Financial analysis

Fundamental investors and speculators do not necessarily sit easily together. They have different investment aims and parameters, the first looking for regular investment capital gain or income over time, the latter looking frequently for short, quick moves. Granted, this is a gross exaggeration and generalization, but it gives at least something of a flavour for the different dynamics at work between the two investor types. The longer the trend continues the more speculative it becomes in a number of ways. In the first case more and more speculators join the trend, sure of easy money to be had. Equally, however, the longer this trend appreciation goes on, the more damage it does to the external balance and thus the more speculative it becomes in the sense of not being fundamentally justifiable. Real exchange rate appreciation must lead to external balance deterioration. Indeed, fundamental market participants, such as asset managers and corporations, increasingly reduce their currency risk for the very reason that there are such fundamental concerns. The ability of speculative inflows to offset fundamental outflows from the currency is increasingly reduced. Because of this increasing tension between fundamental and speculative flows, option implied volatility picks up in the face of increasingly choppy and volatile price action.