Portfolio Performance : +25.34%

US Dollar Barometer stands at 0, down from the +2 in my last update

Trade Recommendation : Sell USD/JPY

Bottomline : The equity market is set to deteriorate further, commodities might slide a bit but not that much. I dont expect the market to falter in the beginning of the week, the weakness might start toward the middle of the week.

I would like to highlight some research on forex markets by Peiter Van Foreest, from The Forex Regime and EMU Expansion, 2003.

In that paper, Foreest found that the choice of the foreign exchange regime is not of first order importance for achieving high real (economic) growth. Empirical evidence showed that production growth was unrelated to the amount of forex volatility and choice of currency arrangement. Rather, the volatility of the currency was determined by the current and the (market's) anticipation of monetary and fiscal policy. Therefore, a flexible forex system can be very stable if the monetary and fiscal policies are coherent with the market's forex rate valuation. Conversely, a managed float or fixed forex arrangement can be quite unstable.

I beg to differ, I think a managed FX system is dependant on the country's financial system vulnerability to external shocks. I think larger countries can afford to adopt flexible target interest rate policies, while smaller countries like Singapore should continue to lean against the wind.

The other thing he said in his paper, was that the stability of the currency would happen if it was coherent with the market's forex rate valuation. I think this should be applied by central banks in their monetary policy. Perhaps one of the reasons why we had such volatile movements in currencies is because the central banks surprise us! We never expected the Fed to cut rates so aggressively, so we had such big moves in the currencies and commodity markets. I think central banks should continue to voice their expectation for interest rates continually with the markets. The financial system is deteriorating. Enough of surprises and shocks, we need something credible and steadfast to hold on for support.