While Gold still maintained the daily Fix from 1919, the currency breakdown was seen throughout the 1920’s, as exchange rates experienced 500, 1000, 1500 and even 2000 pip daily price changes. The factor that caused such volatility was known as the “Par Exchange Rate”. If US Gold was Fixed at $20.67 per ounce and GBP at 3.17 or 10.5 per ounce then the Par Exchange Rate for GBP/USD was Fixed at 4.8379. If a currency such as AUD/USD at 1919 prices is offered then AUD/USD was priced at 2.3790 and its value at two times didn’t equate to 1 GBP. Further, AUD/GBP was quoted in 1919 prices at 0.4980 or 2.0090 GBP and far less than the stated Gold/GBP Fix at 3.17. AUD/GBP reached a 1920 high of 0.5235 or 1.9102 GBP’s. Enormous volatility occurred due to various Fix prices between and among currencies, price imbalances from the Fix and a demand vs supply issue when economic trade is factored into the equations.

Gold and Currencies share an alliance when the world standard is focused on economic stability to maintain fixed money supplies and price levels. All are fixed. But a new system emerged particularly, because the Gold Fix was suspended from 1939 - 1954, where currencies were pegged to each other or Pegged to a reserve currency. The US Dollar was the preeminent Peg for most nations, GBP secondary. This new system began in the 1930’s as exchange rates barely saw a 10 pip movement on any given day and formalized as the Bretton Woods system in 1944. A 1% Band plus or minus was instituted for exchange rate movements and held perfectly until the free float in 1971. Further, nations such as France and Germany left the Gold Standard in 1936 so assisted this new periodic change.

When currency prices free floated, Gold and Currency prices completely separated. The Gold Fix remained as the normal daily Gold Fix as XAU/USD, XAU/GBP and XAU/EUR and all traveled one way while currency prices traveled another way. The Gold Fix price became a market risk measure Vs its currency counterpart pairs. From an economic perspective, Gold and currencies separate when nations agree to inflate money supplies and allow the free float demand and supply of markets to determine its price.

The currency Fix price had to factor as a separate financial instrument so nations instituted either Banking Associations or central banks directly determined a daily Fix price for not only their own currencies but a whole slate of currencies pertinent to that particular nation in trade terms or by use of Trade Weight Indices for G10 nations. The New Zealand Central Bank for example fixes 17 currencies as NZD/other currency. The European Banking Federation manages bid and ask Fix prices but allows the ECB to calculate and report Fix prices for 23 currencies as EUR/Other Currency. The RBI in India calculates its own exchange rates. The Financial Markets Department in the BOJ calculates and releases Fix prices for USD/JPY, EUR/USD and EUR/JPY. Every nation is different and most important is no two nations are the same.

Fix prices are released at different times each day. The EUR/USD for example is Fixed 10 times per 24 hour trading cycle and 11 times if the US close is factored. Luckily for the EUR, Kuala Lumpur and Singapore as well as Jakarta and Bangkok are always fixed together or two additional Fix prices would add to the list. Tokyo fixes its currency prices after Japan market closes at 3 P.M. to price its currencies in perfect time for European market openings at 7 A.M. Frankfurt or 2 A.M. New York. Seoul fixes its currencies at 2 P.M. Seoul or 6 A.M Frankfurt but always before Tokyo so a daily battle ensues between Tokyo and Seoul to allow the respective Fix price to occur conducive to Tokyo or Seoul. Because Tokyo Fixes occur after Seoul, Tokyo always wins unless Tokyo is on holiday. Some nations win, others lose in the currency Fix price matrix due to times respective markets open and close, relationship to other nations and its geography in the market cycle.

What exists today as the Currency Fix is the result of not only a coordinated price from central bank to central bank, but hardly a deviance exists in the prices. The reason for cooperation is because Fix prices are set in small channels and it holds the currency price in small ranges from market to market. It’s like the Bretton Woods 1% fluctuation band. If currency wars truly existed such as what occurred in the 1930’s to outright destroy another nation’s currency then central banks would fight harder for an acceptable price. Instead, cooperation exists, not collusion but cooperation since formulas to calculate Fix prices reveal small movements from market to market. The only manner to argue currency wars is if large price swings are seen market to market. The currency war would then become a true price war. More importantly, not until the 1980’s and the January 1986 introduction of Libor did the world realize that exchange rates must be viewed as an interest rate.

A Total of 10 currencies were fixed in London known then as British Bankers Association Libor. It was the world standard Fix price as the premiere tradable market rate. From Libor developed currency swaps, Forwards, options European and American, Barrier Options, renewed interest in Eurodollars, yield curves, bonds, ETF’s, Futures, repos, Commercial paper and pure interest rate instruments. The list of financial instruments that developed from the Fix comprises a whole host of instruments with an interest rate focus. It is quite the opposite to what the Gold Fix was about just a few years prior. But then markets began to develop the same instruments but for a longer term. Currency Forwards, Swaps, Eurodollars are viewed and traded 10 and 20 years out, Bonds and Yields for 30.

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