A central bank is an institution that is responsible for setting the monetary and interest rate policies for the country in which they reside. This means that it’s the job of the central bank to make sure that the economy is stable and growing while the prosperity of its nation's citizens continues to strengthen. This is no small task either because most major nations are rather large and have a lot of moving parts within their economy.
Introduction to Central Banks
All developed nations have their own central bank that is tasked with controlling the country’s monetary policies. The monetary policy actions of the central bank will directly influence the price movements of the country’s currency. This is because they have full control over the available money supply and set the interest rates. This makes them a big deal to the Forex market.
Control over interest rates, money supply, monetary policy, and much more is why central banks are so important to watch for all Forex traders. Everything that they do will have a certain degree of impact on the price of their currency, and therefore, will have an impact on the trading decisions that Forex traders will take.
There will be many times when the central banks will dictate how a trader will navigate Forex the market. In fact, when central banks need to make decisive policy actions these are the times when it’s actually less risky and there are more pips to be made. Even though it can be more volatile in these times it can make for very safe trades if a trader has an excellent understanding of the fundamental situation with central banks and the Forex market.
One of the things that a Forex trader needs to do is monitor what the central banks are doing and saying. The process for monitoring central banks is quite simple. But before a trader gets too bogged down worrying about all the policies and intricacies of the central banks, all they really need to understand is what the central banks are thinking or what is currently concerning them the most right now in real-time. Traders typically do not need to concern themselves with things that the central banks themselves are not concerned with. This makes the interpretation of a central bank a bit simpler.
It’s important when a trader is analyzing a central bank to appreciate that there are only one or two things that they need to concern themselves with at any given time. The things that Forex traders need to be concerned with are the exact same things that the central banks are saying they are concerned with. Whatever they are concerned with is going to drive their decisions on how they are looking to enact their monetary policies to keep the economy stable and growing. As a consequence of this analysis, traders get insight into where interest rates may be headed in the near future.
Why Traders need to know what Central Banks are Thinking
The reason traders need to know what a Central Bank is thinking is that if traders know how the central banks are thinking, what they are happy and unhappy with, then they can use that information to try and predict how the market will react to that information in the very near future. This is because big institutional players are searching for these same clues because they too are trying to get in on developing price trends as early as possible. It’s human nature to want to predict where the price of something is heading so that we can make the most money with the least risk in the shortest amount of time possible. This is the thought process of the big players and is the same process that retail traders want to be in tune with.
Since the actions that the central banks take will move the price of currencies, this can offer us some excellent trading opportunities to trade around.
Questions to Ask about Central Banks
• What are the central banks thinking?
• What is their next possible move on interest rates and why?
• How is their nation’s economy performing?
• What is the central bank concerned with?
• What economic data has the central bank stated they are watching closely? (These will be the economic data sets that traders want to monitor closely as well).
A Brief History of Central Banks
Let’s take a quick look at central bank history for some context on how the modern financial system got to where it is today.
1870 - 1914
Between 1870 and 1914 the value of most major currencies was pegged to gold. This meant that it was much easier to maintain a stable currency price than it is today when there is no [gold standard] in place. This is because the amount of gold available in the world was limited so it wasn’t too difficult to keep inflation under control. The price of gold was also historically quite stable at the time.
During this time the main role of the central bank was to ensure that people were able to convert gold into currency and issue an appropriate number of bank notes based on the country’s reserve of gold.
World War 1 and 2
Then came along World War 1 and 2 which forced central banks all over the world to change course. The financial toll associated with the cost of war became so large that governments needed to raise a lot of extra money and they needed to do it fast to keep up with all the cost pressures. War is certainly not a cheap thing to do.
They raised this extra money by abandoning the [gold standard]. With this newfound power to do whatever they wanted governments started printing vast sums of money to pay for the extra costs of war and repairing all the damages that resulted from the fighting. Doing this led to steep inflation, which in many parts of the world became completely out of control. Inflation went so high that it forced most governments to eventually return to the gold standard.
Because it was obvious that politicians with too much power over the supply of money is not good for the stability of their country’s currency the solution was to create completely independent central banks to guide monetary policy outside of politics.
Central banks have been around for hundreds of years but in their current status and design, they have only been around since about the mid-20th century.
Central Banks and Interest Rates
Before delving further into central banks it makes sense to understand a little about interest rates first. Traditionally, Forex market traders have been heavily invested in understanding interest rates and interest rate policies. It is consumed over what interest rates are for a particular nation and, more importantly, where they think interest rates are heading over the medium and long term outlook. The expectations are one of the most important things the Forex market will attempt to price in and nowhere is this truer than when it comes to interest rates.
The Forex market participants will aggressively try and price in their expectations of future interest rate policy virtually every day. This is because there are so many asset management firms that are heavily dependent on the interest paid for holding particular currencies in their portfolios. These large asset management firms rely heavily on guaranteed interest payments from central banks and government bonds. Many of the largest asset management firms in the world are heavily invested in multiple countries and therefore need to watch the particular currencies of the countries they are invested in quite closely.
