Portfolio Performance : +25.73%

Actions : I exited my short USD/CHF position, helping the portfolio to recover its performance

US Dollar Barometer stands at +1.5

Trade Recommendation : Long USD / CHF

Bottomline : I think equities are set for a near term bounce. Commodities are also taking a pause from their decline. Market might trend range bound. Signs of fatigue is appearing.

Christelle Lecourt and Helene Raymond in Central Bank Interventions in Industrialized countries : A characterization based on survey results, 2006 did an interesting work on central bank interventions

Central Bank Interventions (CBI) seem to have negative effectiveness from empirical research. The main findings are that FX volatility have increased rather than been reduced, where the FX interventions frequently move in the wrong direction. Interventions done in coordination with other central banks have a larger impact than unilateral interventions conducted by a single bank. Several studies have also shown that the Central Bank statements - accompanied or not by actual interventions - can have a stabilizing effect on the exchange rate.

In theory, there are 3 channels through which interventions can act on the exchange rate : the monetary channel, the portfolio-adjustment channel and the signalling channel

1. The monetary channel involves non-sterilized of foreign exchange interventions, which is basically involving the changing the foreign exchange policy which leads to a change in the monetary policy and a change in the monetary base

2. The portfolio balance channel predicts that selling foreign foreign currency reserves will appreciate the domestic currency, whereas increasing reserves should depreciate the domestic currrency. Obstfeld (1982) has shown that however that in a Ricardian world, sterilized interventions can be ineffective even in the short term : it does not change the net wealth level of the private sector, nor its perceived composition. Empirical studies find no evidence that interventions alters exchange rate levels through a portfolio-balance channel - the main reason is that intervention amounts, although appear paramount are rather small when compared to the total daily activity in the foreign exchange market.

3. According to the signalling theory, central bank's interventions can recover some efficiency through the signal they convey on future policy. In the signalling theory, exchange rate levels are likely to be disturbed in the short term only if the information received by traders is strictly non-anticipated. When a central bank intervenes in the FX market, it conveys a signal, which indicates for instance a change in future monetary policy. If this signal is expected by the market, the information given by the signal is already incorporated in the previous day's spot quote. By contrast, if the signal is "new", it will immediately change the current FX value.

According to the authors, through their survey of central banks, the signalling effect is clearly put forward as the main channel through which intervention should work. Other characteristics found in the survey was that central banks choose large size interventions and stress on international communication and concerted interventions as means of ensuring effectiveness. Second, they prefer domestic banks as counterparts to help maximize their announcement efforts. Third, most central banks do not use secret interventions.