex Gump's  Instablog

A currency war happens when governments competitively devalue their respective currencies. And ladies, gentlemen, alien robot, and monster, we are currently in the middle of one.

Some of the world's major economies have been struggling, whether its a battle with rising employment rates, weakening exports, or keeping stagflation's ugly head from appearing. Consequently, this has convinced central banks all over the world to implement measures that weaken their currencies, in one way or another, to help encourage foreign investment, making exports more competitive, or to keep the price of goods and services balanced.

I know this isn't exactly shocking news. The Fed announced QE3 in September 2012, British central bankers have been engaging in asset purchases for a while now, and the SNB announced its peg on EUR/CHF last year.

However, a few more central banks joined in on the fun and have recently pulled off a few tactics too.

This year, it all started when the BOJ unleashed its aggressive monetary easing policy under BOJ Governor Kuroda. A month or so after, the ECB also eased its monetary policy by cutting its benchmark rate by 25 basis points. It was soon followed by the RBA which slashed rates below 3.00% for the first time in history to 2.75%. Meanwhile, the RBNZ admitted that it's been secretly selling the Kiwi, marking the central bank's first intervention since 2007.

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So what now?

It doesn't take Superman's X-ray vision to see that among the central banks listed, the BOC is the only one that isn't on the devaluation bandwagon. I couldn't help but think that maybe it's time to buy the Loonie.

What do you think?

Of course, I don't want to get ahead of myself and bet the farm on the comdoll. After all, Mark Carney will soon turn over his baton and Steve Poloz will become the next BOC Governor. For all we know, the new head honcho could turn out to be more dovish than Carney if domestic data starts to turn for the worse. It's also worth considering that it may only be a matter of time until the BOC reacts to the ongoing currency war and cuts rates to maintain or boost its export competitiveness too.

Still, I think it's worth everyone's while to remember that the BOC is one of the few major central banks that is not doing anything directly nor indirectly to weaken its currency.

Well, at least, not yet.

Equipped with fresh positive economic data, the Bank of England's (BOE) Monetary Policy Committee decided to hold interest rates at 0.50% and make no changes to its 375 billion GBP asset purchase program. According to the policymakers, the U.K.'s fundamentals are improving, so there's really no reason to... well, rock the boat. As the old adage goes, "If it ain't broke, don't fix it!"

It all makes sense too. Expanding the quantitative easing program would only give minimal benefits to the economy but greatly increase the risk of higher inflation. The U.K.'s current inflation rate stands at 2.8%, 0.8% higher than its official inflation target of 2.0%. Besides that, analysts are saying that the certainty surrounding future monetary policy is giving a lot of confidence to businesses and households.

Granted it's still too early for the central bank to proclaim that sustainable recovery is happening, but the recent string of good economic data gives little reason for those who resisted further stimulus measures to change their stances.

As I've mentioned a few days ago, the country's GDP report for the first quarter showed that the economy grew 0.3%, which was notably higher than the 0.1% increase the market had initially expected. Moreover, the positive figure established that the U.K. didn't fall into another technical recession.

Leading indicators are also pointing to further growth. Below is a brief summary of the most recent PMI readings:

Even though both manufacturing and construction are still below 50.0 (the level that divides growth from expansion), they both came in much better than forecast. They were also significant improvements from the previous month's readings. The services sector, meanwhile, is healthily growing.

If there's any threat to the U.K.'s recovery, it will come from the outside rather than internally. The euro zone, which is the U.K.'s biggest export market, is expected to contract by 0.3% this year. This could negatively affect demand for U.K.'s exports and hurt the economy's growth.

Assuming good data continues to come in, the BOE will likely keep the current monetary policy in place until Mervyn King gets replaced by a potentially more dovish Mark Carney in July. That being said, next month's meeting (June) will probably be another non-event for the foreign exchange market.

Big George has done it again! The man famous for "breaking the Bank of England" was at it again earlier this week, this time his target being the Reserve Bank of Australia.

It all started last Monday, when a Hong Kong based forex firm received a humungous ONE BILLION USD sell order on AUD/USD. The RBA rate statement was fast approaching and exchange rate at the time was around 1.0320.

Rumors soon circulated that Soros was behind the move, and that Soros was anticipating a rate cut by the RBA. Keep in mind that expectations were for rates to remain steady, and that if the central bank did indeed slash the benchmark interest rate, it would bring the rate down to its lowest level since the RBA's creation. Once word got around that Soros could potentially be behind the move, traders hopped on the bandwagon pretty quickly.

As you know by now, George Soros was right on the money, as the RBA decided to cut rates by 25 basis points due to the central bank's poor economic and inflation outlook. The RBA's benchmark interest rate now stands at 2.75%.

Adding to the intrigue of the deal, Soros apparently pulled off the deal three times with three different forex brokers, taking home a tidy profit of 19 million USD on each. For those of you who don't wanna do the math, that's a smooth 57 million USD!

AUD/USD: 4-hour

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Since the beginning of April, it's pretty clear that the pair has been trending lower. After touching 1.0580, it sold-off heavily, pulled back during the final weeks of the month, and then fell again to make a new 2-month low.

While we can never be absolutely certain where price is headed, based on Soros' bet and previous price action, it seems that the pair is poised to go lower. If major support at 1.0150 breaks, we could soon see AUD/USD back at parity!