How do central banks affect the forex? - Part two | Forex Fundamental Analysis

Follow us:

Twitter

RSS

Facebook

How do central banks affect the forex? - Part two

Central banks and their management teams clearly have contradictory mandates to balance low inflation with stable growth and currency stability. They have very few tools to do that job with besides interest rates. One of the additional tools a central bank has access to are its foreign currency reserves. Most central banks use these reserves to back their currency and other liabilities and some will use those reserve accounts to interfere in the FX market.

A central bank maintains reserves of foreign currencies as one of its tools to manage its own currency stability but short term moves in these reserve accounts are not very transparent and are usually not released to the public for some time. However, understanding how these accounts work is helpful from a fundamental perspective to help define the trend in the long term. For example, some economies maintain very high foreign currency accounts not for security purposes but to artificially reduce the value of their currency relative to another. In the video I will talk about some of these banks and how they use those accounts to try and influence the market and other central bank managers.