If interest rates are rising in a particular nation then this is generally considered to be a positive thing for the native currency which tends to move higher in interest rate hiking cycles. If interest rates are falling within a particular nation then this is typically a bad thing for the native currency and prices typically fall.
It’s the central bank of each nation that controls the interest rate for their respective nation. If the Forex market is obsessed with interest rates and the path they are headed on, then it makes logical sense that Forex traders would want to get to know the central bank of the nation’s currency that they are interested in trading.
Because the central banks control interest rates this forces the Forex market participants to become laser focussed on what each individual central bank is talking about and doing in the market. The market also pays very close attention to the individual central bank members as well.
Overview of what Central Banks do
A central bank's main job is to control monetary policy for the country in which they serve. Basically, they do this by manipulating the money supply.
Money Supply: This is simply the total amount of money that is available within the financial system of a particular nation. It’s the amount of money currently in circulation within an economy.
Central banks are generally considered to be the “lender of last resort”. This means that when the economy is struggling and commercial banks cannot cover the demand for money the central bank has the power and the resources to step in and take an appropriate level of action. In other words, the central bank is there to stop the banking system from collapsing in on itself. They do this by manipulating the available money supply.
Most modern economies are very complex, and because of the lack of regulations, financial systems tend to get themselves into trouble about once every 10 years on average. This is why central banks need to keep a close eye on developing trends in the economy to make sure that things don't get out of control, cause a financial system shock, or become unmanageable.
Aside from the primary objective of controlling the money supply, most central banks are also tasked with providing the country’s currency with price stability. It also has regulatory authority over the country’s monetary policy along with the sole right to produce and circulate new currency inside the country.
Central banks are separate from the governments of each nation. The idea is that they should perform mostly autonomously from any political issues that may be going on inside the world of politics. This is because politicians don’t have the greatest track record when it comes to managing money. This is exactly why we have central banks.
Having said that, the central bank is often referred to as “the government’s bank” in the sense that it’s the one that handles the buying and selling of government bonds and other similar transactions.
Monetary Policy and Money Supply
Before we deep into the tools that central banks use to enact monetary policy it would be useful if we first took a more in-depth look into what monetary policy actually is.
Monetary policy consists of the actions that a central bank takes which determine the size and rate of growth of the available money supply. This in turn will have an effect on interest rates because interest rates are one of the central bankers favorite monetary policy tools they use to help steer the economy.
Monetary policy is maintained through actions such as modifying the interest rate, buying or selling government bonds, and changing the amount of money banks are required to keep on hand for client withdrawals.
Broadly speaking there are two types of monetary policy; expansionary and contractionary. This is what we will take a look at next.
Expansionary Monetary Policy
Expansionary monetary policy attempts to “Increase” the money supply in order to lower unemployment, boost private-sector borrowing, encourage consumer spending, and stimulate overall economic growth.
This is often referred to as "easy monetary policy." This easy monetary policy description applied to almost all major central banks after the 2007-2008 Great Financial Crisis. Almost all developed nations slashed their interest rates in an attempt to get their economies growing and expanding again.
Many economists have described this time as a modern-day depression. Interest rates were driven way down and in many cases near zero across most G8 central banks. In fact, some central banks set their interest rates below zero which means they had negative interest rates! This is not something that the world has ever seen before and we are not totally sure what the long-term ramifications are for such untraditional actions just yet.
Can you imagine putting your money into a bank and having them tell you that they are going to charge you interest for the privilege of holding onto your cash? But this is exactly what happened and is currently still happening.
Contractionary Monetary Policy
Contractionary monetary policy attempts “Decrease” or slow the rate of growth in the money supply. Sometimes a central bank will need to outright decrease the money supply in order to control inflation that is growing at a rate higher than the central bank's mandate.
Historically speaking, this has sometimes been a necessary option for a central bank. There are times when contractionary monetary policy is needed to slow economic growth, increase unemployment and depress borrowing and spending by consumers and businesses. It is just not sustainable to think an economy can grow infinitely at large growth rates. This is only done in a situation where inflation is getting way too high and needs to be controlled.
The point here is that central banks are trying to keep inflation stable and in line with their mandate. This is typically around 2% per year. If inflation starts to get too low then they will have an expansionary monetary policy and will use the tools they have to stimulate inflation. If inflation starts to get too high then the central bank will switch to a contractionary monetary policy. The whole point is to control boom and bust cycles by keeping volatility within the economy low.
When Contractionary Monetary Policy Goes Wrong
Monetary policy is not perfect all the time. It really is quite a difficult balancing act to steer economies that are so large and have so many moving parts. Let’s look at a quick example of when contractionary monetary policy goes so wrong for a couple of obvious reasons.
In the early 1980s, the Federal Reserve was forced into a situation where they had no choice but to stage an intervention. The Fed really dropped the ball and allowed inflation to get completely out of control which now reached roughly 15% annually. Do you think this was a little out of line with their mandate of keeping inflation levels stable at around 2%? It’s not like inflation went up to 15% overnight, it was years in the making.
