How do currencies balance?

Hi All,
Today lets find out how come currency pairs always keep circling around the same price range and even if they move on to a larger value, it takes place over a period of 20-30 years and not much sooner. Lets take GBPJPY for example. We all know that pound is a very strong currency, yen is weak, the carry trade stuff is also very strong. So why does the pair simply not shoot up and keep going to 300 or 400 or whatever. The pair has a daily range of about 150 pips and so if the trend is so favorable for the longs, it should be able to reach 300 within 2-3 mnths but that never happens. Why?

The value of a currency depends on the underlying economy. The value of the pound depends on the British economy, the value of the yen depends on the Japanese economy etc. This is the reason why the value of the currency pairs change based on the announcement of various economic news pertaining to each country. Now lets assume that GJ pair shoots upto 300 within this month from its present price of 243. Now assume that a exporter in Britain exports a car part and gets paid say 1000 yen per hour of work put in. So today he would be making around 4 pounds per hour. Next month, when the GJ value increases to 300, he would be making less than 3.5 pounds per hour. If he puts in 100 hrs of work for every car part, it means that he loses 50 pounds on each part that he makes.

This is just one example of a single trader. I am sure that all of you understand that this is a very minute and lame example but this is just to show the effect of an uncorrected rise. So in the above situation, the trader faces huge losses and this is the situation for all exports to Japan from Britain. So the money got by Britain through its trade gets hit to a great extent and this immediately reflects on the British economy and you have losses, slowdown etc. in the next month. When this news releases, everyone understands that the economy is in a downtrend and the value of the pound goes down. On the other side, Japanese exports would get a huge boost as previously, for every pound that he got for his service, the manufacturer would get only 243 yen but now he would start getting 300 yen which would lead to a 20% increase in his profits and this would make the Japanese economy very very strong. This would also get reflected in the economic news of Japan and so next month, the realisation would arrive that British economy is weak and Japan economy is strong and so the price of the currency pair would then automatically correct itself to reflect this change.

This is what is happening to all the USD pairs over the past month. EU went upto 1.36 or 1.36 and GU went upto 2.0 due to excellent economic news from Europe and bad news from USA. Now due to this high change in the value, the British and euro economy could not sustain themselves as they dont get the same returns from the USA (monetarily) like they used to while USA got higher returns due to a cheaper dollar. So this month we see stronger economic news from USA and weaker ones from Europe and we see that the currency pairs then have started adjusting themselves.

Please understand that there are other factors involved like rates, inflation, bank intervention etc. but the above is essentially the basic idea why currency pairs restrict themselves to a specific range over a period of time.

Happy Trading!!