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Central bank

In the foreign exchange market, the Federal Reserve has long been known as the interbank market. This term reflects the nature of inter-bank foreign exchange transactions. Banks include central banks, investment banks and commercial banks. Here is the main introduction to the Central Bank. The central bank refers to a country's major monetary authority, controlled by the central government, responsible for issuing currency, formulating monetary policy, interest rate policy, exchange rate policy, and managing and supervising the private banking sector.

Eight central banks of the world economy

US: Federal Reserve Bank (USD) The US Federal Reserve Bank is the most influential bank because the US dollar is the most frequently traded currency. The Federal Open Market Committee (FOMC) of the Federal Reserve Bank of the United States determines the interest rate, which consists of seven members of the Reserve Board and five members of the 12 local reserve banks. The Federal Reserve Bank holds eight meetings a year. Its main official is the chairman of the Federal Reserve Bank. There are 12 local federal reserve banks in the United States to more effectively regulate economic operations.

The FOMC committee meets every six weeks. The FOMC includes members of the Federal Savings Board and is subject to common designation and approval by the President, Congress, and the Regional Federal Reserve Bank President. The FOMC decision was strictly monitored by US and foreign investors as it gave investors an economic indication that could be used to predict the likely direction of interest rates.

The European Central Bank (EUR) The European Central Bank was established after the establishment of the euro system in 1998. It is designed to oversee the operations of other European central banks, such as the Bank of France and the Italian Foreign Exchange Administration. The European Central Bank also has a group similar to the FOMC to help determine where monetary policy needs to be corrected. The committee is known as the Management Council and is composed of six members of the Executive Committee of the European Central Bank, and also includes the National Bank Governor of the European currency. The Council meets twice a week, but only at the 11th meeting. The chief executive of the council is the president of the European Central Bank.

The Bank of England (GBP) Bank of England consists of the Monetary Policy Committee. It consists of 9 members: 1 president, 2 deputy presidents, 2 executive directors and 4 external experts. The head of the Bank of England is the president of the Bank of England. The Monetary Policy Committee meets once a week to discuss policy shifts.

The Bank of Japan (JPY) Bank of Japan is also composed of a committee, including the Bank of Japan Governor, two Vice Presidents and six other members. They meet once or twice a month, and the head of the Bank of Japan is the president of the Bank of Japan.

The Swiss National Bank (CHF) Swiss Bank's committee is small, has only three members, and is relatively conservative in terms of interest rate changes. The committee meets quarterly and its head is the chairman of the Swiss National Bank.

The Royal Bank of Canada (CAD) Bank of Canada committee is the Management Board. The Management Board consists of the Governor of the Bank of Canada, the Senior Vice President and four Vice Presidents. The committee meets eight times a year and its head is the president of the Bank of Canada.

Reserve Bank of Australia (AUD) The Reserve Bank of Australia is comprised of the Monetary Policy Committee, which includes a central bank governor, deputy governor, financial secretary and six independent members directly appointed by the government. The committee meets 11 times a year and its leader is the Governor of the Reserve Bank of Australia.

The National Bank of New Zealand (NZD) National Bank of New Zealand is different from other banks and has no committee. In fact, all monetary policy rights are controlled by individuals: the central bank governor makes eight decisions a year.

Central bank set interest rates

The central bank, also known as the Reserve Bank, plays a vital role in setting interest rates. The central bank wants to achieve monetary and financial stability (such as controlling inflation) and maintaining overall economic growth. Their basic responsibility is to regulate the monetary policy of a country or group of countries (referring to the EU). Monetary policy refers to various currencies that effectively control and manage circulation in a country.

In the foreign exchange market, interest rates play the most important role influencing the change in monetary value. Since interest rates are set by institutions, the central bank is therefore the most influential player. The interest rate determines the investment flow. Since money is a reaction of a country's economy, the difference in interest rates affects the value of one currency relative to another. When the central bank changes its interest rate, it will cause the foreign exchange market to experience changes and shocks. In the foreign exchange market, correctly predicting the actions of the central bank can increase the chances of successful traders.

Interest rate decision investment

Interest rates can be simply defined as funds that the borrower must use to repay the loan to the lender. In the foreign exchange market, the lender is the investor who owns the cash or assets, and the borrower is the bank of a certain country. The lender (investor) provides the borrower (bank) funds and, after a certain period of time, receives the corresponding interest on the original lending funds. The typical method of calculating interest is the annual interest rate or percentage of the loan. In foreign exchange trading, trading interest is calculated in days.

