Aug 24 2009
Most of the companies and businesses need to import raw materials for production or export their finished products. Companies and businesses need to pay for goods and services that are denominated in other currencies. These companies and businesses deal through their banks instead of directly accessing the interbank market since they deal in smaller quantities of forex transactions. Learn
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In addition to paying for the goods and services, these companies and businesses also have hedging requirements. Large trade flows impact the forex markets as they tend to influence the supply and demand of currencies.
Sometimes these companies and businesses also take part in currency speculation in order to generate additional revenues. Cross border Mergers and Acquisitions (M&A) also tend to have a short term effect on the currency prices.
Currency conversions are involved in these M&A activities as these companies relate to different countries and involve sizable cash transactions. M&A between large multinationals usually involves huge amounts of money something like in billions.
As a forex trader you should be aware of any M&A deals that are likely to affect your trading. Major cross border M&A deals often involve change in the trading decisions of speculators as they anticipate a temporary shift in supply and demand of currencies involved.
Examples of some important central banks are the US Federal Reserve Bank (FED), the European Central Bank (ECB), the Bank of England (BOE) and the Bank of Japan (BOJ). Central banks play a very important role in the forex markets as they hold the key to the supply and demand of national currencies. FED is the most influential central bank due to the global reserve currency status of US Dollar.
Monetary policy involves the setting and adjustment of interest rates. Central banks are mostly concerned with the inflation, growth rate and unemployment rate in the national economies. For this they use the monetary policy.
Central banks normally don’t fix the exchange rate of their currencies. Sometimes, the central banks have to intervene directly in the forex markets especially if they are not satisfied with the currency exchange rates of their currencies. In this regard Bank of Japan (BOJ) is the most active central bank in intervening in the forex market.
Japan is an export oriented economy. A weaker Yen is always helpful in stimulating exports. Hence, if the BOJ thinks that Yen is getting stronger relative to US Dollar or Euro, it may sell Yen in the forex market to deliberately bring down its price relative to US Dollar or Euro.
This intervention by the BOJ may cause other institutional players to follow suit and further drive down the price of Yen to that desired by the BOJ. Central bankers also use verbal comments about the state of their national currency exchange rate also in order to achieve some results. So central banks have many tools at their disposal that they can use to achieve the desired currency exchange rate that they want.
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