Posts Tagged ‘currency intervention’

26.12.2011 Post in Trading

After the gold standard was cancelled, the world economy switched to the floating exchange rates. Since then every currency price is the result of the free interaction between its demand and supply. The demand for the currency is formed under the influence of such factors as the necessity for goods import, investment attractiveness of the country, currency reliability, etc. The supply is determined by the national export volume, loans, etc. intervencia

However, it does not mean that there are no exchange rate regulation measures. Each country government is interested in maintaining their currency price on the acceptable level (to avoid the negative influence on the national economy). Previously IMF watched over exchange rate policy of counties in order to maintain the economy stability and consider common interests. Now this supervision has become less strict, so, when carrying out any intervention, counties should follow only several principles developed by IMF.

Currency intervention is a strong instrument of central banks. It is interference in operations on the exchange market in order to influence national currency exchange rate. It is usually a result of currency selling or purchasing. There are also coordinated interventions when banks are operating together.

Reasons and consequences of intervention can be absolutely different. Currencies are traded in pairs, so everything is interconnected on the market. When some currency appreciably loses or strengthens its position it influences other currencies. Sometimes sudden movements happen on the market because of some circumstances. In that case carrying out gradual adjustment is impossible and banks must give quick response to the market circumstances by making currency intervention.

Traders should take in account such events because interventions can contribute both to the investment capital growth and reduction. If there is a probability of intervention skilful traders can be ready for profitable positions opening and taking considerable profit.

When waiting for an intervention, sometimes it is necessary to act against the trend, and it is always a risk. That is why it is better to use a low leverage, put stops and remember capital management rules.

Very often interventions are sudden or hidden. Not always central banks divulge information about interference in Forex, sometimes such information is delayed. However, a trader has several instruments which help forecast intervention probability. The fundamental analysis and news tracking are necessary to be aware of the world economy events. Secondly, often international leaders hint at intervention possibility, so it is very useful to pay attention to their declarations. Thirdly, read analytical reviews and forecasts of professional analysts who represent large banks and companies. Finally, experts note that often banks vary out interventions when the price reaches the level of the previous intervention.

By the way, intervention can be carried out to curb or strengthen the trend. Interventions against the trend are not always successful because sometimes even banks cannot resist the market.

Added by Daniel Shchagin,

InstaForex Clients’ relationship manager