Divide and Conquer


Those of you currency traders old enough to remember the US Federal Reserve Chairman before last, Mr Paul Volker, will have a wry smile when being reminded of his tactics in the financial markets. When Mr Volker took the top job, the US economy was in a mess, interest rates were all over the place and the strength of the US Dollar was a worry.
Mr Volker surmised that the problem was that the financial markets were very much in control. The way he was able to take back control of the financial markets was to send out officials that included the US Treasury secretary and the various heads of the Federal Banks with different messages about what the Federal Reserve was going to do. Press conferences and speeches were reported in great detail, with all giving out different messages.

The forex markets became so confused, reacting to each comment and headline, trying to second guess the future, the focus came off the actual Federal Reserve actions. So the Federal Reserve was able to take action in its own time and soon became the currency market leader rather than the currency market follower. Divide and Conquer.
The Deutsche Bundesbank employed this tactic with great success in the 1990’s to enforce their control over the forex markets and ensure a strong currency. Is the ECB (European Central Bank) starting to employ this tactic on the financial markets now?

Don’t be fooled by the sound bites, actions speak louder than words.