This out-of-control inflation forced the Fed to take decisive action. In a historical event, they chose to raise the benchmark interest rate to 20%! This hike resulted in a severe recession. However, it did keep the out-of-control inflation in check by unfortunately causing harm to many everyday people and companies. There was simply no way for regular people to prepare for that level of interest rate shock.
It's obvious that inflation got so out of control because the Fed waited way too long to start slowing down the economy. Had the Fed reacted years earlier it could have kept with one of its mandates to keep price stability under control. This is considered one of the few times that a major central bank failed miserably to meet its mandates to the economy.
Exchange Rates
Exchange rates, or the pricing of currency, are generally moved by forces outside of the control of central banks. But this is not always the case because sometimes central banks will step into the market and attempt to influence the pricing of exchange rates.
A quick take on weak and strong currencies:
One of the most immediate effects of a weak currency is the potential for high domestic inflation. A weak currency is attractive to inward investment into a country because it’s cheaper for foreign investors to invest in an economy with a low-valued currency. This is because foreign investors will have more buying power by using their strong currency to invest in a country with a weaker currency.
A weak currency is also something that exporting countries really like because they will be paid in a currency from the foreign investor that has a higher value than their domestic currency. This means exporters have the potential for making higher profits when the value of their domestic currency is lower.
A currency that has a high value when compared to other currencies is something that you want to see if you are a net-importing country. This is because if your cash is worth a lot then you can buy more at cheaper prices. Other countries will also want to do business with countries that have high currency valuations because they will be paid with a more valuable currency than their domestic currency.
What it comes down to is that net exporting countries typically prefer low domestic currency valuations whereas net importing countries will typically prefer a higher value domestic currency.
Money Supply
The money supply is just that; it’s the available supply of money that is circulating within an economy and globally of one particular currency. The central bank of each nation is tasked with controlling their country’s supply of money. The money supply is sometimes referred to as the “Money Stock”.
The central bank of each nation manipulates the money supply. They will increase or decrease the money supply depending on what their current monetary policies are. They do this by using a series of tools that can be employed in different market environments. A lot of this depends on where they believe they are in the economic cycle.
There are several tools that central banks can use to enact their monetary policies. In the next section we will take an in-depth look at what tools the central banks have and how they use these tools to move the economy in the direction they desire.
Central Bank Monetary Policy Tools
Ways to Manipulate the Money Supply
Central banks are major monetary authorities that attempt to control the size and growth of money in several ways:
- Interest Rates
- Price Controls
- Reserve Requirements
- Credit Control
- Central Banker Language
- Moral Suasion
- Open Market Operations
- Quantitative Easing
Interest Rates
Understanding Interest Rates
Interest rates have “traditionally” been considered to be one of the primary tools a central bank will use in order to effectively manage the health of an economy.
If we break interest rates down into their most basic use we can say that they are generally used to attempt to control inflation within the economy. They are known as a “Traditional Monetary Policy Tool”. Interest rate changes are typically done by changing the “discount rate”.
Interest Rate Examples
As an example, if inflation is increasing faster than the central banks would like then the central bank will look to increase interest rates in order to try and slow the economy down. Because increasing interest rates increases the costs of doing business it ultimately discourages people from borrowing and spending.
Raising interest rates will also encourage people and companies to start saving their money. This has traditionally been used as an effective tool to reduce the rate at which inflation goes up.
On the other hand, if inflation is low or falling, the central bank will look to cut its interest rate. The idea is that this will discourage people from holding onto their money and start spending it. This actually encourages people and companies to start borrowing and spending more money within the economy. Investment and spending will generally pick up because companies and people can borrow money at lower interest rates than they could previously. This lowers the barrier for entry to more people and companies who may not have been able to borrow at the previous higher interest rates.
How the Forex Market Focuses on Interest Rates
Any hint that forces Forex traders to think that a central bank will adjust its interest rate either up or down can provide them with some excellent trading opportunities.
For example, if a certain central bank is indicating to the markets that it's thinking of cutting its interest rate then the market will go to work and attempt to price this new information into the currency. This is what creates some great trading opportunities to short that specific currency. We would want to look for short trades because we know that cutting interest rates is bad for currency valuations.
If a country cuts interest rates then large asset management companies will move their money out and into another country with higher yields. Money comes out of the currency which means selling, and selling means the price goes down.
What Forex traders do is look to trade in line with the central bank’s current and expected interest rate policies. This is one of the best ways traders can make money in Forex trading. Trade the 'current' situation for a bit of profit and trade the 'expectations' of the future for much bigger profits.
Interest rates are one of the biggest things that the Forex market will obsess over. If you think about it, a country's interest rate is the interest rate that you will be paid for holding that specific currency. As an example, if you are holding Great British Pounds long and the interest rate of the UK is currently 5% then this means that you will receive 5% per year just for holding Great British Pounds.
That sounds like a pretty simple way to make 5% per year and this is exactly how a lot of large asset management companies think. This is called a carry trade. The largest financial companies in the world are not trying to make 100% per year. If they can get 5-10% the bankers are all going to get massive bonuses.
