Читать книгу Taming the Lion - Richard Farleigh - Страница 19

In September 1985 the world's biggest governments met at the Plaza Hotel in New York and reached an agreement: the US dollar was over-valued and needed to fall.

The effect was stunning. With the market aware of the new “official” preference for a weaker dollar, and some ten billion worth of dollars sold into the market by the governments as a show of force, the dollar dropped dramatically. In the following two years or so, it halved in value versus the other major currencies. An astonishing success for government policy.

However, this success was more of an exception than a rule. In fact, markets are normally too big to be bullied.

Countries of all sizes have often been tempted to try to dictate the value of their currency by intervening in the markets. Sometimes they want to lower a strong currency, but more often they want to prop up a weak currency. In some cases a falling exchange rate can be seen as an embarrassing assessment of political integrity and economic performance.

So governments enter the market with one thing in mind: to move the price. They buy or sell aggressively, and may add to the drama with a big announcement about government policy and commitment. The effect is immediate. Like a shark at a beach they cause widespread panic. Speculators and dealing rooms all over the world scramble to adjust their positions, and the media give the news top priority.

It was in the middle of one such episode a few years ago, when I had the idea to investigate the longer term effect of government intervention. The government was intervening aggressively in the Australian dollar market and there was a flurry of activity around me in the dealing room. Looking at the prices flashing on the screen, I wondered if the market reaction was very long lasting. Sure enough, my subsequent research showed that while falling currencies typically bounce after government action, in less than a month or so, they resume on their downward path and continue to weaken towards fresh lows.

So by spotting this pattern I had found a new, profitable strategy. Whenever the market had this kind of knee-jerk reaction to government intervention, I would bet against it, on the assumption that the bounce was only temporary. I was effectively backing market fundamentals versus the government.

The fact that even governments, with all their muscle, cannot reverse the market has always impressed me. It shows the depth and efficiency of the financial markets.

Keep that in mind when you think that the market price is wrong.