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FX Markets Dominated By Central Banks, Governments

The FX markets are dominated by the actions of Central Banks and Governments in the post-2008 crisis world. Much of what drives the FX markets today is the result of what politicians say and do, instead of capital flows and economic factors.

The capital flows in and out of countries are being driven by decisions taken by central banks and governments. These are largely political decisions, and happen outside the realm of economic factors and capital allocation decisions.

This has made trading much more difficult. Instead of predicting fundamental economic factors and the response of capital flows to these factors, the active hand of government intervention must be taken into account - and how large players might react to those decisions.

Simply look to Europe as the extreme example. Much of what happens with the price action of the euro will be driven by the actions of governments and the ECB, the timing of those actions, and the commitment of the government to follow through with the actions. These are nearly all political decisions, with very little actual economic or financial information making much of a difference at all.

The FXE and EURUSD are driven by political outcomes and statements instead of the relationship between European fundamentals and capital flow response.

This is just one currency, but look to any currency and you'll find politics play a far larger role in determining currency levels than pre-2008. Japan, the U.K., Switzerland, Australia and New Zealand, China, Emerging markets like Brazil - all of these have currencies which have been massively impacted or even dominated by the active hand of government.

This is very different than the environment pre-2008, where government actions were less frequent, typically more predictable, and less extreme.

Many of my trading friends and colleagues are weary of creating trading scenarios - only to have them dashed by some new announcement or program. We've all become analysts of the political situations as they relate to the currency markets, instead of a market action and capital flow analysts.

As you are formulating any trading scenarios for the FX markets - or the interest rate markets - keep in mind a major force determining the outcome will be government actions.