The other big benefit of moving money into a high-interest rate paying currency is the potential for the currency to gain in value. This tends to happen as more and more investors want to own Great British Pounds to gain the high-interest rate in our example. Their buying of the currency naturally moves it higher over time.
One thing to keep in mind is that it’s not difficult to figure out what the market is thinking. How the markets are thinking will be plastered all over the news feeds on a daily basis. It really only takes a few minutes of scanning the news wires to figure out what the market is obsessing about today.
It’s also very easy to understand what the central banks are thinking because they will literally tell us in their press conferences and in other communications to the market. These are deliberately designed to keep the market in step with their policies so that they can control price stability within their country’s currency.
Almost all central bank meetings and press conferences are scheduled weeks in advance. Any decent economic calendar should have these clearly highlighted so that you are prepared for potential market-moving events.
Interest rates are a medium to longer-term tool because it typically takes time for the effect to filter through the economy. This is why central banks have many tools that they can use.
Price Controls
A price control is simply that. It is a way to control the price of a country’s currency. This can be done directly or indirectly by a central bank.
Price controls happen when a central bank tells the market that it desires the price of its currency to be at a specific price level. If they are doing it “indirectly”, the central bank will simply communicate or threaten to act if the price moves too far away from where they want the price of their currency to be.
If the central bank decides to act “directly”, they will provide a very specific price level and make it clear that every time the price looks like it will breach their price limit they will step in and intervene to keep the price in line with its target. They would typically intervene by buying up or selling huge amounts of their own native currency in the open market.
Swiss National Bank Price Control Example
An example of price control was when the Swiss National Bank (SNB) created a price floor for the Euro-Swiss (EURCHF) currency pair between 2011 and 2014. They felt it was in their best interest to not have the Swiss Franc appreciating against the Euro so they imposed a floor on the pair at a price of 1.2000.
They did this because the Eurozone is Switzerland’s largest trading partner. If the price of the EURCHF dropped too far this would have a negative impact on their exporting companies that relied on the higher value Euro as part of their ability to remain profitable.
If the price came close or broke the floor at 1.2000 the SNB would step in and intervene by literally buying up the currency pair. They would sometimes buy billions worth of Euros to make sure the price would not go below the 1.2000 handle.
The market did not believe the SNB at first but after several failed attempts to push the EURCHF pair below 1.2000 the market finally gave up and the price held consistently above the 1.2000 level for a couple of years.
This kind of action creates an interesting opportunity for a trader. If you have a central bank backing a trade to buy at a certain price level then this can create an opportunity to trade in line with the central bank with very little risk. The risk can be very low because a central bank can print money endlessly but the rest of the market cannot. Generally, the central bank will always win the battle because they just have so much more firepower.
The major risk to a trade like this is that the central bank can abandon its policy at any time without notice to the market. Guess what? In early 2015 the SNB removed the price floor very unexpectedly which sent the market into complete chaos as traders tried to find a new fair value for the EURCHF pair. You can see from the daily chart of the EURCHF that the price hung at or slightly above 1.2000 for a long time until the SNB pulled the rug out from under the market. It actually dropped about 2,300 pips or almost 40% in minutes!
This event wiped out a lot of traders who were relying on the SNB to hold the price floor at 1.2000. It even instantly put large well establish Forex brokers out of business because of the huge number of client accounts that went into the negative and could not be paid back.
One of the things that made this event so chaotic was the fact that only 3 days before the SNB pulled the price limit they actually went on record stating that they would defend the price limit with the “Utmost Conviction”. They communicated this to the market because this was at a time when the Euro was plummeting day after day on the back of the European Central Banks' decision to start a new quantitative easing program.
We can only guess that the SNB members did a little bit of math and decided it would cost too much money to defend the price limit given the terrible outlook of the Eurozone and the major devaluation that was taking place in the Euro.
Fixed price controls, such as the one the SNB used, are rare but less formal versions are more common. Often central banks will tell the market where they would like the price of the currency to be. When they do this it’s a time that traders should be paying attention.
Reserve Requirements
Reserve requirements are sometimes referred to as reserve ratios of asset ratios.
Reserve requirements are the requirements regarding the percentage amount of cash a bank must hold in reserve against deposits made by customers at their banks. This cash must be held physically in the bank's vaults or stored at the closest Central Bank.
Said another way, the reserve ratio is the portion of all depositors’ cash balances that the banks must physically have on hand as cash so that clients can make normal everyday withdrawals.
These requirements are set by the central bank of each nation and are one of the main tools of traditional monetary policy.
How Central Banks Use Reserve Requirements
When the economy is doing well and inflation is rising a central bank will look to increase the reserve requirement to keep inflation in line with their mandate. They do this to try and slow down lending which would ultimately slow down inflation because people and companies will likely borrow and spend less. However, this does serve the purpose of storing more cash at regional banks when times are good so that when the economy takes a turn for the worse there is plenty of cash on hand in the banks to cover the client needs. It also means that if a recession hits the central bank can lower the reserve requirements so that the regional banks can start lending that idle cash and hopefully stimulate the economy.
