The credit and equity markets have been rocked by exceptional events. The currency markets have seemingly been spared of a lot of grief, even though there have been large scale price moves of 20 and 30 percent, but not as detrimental as the events in the other markets. We argue that it is only a matter of time until similarly catastrophic events occur in the currency markets. We argue that central banks have to take a pro-active role in the foreign exchange markets to dampen volatility and prevent big price shocks in the currency market. We are not arguing for large scale interventions, but for an ongoing quantitative intervention strategy to provide market liquidity in the spot currency markets, whenever there is a short-term imbalance of demand and supply. Imbalances of demand and supply have an amplified impact: price spikes trigger margin calls, which lead to a cascade of margin calls setting in train massive price dislocations…
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