The Anatomy of Foreign Exchange Intervention

Jim Sinclair, www.jsmineset.com  08/13/08

[As often, Mr. Sinclair's analysis/comments are a bit opaque, but most observers of recent dollar/euro/gold market behavior will get the gist of his understanding from this latest offering.]

We have just witnessed the first massive act of intervention coming off the .7199 USDX and $1.5974 Euro. We have covered why this happened and its meaning in terms of the instatement of currency parities, albeit this time on a floating basis.

Now you need to understand how intervention works when repeated over time:

1. Currency intervention is like being addicted to a controlled substance. Your first experience at the height of the controlled substance produces mind-altering feelings and emotions. From this point forward you require more and more of the controlled substance to reach anything near the first experience. When you fail to get the fix, the pain and/or downer is unbearable.

2. Each subsequent experience of foreign exchange intervention demands more vocalizing and funds. That being said, you have just seen the most success you will see in the Euro via intervention - and thence gold

3. Eventually it becomes much too expensive to sell a more valuable and appreciating currency in return for fundamentally weak and therefore depreciating dollars.

4. The operation loses capital input because it is the reverse of what central banks in the East wish to be a part of.

5. The operation runs out of capital as one central bank after another uses intervention to covertly unload US treasury instruments into demand.

6. The operation runs out of power as the market senses a wounded strategy. The seven trillion dollar a day turnover in the world dollar market now fades it. That means taking the opposite position to the desired impact of the intervention earlier and earlier in the process.

7. Eventually the operation moves to 75% verbal intervention and 25% capital-driven intervention.

8. As the price of the fade comes in closer, the power of the strategy weakens. The USD troops will move up in price as a secondary line of defense for the ongoing operation.

9. Eventually the strategy fails at that level. This is why you have heard many times that intervention in foreign exchange markets always fails. Intervention in foreign exchange markets never has nor ever will change the trend in any currency.

Intervention can only have legs when it floats the temporary parities in the direction of the major market trend. Understand this and you will understand why and how much of an influence the strategy will produce. When the vocal instruments get louder, the reactions become smaller until the strategy at that level of floating parity is checkmated by the world marketplace