The Forex markets have seen a new entrant, the likes of the Central Bank now getting directly involved in their respective currencies. Being the largest institutional liquidity provider, the role of the Central Banks has become increasingly influential in the forex markets. If interest rate decisions was the primary tool, we are now in the age of direct market intervention in the likes of quantitative easing or asset purchase program. It is no wonder then that monitoring the policies of these large institutions, from a trader’s perspective is imperative.
Commonly referred to as currency wars, a case in point can be derived from the US Federal Reserve Bank, which (along with other Central Banks) started injecting money into the financial markets (QE). If earlier the Central bank minutes was to be seen only as a policy guidance, especially in regards to inflation and interest rates, we now have Central Banks directly influencing their respective currencies in a bid to boost and drive growth. The most recent FOMC minutes where Bernanke talked about tapering saw the US Dollar rally against all of its peers, which just goes to impress on the importance of central banks in the spot fx markets.
Besides the Federal Reserve, a classic case can be derived from the Bank of Japan’s policies to embark on what is now touted as ‘Abeonomics‘ to drive down the value of the Yen. Besides the Fed, , ECB, BoJ, BoE, RBNZ, RBA, BoC including central banks from emerging markets have all been directly involved in setting the direction of their respective currencies. At this point, most of the central banks have been dovish, putting the onus on the US Federal Reserve, which last month announced tapering its QE program towards September this year.
While economic data continues to be the primary driver of the markets, the Central bank’s have become increasingly active in the spot forex markets and cannot be ignored. As such, traders should pay attention to interest rate decisions, policy meeting minutes as well as the Q&A post the conference in order to understand the intentions of the Central Banks. Staying on the right side with the Central banks is a simple strategy, at least for the rest of this year.
To quickly recap:-
- We have a dovish outlook from BoE’s new Governor, Mark Carney. A weaker GBP is essential for the UK to drive growth
- It is widely expected that Bank of Canada might be the first to introduce an interest rate hike in the next 6 – 8 months
- The Fed has made it clear to scale down their asset purchase program towards the end of this year with a possible stop by mid 2014
- The RBNZ has a harsh outlook for the Kiwi Dollar, making its intentions clear to put a stop to any Kiwi rally
- The SNB so far managed to put a floor on the EURCHF at 1.20 thus clearly proving that the Central Bank does indeed get its way