Foreign currency prices and monetary policy

<body><table border="0" cellpadding="0" cellspacing="0" width="100%"><tr><td> <font face="garamond, times new roman, times" mstheme> <p> Liquidity </p> <p> </p> </font mstheme> </td></tr></table><table border="0" cellpadding="0" cellspacing="0" width="100%"><tr><td valign="top" width="1%"><font face="garamond, times new roman, times" mstheme> <p> </p> </font mstheme></td><td valign="top" width="24"></td><td valign="top"> <p>This page uses frames, but your browser doesn't support them. </p> <p><strong><font face="Arial Narrow" size="2" color="#C0C0C0">Forex: Liquidity</font></strong></p> <p><strong><em><font face="Arial Narrow" size="2" color="#00FF00">Buy on the up arrows,</font><font face="Arial Narrow" size="2" color="#C0C0C0"> </font><font face="Arial Narrow" size="2" color="#FF0000">sell on the down arrows</font></em></strong></p> <p><strong><font face="Arial Narrow" size="2" color="#C0C0C0">This tool is intended to predict exchange rate movements based on government policies, using data on monetary policy available at the time, specifically comparative real interest rates and real effective exchange rates, as calculated by PIT for all countries in the database. For comparability, exchange rates have been rebased to set year-end 1994 at 100.</font></strong></p> <p><strong><font face="Arial Narrow" size="2" color="#C0C0C0">In each chart the currency index is shown as </font><font face="Arial Narrow" size="2" color="#FFFFFF">the thick white line</font><font face="Arial Narrow" size="2" color="#C0C0C0"> on the right hand axis, as is the real effective exchange rate. The first explanatory variable, domestic less foreign real interest rate, uses the left hand axis, shown as </font><font face="Arial Narrow" size="2" color="#FFFF00">the thin yellow line</font><font face="Arial Narrow" size="2" color="#C0C0C0">. Best Guesses as to the future direction are shown as </font><font face="Arial Narrow" size="2" color="#FF0000">red arrows</font><font face="Arial Narrow" size="2" color="#C0C0C0"> alongside the currency. Unlike other explanatory variables, the second one,  the real exchange rate, shown as </font><font face="Arial Narrow" size="2" color="#00FF00">the light green line</font><font face="Arial Narrow" size="2" color="#C0C0C0">, uses the rights hand axis, because it is indexed on a comparable basis to the actual exchange rate, that is to say both are equal as at year-end 1994.</font></strong></p> <p><strong><font face="Arial Narrow" size="2" color="#C0C0C0">Depending on whether the investment perspective is Dollar-based or relative to a global benchmark, the relevant foreign data are those for the United States or a GDP weighted global average.</font></strong></p> <p><strong><font face="Arial Narrow" size="2" color="#C0C0C0">This tool works on the assumption that governments rarely make a change in policy all at once, but spread out over a number of intermediate steps, so the effects of a change create a trend over time that investors can exploit. However, in times of crisis this is not the case. </font></strong></p> <p><strong><font face="Arial Narrow" size="2" color="#C0C0C0">Buy signals are generated when two conditions are met - the real effective exchange rate is depressed and real interest rates begin to rise compared to international levels. Sell signals arise when the converse applies. Noise reduction methods have been employed to minimise the number of signals. Please note that this system may not catch all important moves.</font></strong></p> <p><strong><font face="Arial Narrow" size="2" color="#C0C0C0">Owing to the conversion of legacy currencies into Euros, analysis is provided on the common currency, rather than for individual countries. Historical data is provided by creating synthetic GDP-weighted time-series for the component currencies, expressed in the European Currency Unit.</font></strong></p> <hr color="#FF0000"> <p align="center"><font size="2">[ <a href="global_asset_allocation_sitemap.htm" target="_top">Site Map</a> ] [ <a href="index.htm" target="_top">Home</a> ]</font><font size="2" face="Arial"><br> </font><font size="2">[ <a href="Chart_Library.htm" target="_top">Chart Library</a> ] [ <a href="ChartLibrary_foreign_currency.htm" target="_top">Forex Charts</a> ]</font> </td></tr></table><table border="0" cellpadding="0" cellspacing="0" width="100%"><tr><td><font face="garamond, times new roman, times" mstheme> <p align="left"><font face="Arial Narrow" size="1" color="#C0C0C0">Copyright © 1999 Professional Investment Tools Ltd., authorised by the Financial Securities Authority. An Independent Financial Adviser. Please read Financial Health Warning and Licence Agreement. UK laws apply exclusively. Principal sources: Consensus Economics, Corel Corp., FIBV, Global Financial Data, PIT, national governments and stock exchanges. Information and opinions are based on sources believed to be reliable and accurate. However PIT does not guarantee this to be the case, and does not accept liability for any loss arising. This is for information only and does not constitute a solicitation to deal in any securities. Opinions are liable to change. Past performance is no guarantee of future success. Last modified: January 05, 2001</font><font face="Arial Narrow" size="2" color="#C0C0C0"><strong>.</strong></font></p> </font mstheme></td></tr></table></body>