When inflation is falling the central bank might look to decrease the reserve requirement in an effort to pump extra money into the financial system. The hope is that the banks will use this extra money to start lending out to companies for capital projects. This in turn could decrease unemployment and put people back to work.
Consumer spending is a major component of GDP so if more people have jobs then there will be more people spending money which will show up in the consumer spending numbers.
You can find the current reserve ratios for most central banks around the world at the following link. You might be surprised just how little cash banks are actually required to hold onto.
Credit Control
Credit control happens when a central bank imposes limits on how financial institutions can lend out money to other businesses or consumers.
Credit control can also be used to set limits on the amount of money that regular consumers can borrow from financial institutions. The idea is that you don’t want everyday people leveraging up to levels that they might not be able to afford if the market environment changes.
This is different from the reserve ratio in that it looks to target things other than how much banks can loan out in total. It will typically come after a reserve requirement has been set. This is usually done by creating rules around how much debt-to-income ratio companies and consumers can comfortably afford to have.
Credit control is a strategy that attempts to only allow the more credit-worthy people and companies to borrow from financial institutions. The idea is that if an economy has too many people or companies borrowing money then there might be a high number that can’t afford to pay back what they have borrowed. Obviously, if there is a high percentage of people not paying back their loans then this can cause a pretty awful banking crisis just like the one we saw in the Great Recession that kicked off in 2007 in the United States.
Lending out too much money too quickly could lead to runaway inflation and destabilize the overall economy. It could also increase the number of people and companies declaring bankruptcy which is obviously not something that a central bank wants to happen.
Central Banker Language
Central bank language is simply the things the central bank “says” rather than what it “actually does”. By making statements to the public about what it would like the market to do and where it would like the price of the currency to be, the central bank hopes that the market will take this language as a sufficient threat of action and then trade in line with the central banks desired route.
This highlights why credibility with the overall market is so essential to a central bank. Think about it for a minute, if the market doesn’t believe that the central bank will follow through on its threats then the central bank has a much more difficult time influencing the markets.
If the market shrugs off what the central bank says then it makes for a much tougher job in dictating monetary policy. This is why most central bankers are extremely careful about what and how they say something in the public domain because the slightest slip-up can harm the central bank's credibility. It can also cause excessive price volatility which controlling price stability is something that most central banks are tasked with doing.
Most of the time language will have the desired effect but sometimes it does not. It’s at these times that the central bank may actually have to step into the market and take some kind of action so that the rest of the market believes they will follow through in the future. There is no better way to command the attention of the market than by stepping in and following through in a big way.
Moral Suasion
Moral suasion is similar to central banker language but differs in that they are not typically speaking to the market as a whole. This is where the central bank will attempt to persuade financial institutions to increase or decrease the amounts that they are lending to their clients. Said another way, moral suasion is a persuasion tactic used by a central bank to influence or pressure, but not force, financial institutions into doing what the central bank wants them to do.
This is easier than outright passing laws and is often something the central bank will try and use before they are forced to pass new laws. Passing new laws could take a long time to get done. Moral suasion can happen much quicker and is sometimes needed when times are looking particularly dark.
Some historical moral suasion tactics that have been used are:
- Closed-door meetings with bank directors
- Increased number and severity of inspections
- Appeals to community spirit
- General threats
Basically, moral suasion is when the central bank jawbones financial institutions into hopefully doing what they want without the central bank itself actually needing to enact a new policy.
Open Market Operations
Open Market Operations (OMO) refers to the buying and selling of “government securities” in the open market by a central bank. The central bank will do this in order to increase or decrease the amount of money in the overall banking system.
This is basically a quick way to control the money supply. If they want to add money into the market they will buy government securities from the marketplace. This puts money into the pockets of financial institutions. If they want to decrease the money supply they will sell more government securities to the marketplace. This takes money out of the pockets of financial companies.
In the United States, this is facilitated by the Federal Reserve (Fed). OMO is the most flexible and most common tool that the Fed uses to implement and control monetary policy in the United States. However, the discount rate is also used which is the rate at which banks borrow reserves from one another.
The Fed can use various forms of OMO, but the most common OMO is the purchase and sale of government securities. Buying and selling government bonds allows the Fed to control the supply of reserve balances held by banks.
If a central bank purchases government securities in the open market this will have the effect of injecting money into the banking system. This is because when a central bank buys something the money comes off the central bank’s balance sheet and into the financial companies’ balance sheets. This is different from a normal business-to-business transaction where money simply changes hands.
If the central bank decides to sell government securities in the open market this will take money out of the banking system. When a business buys something from the central bank it takes money off its balance sheet and transfers it to the central bank’s balance sheet. This means that this money from the business is no longer available in the money supply until the central bank decides to put it back into the economy.
Open market operations are a tool that central banks will use as a fast-acting tool. This is because they can literally control how much money is in the banking system as long as other participants are willing to buy and sell from the central bank at that time.
Quantitative Easing
Quantitative easing has rarely been used with any significance throughout most of central banking history. However, there is the exception of the global financial crisis that started in 2007 and the subsequent global fallout. Several central banks are still using QE to support their economies at the time of this writing.