A simple example - an American investor - Jane wants to deposit $100 into a domestic or foreign bank. Bank of America's interest rate is 5.25%. In Japan, the interest rate on savings accounts is 0.25%, and in New Zealand it is 7.25%. Considering the best investment after one year, Jane can earn $105.25 if he saves in Bank of America, $100.25 for Japanese banks, and $107.25 for New Zealand. Opening an account and depositing funds into Bank of New Zealand can bring Jane the greatest return on investment.

Jane's investment decisions show that higher interest rates can attract capital inflows. As a result, the central bank may try to attract foreign investment back to its own country through higher interest rates.

The role of interest rates in the money market

Raising interest rates encourages traders to invest in the market and raises demand for money. As demand increases, money becomes rare and therefore more valuable. Investors are interested in the currency, which leads to an appreciation of the currency, as their investment can therefore achieve higher returns, as in the case of Jane. In order to purchase the country's assets (securities or government bonds), Jane needs to convert his domestic currency into other countries' currencies to increase his demand. On the contrary, the decline in interest rates prevents investors from buying assets in the economy because the return on investment is getting smaller. . The currency of the economy will depreciate because of the shrinking demand.

Experienced investors can correctly judge the increased exchange rate based on the announcement of the central bank and the upcoming financial data. Investors who correctly predict can predict the direction of each currency through expectations and use this to make appropriate decisions to make more or short positions.

Central bank controls inflation

The central bank aims to reduce the impact of inflation on the economy. Inflation, the rise in the price of goods, has led to a decline in the purchasing power of money. Inflation includes an increase in the overall price of goods and services, rather than a rise in the price of a single item. Monitoring the price of a class of items is called a calibration index, which provides a reliable way to detect inflation.

The effects of inflation will spread to society as a whole, regardless of whether the individual is engaged in trading. When the inflation rate is high, employees will ask for an increase in wages because the previous hourly salary does not reflect the same value. In order to pay more to employees, companies need to raise their prices to pay higher wages for their employees.

Inflation and oil

Interestingly, the cause of inflation may simply be due to an increase in the price of a key item (food or energy). Oil is a classic example of a volatile commodity that stimulates inflation. The rise in oil prices will lead to the simultaneous rise in the price of many commodities (such as gasoline) that use petroleum as a production process, leading to the beginning of inflation. Inflation is a big problem for the population because it consumes the wealth and living standards of the people, because as the price increases, their bank accounts and wages will also decrease. The decline in the purchasing power of money has made the currency weaker. Therefore, the erosion characteristics of inflation make the central bank's actions necessary.

The impact of inflation on interest rates and investment

If inflation is a concern, the central bank will raise the pressure on interest rates to ease inflation. High interest rates can cause inflation to slow, because it will allow companies and consumers to pay more money to banks to pay for their investment or consumption (eg, for consumers, rising interest rates will increase their home loan repayments) Difficulty, thereby reducing costs). Increased borrowing restrictions can slow economic activity while reducing inflationary pressures.

In the eyes of investors, higher interest rates, whether domestic or foreign, can exacerbate currencies (domestic or foreign currencies) because they can benefit from the high returns of state assets. If the currency now appreciates against other currencies, the foreign exchange trader will buy it in order to comply with the trend trade and invest more money in the economy.

Therefore, it is not easy for the central bank to balance it. They like higher interest rates to strengthen currencies and boost foreign investment, but they must be aware that higher interest rates can hurt companies and individuals in the country who rely on borrowing from banks.

The central bank influences the supply and demand of the currency of the country in which it operates by controlling exchange rates or interventions.

For many large economies, central banks can influence the value of money by changing the exchange rate. For the US central bank, the Federal Reserve Bank will not necessarily adopt a weak or strong monetary policy, but will stop the inflationary pressure and stabilize the steady improvement of the economy. It uses the exchange rate as a mechanism to achieve this type of economic state.

