When you or I buy or sell a fiat currency, we have no direct bearing on its composition. However, when a central bank buys or sells its own currency it does have a direct impact on the currency’s composition. In buying or selling its own currency, a central bank alters the structure of its own assets and liabilities; hence, its currency becomes ‘good for’ different things.

 

In this article, I explore this peculiar aspect of currency interventions. In particular, I explore how this concept can help us understand the nature of recent interventions in the Yen. Depending on the progress of consensual thought, this understanding may prove profitable for the contrarian investor; traders may be foxed into the wrong positions based on their false premises about monetary matters. If this comes to pass, the contrarian may find profitable opportunities in assuming the other sides of their trades.

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