Quantitative easing is viewed as an unconventional monetary policy tool that many central banks use only as a last resort if the more traditional tools such as interest rates are not having the desired effect on the economy.
QE is the process of printing money and injecting that money into the financial system. This is usually done in the form of buying government securities and other government-linked financial assets. The central bank purchases these back from the companies that hold them so that those companies will have more money on their books. The idea is that these companies will use that extra money to pump into loans for capital projects within the economy.
This is done to hopefully lower interest rates that financial institutions charge and increase the money supply by flooding the financial system with fresh capital. This is an effort to promote increased lending and make sure there is enough of the vital liquidity that the market needs to function properly.
When the central bank does QE it serves to add more liquidity to the financial system so that it remains stable during hard economic times. A central bank would only consider performing QE when interest rates are at or approaching 0% and the economy is not looking like it will meet the central bank's inflation targets. If the central bank is considering QE then they are probably more concerned with deflation rather than inflation.
If a QE strategy is not having the desired effects then the central bank will look to target commercial banks and private sector assets rather than only buying government securities and bonds. This is when you know the economy is really unstable and has a lot of issues to sort out. Effectively, if the central bank starts buying public sector debts and assets then you know that they are extremely concerned about a potential depression rather than just a recession. Think about that; a central bank doesn’t want to own unstable public assets with an uncertain future when it could own its own debt but hard times call for major measures to be taken.
Quantitative easing serves the purpose of stimulating growth and investment because there is so much fresh and cheap money going around. It can also devaluate the currency because more supply is being printed faster than the natural rate of demand is able to absorb it. This currency devaluation further encourages growth as the country’s exporters become much more competitive which is good for the economy overall.
Generally speaking, QE has proved itself to be extremely effective so when the central bank threatens to or actually implements QE the market will pay very close attention.
Final Thoughts on Central Bank Tools
When a central bank implements any of these tools it gives Forex traders the opportunity to potentially find a profitable trade. All you need to do is be tuned into what is going on with the economic indicators that the central banks are watching and then listen to what the central bank is telling the markets about those indicators.
The question traders should be asking is; Is the central bank happy or concerned with a particular indicator? They will tell us! This will prepare you extremely well to seize excellent trading opportunities as they come up.
You might be thinking that this all sounds very simple; you get the concepts and understand that it’s the central bank's actions that cause most of the price moves in the Forex market. But you might be wondering how you will figure out exactly what the central bank is thinking of doing. Surely this is important information to be aware of if the central banks play such a big role in the Forex market. This is a fairly simple process because the central bank will rarely focus on more than one or two specific things at any one time. This makes it much easier to track and understand what is going on right now.
For example, if the central bank is worried about inflation being too low they will express this concern to the market. As traders, we know that there is a good chance they will cut interest rates in order to fight the falling inflation rate. This is the information traders can trade in line with. Cutting interest rates or the 'expectation' of falling interest rates will have a negative impact on the particular currency.
In this scenario, traders can forget all about production or housing data because we know that the central bank is now looking at low inflation as a primary concern. Traders will need to focus on inflation-related data and anticipate the central bank using tools associated with inflation. In this case, the tool would be interest rate cuts. Traders can then determine how that action will impact the currency and trade in line with it.
The central bank will express this information in what is called “forward guidance”. Forward guidance is the act of the central bank telling the market its intentions so as to not cause irrational price instability when they do make a policy adjustment.
Most central banks will leave little breadcrumbs for the market to pick up on. They typically won’t outright tell the markets their exact plans because that would cause too much immediate price volatility. Instead, what they do is leave a trail of hints and clues in the weeks and months going into a policy change. This way the impact on the market is minimized and happens gradually rather than abruptly causing price shocks.
If traders focus on what the central bank is focusing on then their trading becomes much simpler. Focus on the indicators, focus on the central bank, and once traders know what the central bank is focusing on we can then they can figure out what tools they could possibly use and how it will impact the markets.
Hawks and Doves
Now we are going to look at the individual central bank members' stances. That’s right, not all central bankers within a particular central bank will all want the same thing when it comes to monetary policies. This means that some may prefer to have higher interest rates and other members will prefer lower interest rates. The differences in those opinions are what we are going to discuss next.
Central Bank Member Speeches
Any public speeches or comments made by board members of central banks will be very important to the Forex market. This is because these members actually have an active say on what the future monetary policy of the central bank should be.
This highlights why FX traders obsess over central bank member speeches and why those speeches can have a significant impact on the value of their currency as they happen.
If a central banker says something important then traders need to appreciate that they might actually go ahead and implement their thoughts into the economy which will definitely have a certain degree of impact on the respective currency. The Forex market is always looking for clues as to which direction monetary policy is heading.
Central Bankers are Not Created Equal
Some central bank members will be more important to the markets than others. What do we mean by this statement?
Well, for example, for the FOMC not all members will have voting rights in a particular year. This means that there are more FOMC members than there are members that actually have a say at the table and can vote on the future of monetary policy.
A particular central banker can propose policy changes all they want but if they don’t have voting rights then they don’t actually have much of a say do they? What they say will obviously be important because they are on the inside and have access to information that we simply do not.