In 1971, before the disintegration of the Bretton Woods Agreement (a fixed exchange rate system linked to the US dollar and gold), the exchange rates of most currencies were fixed. Today, the current international financial system. The floating exchange rate is more popular because it reflects the market's movement, supply and demand principles and limits the imbalance of the international financial system. The fixed exchange rate gives the central bank more control (they may be attached or independent of the government) to develop monetary value and provide great stability when the market fluctuates. Many developing countries use fixed exchange rates to circumvent market violations.

In extreme cases, such as political turmoil, terrorist attacks or natural disasters, a country's currency may experience a large sell-off, causing its devaluation. The country’s central bank may intervene to restore monetary value. If a central bank's system is routinely intervened, it will adopt a “management float”. Sometimes, the central bank may set upper and lower limits, which is called, when the price reaches this limit, they will intervene.

Another way for banks to influence the supply and demand of currency transactions is to buy and sell currencies directly with their reserves. The classic example is the Reserve Bank of China. Assuming the Chinese Reserve Bank believes that the renminbi appreciates too fast and needs to reduce its value, the Reserve Bank of China will sell the renminbi and buy another currency, such as the yen. An increase in the supply of renminbi will lower the exchange rate of the renminbi.

Although this provides an effective means for the central bank to control its monetary value, banks still need to be cautious. Each country has limited currency reserves, and long-term resistance to market forces will consume its reserves and trigger a financial crisis.

Central banks can also influence the money needs of other countries. If the bank (the Russian central bank) thinks that the reserve of a country's currency it owns is too low, it will enter the foreign exchange market to buy the country's currency. This will cause changes in the composition of the Russian bank's reserve currency and increase demand for the euro. As the euro is bought, its value will also rise.

Import and Export Company

When large multinational companies conduct goods and materials for cross-border trade, they will have an impact on the foreign exchange market.

The first category will have an impact on the foreign exchange market. The group is a large, multinational company. Imagine a New York company exporting products to a German company. The transaction will be settled in US dollars so that US companies can earn US dollars and pay employees in US dollars.

In order to facilitate the transaction, German companies need to convert part of their capital from the euro to the US dollar in the foreign exchange market. The increase in the supply of the euro led to an appreciation of the dollar and a depreciation of the euro. It can also be said that German companies have increased the demand for the US dollar, causing the dollar to appreciate against the euro. But if you want to pull the exchange rate up or down a bit, the deal needs to be a big deal.

If a German company wants to pay after six months, there is a risk that the current amount of dollars can be exchanged for the euro is different from that of six months. The company may limit or circumvent exchange rate risk by immediately changing the euro to US dollars or buying forward contracts in the foreign exchange market. A forward contract converts the euro into dollars at a fixed price at some point in the future.

Importing companies also influence the demand for money. For example, a US retailer imports Japanese furniture and pays Japanese currency to its suppliers. If consumers like these products, it will indirectly increase the demand for Japanese currency, because American retailers will buy more products from Japan. When the retailer buys the yen in the foreign exchange market and sells the dollar, the yen appreciates.

Foreign investment flow

There are many foreign investments, such as goods, services, securities, government bonds or real estate. Suppose a Canadian company wants to open a factory in the United States. Companies need dollars to pay for land, labor, and capital. Assuming that the company's currency reserves are mostly Canadian dollars, it must sell some Canadian dollars to buy dollars.

The increase in the supply of Canadian dollars in the foreign exchange market and the decline in the supply of the dollar will eventually lead to an appreciation of the dollar against the Canadian dollar. In other words, foreign investors are also in the process of raising or lowering the interest in investing in the country's currency.

Speculators - investment management companies, hedge funds, individual traders

Many financial institutions use currency exchange as a way to generate income. Many individuals also try to do the same thing. Only when many investors act in concert, the money market will move in the same direction. Individual investors cannot shake the currency rate, but many traders, investment funds and banks can operate together.

If speculative traders believe that the yen will weaken in the future, because the economic data is not ideal or the exchange rate policy changes, they will sell the yen to buy other strong currencies in the foreign exchange market. The yen supply has increased correspondingly, causing its currency to depreciate. If many investors believe that a currency will depreciate in the near future, they will also lower the value of the currency by selling it at the same time. Similarly, if speculators believe that a currency will appreciate in the near future, they will buy the currency today, causing the demand for money to continue to rise and its price to rise. The unanimous public mindset of investors can help them achieve their expectations, and in some people's eyes, it makes it self-expected.

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