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Welcome back!

I invest in the forex markets, and I pursue a carry trade strategy--going long in relatively high-overnight-rate currencies and partially funding that by shorting low-overnight-rate currencies.

I fail to see a connection to AD or a sense of what it signals, and I am not alone. The forex markets markets are dominated by people like me. We couldn't give one wit about AD. The CB wants to give us money, great. For this reason, wide-spread knowledge of the carry-trade has failed to stem its profitability. Its the CBs that keep losing by their perpetual open-market activities that sustain the arbitrage opportunity.

Your umbrella analogy is spot on.

The Bank's haphazard attempts to jawbone the dollar down are percieved as nothing more. No one seriously thinks the Bank has the ability to lower the dollar, though (as Stephen noted) they can. Even if people accepted that they could, and they wanted to, there is also the perception that the Bank will be unsuccessful.

This Bank is afraid of it's own shadow, and everyone (especially the forex traders) know it. I think Jim Stanford (I know I know...) recently wrote that the loonie would drop 20 per cent the day after the government appointed him Governor of the Bank.

Thanks Stephen!

Jon: But when you do the "carry trade", don't you worry that the exchange rate will tend to move against you? And don't you worry that changes in AD might matter because they affect the exchange rate?

Mark: If Jim Stanford were appointed Governor, and permanently, that would be different from the Hawks' temporary takeover. First, obviously, because Jim is a dove, and the Hawks are hawks, so they are moving in different directions. But second, and less obviously, because if Jim stayed there he would presumably change the inflation target from 2% to higher (or try to target low unemployment). That would definitely cause a depreciation of the Loonie.

But if I am right, then paradoxically, a temporary takeover by Jim might cause the Loonie to appreciate!

That is not my experience. Many CBs issue sterilization bonds to regulate the movements of exchange-rates despite the pressures of the carry-trade and relative inflation-rates. The primary source of risk arises from panic volatility. Exchange-stabilization of sudden and severe moves is often too late. You've already lost your shirt.

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