Forex Lesson 7: Key Market Influences
The Forex market is considered to be the largest market in the world with huge numbers of buyers and sellers. The volume of trade in the Forex market is difficult to monitor because the number of buyers and sellers isn’t restricted in any way, as long as the price is right anyone is capable of buying and selling.
A common misconception is that the major world banks buy and sell currencies to influence or manipulate the market. The reality is that the Forex market is too vast for single entities or banks to be able to control or manipulate. What major banks do try to do is to create a favourable economic climate for their country by buying or selling currencies depending on the strength of their own currency. Large companies with overseas investments or employees will also buy or sell currency pairs to influence their currency’s strength. For instance if a UK company owned a business in Europe they would pay their employees more if the pound weakened against the Euro. To avoid the pound weakening this company may invest in the pound to make it stronger and avoid losing out due to a stronger Euro.
Banks can also influence the strength of their country’s currency by intervening if it begins to drastically devalue. The Bank of Japan has been known to intervene when the value of the JPY was weakening. There are often key signs that a bank is going to intervene and invest in a currency to boost its value and worth. Some traders consider this to be a good indicator and use it to influence their trading, however it is not a recommended indicator and is one that carries a high risk of failure, as there is no clear indication of when the bank will intervene. This makes the increases the risk factor and the likelihood of losing money. It is much safer and recommended to use a method of stop loss as mentioned in an earlier module.
As mentioned above a bank may intervene to boost the value of its country’s currency, this makes the currency stronger and the country more attractive for foreign investments, which in turn boosts revenue and perpetuates the increase in value of the currency. On the other hand a country may wish to devaluate its currency in order to make the country more popular for exportations, as the currency becomes weaker the foreign currencies have more buying power.
The currencies being traded influence the spread, or the cost of the trade. Currency pairs that are in high demand are considered to be more liquid. This simply means that these currency pairs are more popular with more need to cross trade. Pairs such as the EUR/USD or the USD/JPY are examples of currencies that are liquid, there is a high demand for them with many buyers and sellers at all levels making the cost of trading these currencies, or the spread when trading these currencies low. Currency pairs such as the GBP/USD and the CHF/JPY are less liquid as there is less demand for them; this makes the spread when trading these currencies higher.
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