However, the market impact will always be far less for non-voters than for voters because non-voters just don’t have the same pull to actually cause change. So the markets will give more weight to the members that actually have a vote in the current year because someone with a vote obviously has far more say in the final outcome than someone who does not have a vote.
Along with this voting power, each central bank member has what is called a bias or a stance. What this means is that this particular person favors a one type of monetary policy over another. Some of them prefer to keep interest rates low while others believe that interest rates should be higher to benefit the economy. It's pretty uncommon for all members within a central bank to have the exact same stance because people just can’t ever agree on anything most of the time.
Hawks
Central bank members that prefer higher interest rates are called “Hawks”. This means that they think the economy is performing a little too strong and interest rates should rise to keep inflation in check. Each central banker has pretty strong opinions on how inflation is impacting the economy and this is why the market separates them with these naming conventions of hawks and doves.
Some central bank members are also known as a “Soft Hawk”. This means that they are happy with the way that the economy is performing but they do not necessarily think that the economy is overheating. Everything is performing well in their view and they do not think that interest rates need to be higher in the “Immediate” future. But, if you had to pull a soft hawk's arm they would say that interest rates should rise gradually over time. They certainly would not speak of lowering interest rates.
The major difference between a hawk and a soft hawk is basically how immediately they think interest rates should rise. Hawks want it as soon as possible and soft hawks are happy for interest rates to rise gradually over time. Either way, they agree that interest rates are better at higher levels and should not be going down.
Doves
Doves are just the opposite of hawks.
Central bank members that prefer low-interest rates are called “Doves”. This means they think the economy is in such a state that it needs a boost or stimulation of some kind. Basically, they want to become or remain “Accommodative” to the economy to help get it running at a higher capacity as soon as possible. Accommodative simply means that they want to do things for the economy that will increase business activities and spur inflation.
Because of the great financial recession that kicked off in 2007 most major central banks have been accommodative for a long time and are running at really low-interest rates. This is a situation where almost all major economies have been running at historically low-interest rates and it is yet to be determined how these economies will react when interest rates start to rise to historically normal levels.
Low-interest rates are intended to promote borrowing and spending within an economy with the hopes that inflation will pick up and move toward the central bank’s desired target. The target is typically around 2% inflation per year.
Some central bank members are also known as a “Soft Dove”. This means that they are not necessarily happy with the way that the economy is performing but they do not think that the economy needs to be excessively stimulated. They don’t think the economy is performing overly well but they do not think that interest rates need to be lower in the “Immediate” future. If you had to pull a soft dove's arm they would say that interest rates should be lowered gradually over time.
The major difference between a dove and a soft dove is basically how immediately they think interest rates should be lowered. Doves prefer lower interest rates as soon as possible and soft doves are happy for interest rates to decline slowly over time. Either way, they agree that interest rates are better at lower levels and not at higher levels.
What is a Centrist (Neutral)?
There is also a neutral stance on interest rates. Central bank members with this neutral stance are referred to as “Centrists”.
Basically, these members are overall happy that the economy is performing well enough that there is no need to change interest rate policy in the short to medium term. They are typically in the thought camp of “let’s wait and see” how the economic data is performing within their nation. They simply need the economic data to turn one way or the other before they would look to change their stance or for changes in monetary policy.
Over time these members could go either way based on changes in the fundamental economic trends. These members are typically the most flexible.
The market would find it very interesting if a centrist started talking overly positively or negatively about interest rates. When this situation happens the market is going to think that there must be a very compelling case for the centrist to be changing their tone from neutral to positive or negative. This is the kind of event that could really move the price of the currency in question because the centrist obviously knows some key information that we do not and that makes the market very interested to learn more.
Why do Traders Care about Hawks and Doves?
Well, that’s a great question. Traders trade because they want to make money, like it’s really the ultimate reason we trade or want to become a trader right?
The key to profiting from knowing the differences between hawks and doves is looking out for comments from these central bank members that go against or are out of line from their traditional stance.
For example, if a central bank member that is traditionally known to be a hawk (pro high-interest rates) says something that is pro lowering interest rates (dovish), this could potentially be market-moving information.
On the flip side of that, if a central bank member that is traditionally known as a dove (pro low-interest rates) says something that is perceived to be pro higher interest rates (hawkish) then this could be market-moving information as well.
For example, if a hawk that is a voting member of a central bank delivered a speech and in that speech, they started talking about how concerned they are about the economy and that a rate cut would probably be a good idea soon, the market will react in a big way because this particular member is traditionally known as a hawk who prefers higher interest rates. So for that member to say something so far out of line with their traditional stance this means the case must be really strong to have lower interest rates. Remember, central bank members have access to information that we simply do not. If they are telling us something that is out of line from their normal position then this is a big deal to the Forex market.
There would be no reason for a known hawk to temporarily switch its stance to being dovish unless there was a very real reason and big concern to do so. These people don’t just flip-flop any old time they feel like; it’s a really big deal if they do. Remember, part of each central banker's mandate is to ensure the price stability of their nation’s currency so they are very careful in how they communicate to the market. Any central banker that became erratic in their stance would be ousted soon enough.
