Trading forex can be a challenging, exciting and profitable activity for investors who take the time to learn techniques and rules associated with these international transactions. One thing every new trader should learn about is the role of central banks. The world’s biggest financial institutions make the rules for trading, brokerage, exchange and all other forms of monetary activity in their respective nations.
So, when anyone wants to buy yen, for example, and sell U.S. dollars, the trade will touch the economic laws of two countries. The good news is that all the central bankers have worked out protocols and agreements so that currency trading can take place almost instantaneously. Still, it’s important to know the role of these entities, understand how powerful they are and see which ones are the dominant forces in the global marketplace.
Foreign exchange traders need to stay abreast of all international banking news in order to know about interest rate changes, currency supply changes and other rules that have a direct impact on the health of a particular nation’s money. Reading about international banking can help you see what lies ahead, for better or worse, for a nation’s economy. That way, you can make your own predictions about the strength or weakness of the yen, U.S. dollar, peso or whatever you intend to focus on.
What Central Banks Do
Central banks are, in essence, agencies of the governments they represent. Their primary role is to keep their nations’ economies running smoothly and to regulate the currency in their respective countries. Most of them also play a key role in maintaining a delicate balance between imports and exports, avoiding inflationary pressures, and boosting domestic economic growth.
When it comes to the major financial markets, they play a pivotal role. This is especially true for foreign exchange. Every national banking institution strives to keep their local economy vibrant and healthy. At the same time, they work on the other side of the ledger to help their homeland remain competitive in the international arena.
Of the many tools the big banking institutions have at their disposal, three are of key importance, which are carrying out monetary policy, setting lending rates, and acting as a lender of last resort. In most cases, when economists speak of monetary policy, they refer to the control of national money supply. By expanding and contracting the supply of a domestic currency, bankers are able to directly control the size of their economies.
The Big 8
Anyone who plans on opening a forex trading account should know about the big 8. The term does not refer to a sports league in this context but to the eight largest central banking institutions that make all the rules for traders. Keep in mind that even though most every nation on earth has its own central bank, these eight are the those whose rules cover about 98 percent of all foreign exchange transactions. In order of size, they are:
- U. S. Federal Reserve
- Bank of England
- European Central Bank
- Swiss National Bank
- Bank of Japan
- Bank of Canada
- Reserve Bank of Australia
- Reserve Bank of New Zealand