ABSTRACT
One prominent factor which increases the probability of a currency entering a partial speculative vacuum is inflation. Beyond two years into the future, it is probable that swap rates quoted forward today can swing within a wide range without any speculator feeling tempted to take an open position. The chapter describes the 3-year forward rate as being within a partial speculative vacuum with respect to speculation of beyond a two-year horizon. On the edges of the speculative vacuum lies a border region populated by speculator-extremists who have markedly different views from the 'middle view' in the market-place about economic developments in Germany and the USA. Unlike in politics, where fine swings of opinion among the moderate centre are all-decisive, in speculative markets where levels of confidence are low, re-groupings of opinion at the speculative extreme are very important to price formation. Speculative vacuums may arise in markets other than the long-term forward exchange markets.
