It has been mentioned severally that the banks are the biggest players there is in the forex market; and the market is so huge. So how exactly do they exert so much influence on the forex market to the point of being tagged the major player? They have a strategy they use for forex transactions; and it is aimed at
What commodity is to be traded
When it should be traded
How it is traded
These, in addition to their hyper productive trading skills and resource, give them great leverage over forex the forex market.
There are three different categories of banks that operate in the forex market; they are the central, investment, and commercial banks. For the purpose of this article, focus will be on the central banks and what functions they carry out that can affect the forex market
THE CENTRAL BANKS:
These are the major key players in the forex market, and they carry out several functions which directly affects the forex market. Some of the functions are related to quantitative easing, devaluation, and in interest rate.
Back in 2008, the world struggled with financial hardship that could result to total collapse of the global financial system. All conventional monetary policy stimulants at the time were failing, and it was time to come up with something new. So the central banks devised an unconventional policy action to prop up and boost the market confidence. Quantitative easing can be in different forms, but basically has to do with the Central banks investing in government commodity.
The central banks sometimes deliberately reduce the value of a nation’s currency for certain reasons. The central banks are vested with that much power to increase or decrease the value of a currency so long as it is to the benefit of the nation.
Setting the interest rate of a currency is the responsibility of the central banks. This is a way of controlling inflation/deflation, as well as determining the bond rate of a country.
If the central banks also trade the forex market, and they are charged with the responsibilities above, it is pretty easy for them to know when to go long and when not to. Take interest rate for instance, any slight change in it can affect the market and cause a lot of investors to either lose or make some profits. To those that cannot read the handwriting on the wall, or do not trade with the bank trading strategy, a change in interest rate may not work in their favor. But those that are aware before time (like the banks) can trade accordingly to make it work for them.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.