US Dollar Barometer stands at +1
Trade Recommendation :Sell AUD/USD
Bottomline : Equities having a tough market. Gold has surged, as expected. The US dollar bulls are fighting, but I think the longer US dollar outlook is negative. The recent Bond rally might weaken a bit on higher yields. Commodities might stay supoorted but the longer term outlook for the asset is negative
Today, I wish to highlight work on "Exchange Rate Regimes : Middling Through" by Ashima Goyal (2006)
In the paper, Goyal says that most emerging markets are moving towards a regime that has higher exchange rate volatility and lower interest rate volatility. In his study of emerging markets, he noted that many countries have adopted a limited flexibility and managed float exchange rate regime. (see below) Independant float regimes have actually fallen
In looking at interest rate and FX volatility of various countries, he noted that a desirable characteristic of intermediate regimes would be to have low FX and interest rate volatility. Interest rate volatility should be lower than FX and be allowed to respond to domestic cycles, as their smoothing would minimize banking crisis, facilitate smooth working of the financial system and lower the burden of government debt. (Maybe Bernanke should have read his paper)
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