It is the Central Banks and their monetary policy that run the show when it comes to driving the currency markets.
It is the Central Banks job to ensure that their economy is performing well so any action they take will have a major impact on their currency.
The main tools they use are interest rates, money printing and asset purchases. They use these tools to either stimulate or slow down their economy and this action will impact their currencies. It is a cause and effect.
If for example the US economy is performing well, showing a high growth rate (not too high), strong employment and stable inflation (around 2%) this should in theory be good for the US dollar and the FED will not get too involved.
However, they will review the many economic reports that come out every week and based on this data (positive or negative) they will take whatever action they see necessary to keep their economy strong.
At times of economic stagnation or financial crisis they will bring out the big guns by reducing interest rates to zero, printing trillions of dollars and purchasing every corporate bond that moves to stimulate their economy.
The FED, the European Central Bank and the Bank of Japan have been taking these actions for years now. A zero-interest rate policy, which should mean weak currencies across the board, however, this is not always the case.
The reason for this is that if interest rates are low; the national currency will not be attractive to foreign investors and as such the demand for that currency falls and as a result, its value will drop.
The reality of all of this is that no Central Bank wants to be seen to be directly manipulating their currency even though this is what is happening because of their actions.
A weak currency helps a countries export market, and this is the one of the hidden motivations behind these central banks’ actions.
All of this is slowly changing as Central Banks are currently in the process of raising interest rates by miniscule amounts and/or reducing their bond purchases.
They are doing this even though they have not achieved their goals, as inflation and growth rates are still dragging along the floor across the US, the Euro Zone and Japan. They need these tools for the next crash!
It is a common strategy to keep interest rates low and keep a currency weak to entice outside investments, however, this spurs further competition from other central banks who may opt to do the same.
To better understand how to identify good trading opportunities, fund your account with CMTrading and get access to our 6 Part “Make Me A Trader’ program.
YOUR COUNTRY IS BLOCKED