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Hey everyone, Michel from Real Vision here.

Saw the Michael Pettis/Kyle Bass interview this morning and almost instantly felt like I was back in grad school! They mentioned the Impossible Trinity and it got me thinking about our Exchange here...

As individuals who observe the FX markets for one reason or another, understanding capital flows and the relationship they have with interest rates and exchange rates is absolutely fundamental.


How many of you remember the Mundell-Fleming Trillema, also referred to as the Impossible Trinity?

Here is a quick recap: Lets imagine you run a country. Ideally, you’d like to keep the exchange rate stable so that import/export prices aren’t all over the place. Second, it would be nice to control interest rates so that you can appease both savers and borrowers. Lastly, it would be perfect if money could flow in and out of your country without too much friction.

The issue is you can’t do all 3. Why? Simple- Here is 1 scenario: If you lowered interest rates in your country in the hope of boosting domestic investment and lowering unemployment, there is a good chance capital will flow out in search of higher yields. This in turn would cause your exchange rate to fall which theoretically would create inflation. Under such circumstances you’d be forced to raise interest rates again. See the problem?

Here is the breakdown of your choices. (Most countries have gone with option B.)

  • A = Fixed exchange rate + free capital mobility
  • B = Free capital mobility + monetary autonomy... (More)

EUR/AUD Setting up for a breakout?

I previously posted about EUR/AUD being in a range.

Price is now approaching the upper level again, with plenty of momentum in the move up IMO.
I am already in a trade from the break of the 3 week Symmetrical Triangle, and price consolidated at the back end of last week after I entered.
I would add to my position if I see price move & close through the June highs.

I like the AUD short idea (also posted previously), and am also in a AUD/CAD short (stop at breakeven).

Interested to see if anyone else is looking at this from another angle, or completely disagrees, as that is the other side of the trade I need to understand.


"It may affect the USD-gold-price as their is additional demand for gold, right?" This is my understanding, as gold will be purchased on the open market

If you want to bet on policy stimulus, bet on the assets that they are pointed towards. In today's On the Daily, we discuss why we aren't in favor or EMFX carry trades.