Currency intervention- Pressure has been reduced with the dollar rally

From FT Alphaville:

"Morgan Stanley has knocked up some currency-intervention models to help guide you through the uncertainty.

These are based on the following four criteria:

(1) market mis-pricing of relative growth outlooks;
(2) significant deviation of the real exchange rate from historical trend;
(3) excessive market positioning;
(4) increased momentum in exchange rate moves."

What the dollar rally has done is take away a significant amount of the pressure for intervention. The currency markets now have a 5% cushion to retrace before central banks start to again have that nervous feeling that the dollar has moved too much. We have not explicitly followed this type of model, but we track many of the components that are used in the MS model.

We ask the following questions to measure the potential for intervention:

• What is the momentum or trend in rates? Strong directional moves will be the catalysts for action even though it is called "excessive volatility". Range-bound high volatility will not get the attention of central banks.

• What is the exchange rate direction central banks want?Excessive market positioning is code for carry or short-term capital flows. One way flows will more likely cause intervention by central banks. Carry will often push exchange rates in the direction that central banks do not want.
  

• Are there significant deviations from fair value? Significant deviations from real exchange rates especially if the exchange rate is overvalued is a reason for intervention.

In the near-term we think the potential for intervention has declined. This may change if we again see dollar decline pressure.