Why spread betters should fear politicians

No matter how thorough your analysis, if politicians get the notion they can take on the markets, you could get your fingers burnt.

Last week, the forex markets had a 'King Kong versus Godzilla' moment. The Japanese authorities, annoyed at a strengthening currency, suddenly decided to take on the might of the markets. The intervention, aimed at weakening the yen - Tokyo sold an estimated 1.8trn (£13.5bn) just last week -highlights something it's easy to overlook as a spread better: political risk. Plenty of short-term traders got their fingers burnt.

Doing your homework on, say, interest rates (higher relative rates tend to push up a currency) and other economic indicators that influence a currency trend is vital. But when it comes to politicians, normal market logic can sometimes go out of the window, and what looked like a sure-fire bet from a fundamental analysis can backfire.

There are countless examples of politicians meddling where they probably shouldn't, trying (and usually failing) to beat the market. Witness the UK government's futile attempts to keep the pound within the European Exchange Rate Mechanism back in 1992, or Gordon Brown's ill-timed sales of half the UK's gold reserves between 1999 and 2002.

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Now it's Japan's turn to try and turn a tide of upward momentum behind the yen.

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Whether or not it worked as intended, last week's intervention caught a lot of traders by surprise it was the first large-scale currency intervention in six years. Quite a few probably assumed that the Prime Minister wouldn't carry out his threat of "decisive" action.

The message? You never know quite where and when politicians will attempt to temporarily skew the markets. So keep a watchful eye on the political, not just economic, news and use stop losses to reduce the damage should you get wrong-footed.

Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.