In this example, having information like this would make rate cuts far more likely to happen because this person has a vote and obviously has access to information that we do not. Let’s not call the central banker a liar here; let’s just do what we are told by the particular central banker and trade in line with the sentiment that would have been created by this event.
On the other hand, if a dove (pro low-interest rates) said something that the market perceives as being pro higher interest rates (hawkish) then this would be way out of line from their traditional stance. This could cause the market to start buying up their home currency because the Forex market loves higher interest rates. We also know that any market is a discounting mechanism that always tries to price in new information as quickly as possible.
The point is that these central bankers have access to information that we simply do not. So if they are saying something that is the opposite of their traditional stance then there must be a really strong reason for it. And traders need to pay attention to that reason and dig deeper to find out what has changed to make them change their stance.
It's most likely that you will see these central bank members' comments being streamed across news feeds. Most of the time these comments will be in line with their traditional stance and cause little market reaction. However, when you do see or hear a comment out of step with their usual stance then these can be great opportunities to trade the market’s reaction to this information.
Major Central Banks
USA – Federal Reserve (Fed)
The Federal Reserve is by far the most influential central bank in the world at the time of this writing in mid-2022. Its currency is involved in an estimated 70% of all FX transactions that take place every single day. Because of this, the actions that the Fed takes can have a strong impact on most of the world’s currency valuations. This is because the USD is one-half of most all major currency pairs.
Fed Structure
Within the Fed, there is a group of people called the Federal Open Market Committee or FOMC for short. This group consists of 1 chair, 7 governors from the Federal Reserve Board and 5 presidents from 5 of the 12 district reserve banks. The 5 presidents rotate through the 12 district reserve banks every couple years ensuring all districts get a voting seat within a 4 years cycle.
All these people combined make up the Federal Open Market Committee (FOMC) and they are definitely a big deal to the FX market so FX traders need to listen to what they say and do very carefully.
Fed Mandate
The Fed’s mandate is to achieve long-term price stability of the U.S. Dollar and ensure sustainable growth within the United States economy. Under normal circumstances, they meet to discuss and change monetary policy 8 times per year. They then release the “Minutes” from the meeting to the public one month later.
Fed Minutes
The meeting minutes are a summary of the key topics discussed and the views expressed by the individual FOMC members on those topics. These minutes are something that the market pays a lot of attention to because there are potential clues in the wording of the minutes that can give traders insights as to what type of moves the Fed might make on interest rates in the near future.
The FOMC discusses and prepares the wording of the minutes very carefully because they want to communicate very specifically to the market what they are thinking and what their intentions are. Adding or dropping certain key words can have a huge impact on market expectations of future interest rate policies. They communicate with the market in this way to try and keep price volatility as low as they can. This communication style is a form of forward guidance.
Forward Guidance
The Fed uses something called forward guidance very specifically. This simply means that they like to give the market lots of little clues and hints about what potential changes to the policy they will make and when they plan on making these changes. The idea is to minimize aggressive market reactions and control price volatility by stating things over time rather than hitting the market all at once. They do this because the more known something is to the market the less violent the reaction will be when the data is released. Remember, part of their mandate is price stability for the US Dollar so this forward guidance is an attempt to accomplish price stability.
You can read all about what the Fed is currently up to and concerned about on its website.
What Does the Fed do and How do they do it?
There are 4 main actions that the Fed takes as part of its regular operations. There are other tools and actions the Fed can take but these are the most common that they use during "normal" economic environments.
1. Reserve Requirements
As a general rule, all commercial banks that most people deposit money into and do banking with are mandated by law to keep a certain percentage of all their client deposits physically in their actual banks. They do this so that they have money available for those people who would like to take money out. This is called the reserve requirement. The Fed sets the reserve requirement for all banks in the United States.
The term reserve requirement is sometimes used interchangeably with reserve ratios. They are referring to the same thing.
By “decreasing” the reserve requirements, less money has to be held back by commercial banks. This means that they can loan out and inject more money into the economy. This is a simple and effective way for a central bank to increase the money supply circulating throughout the economy. This is something you would see happen if the Fed wants to stimulate or jump-start the economy.
Conversely, if the Fed wants to reduce the money supply then they would “increase” the reserve requirements on banks. This would mean that banks have less money to lend out because they need to hold onto more cash at their banks. The Fed would do this if they wanted to try and slow down an economy, perhaps because inflation is getting to the upper limit of what they would like to see for example.
Most countries’ central banks will manipulate reserve ratios the same way that the Fed will. If you want to know what the current reserve requirement for a particular country you can check that info out on the following website that we have found to be helpful.
The other alternative is to go check out each of the individual central bank websites. They will have this information and much more freely available.
2. Interest Rates
Interest rates are what the entire FX market obsesses about on a daily basis.
Contrary to popular belief, the amount of control the central bank has on the interest rate differs around the world. For example, the Fed does not set the interest rate that U.S. consumer pays on their mortgages simply because it has no power to do that. The process is a bit more complicated than this so let’s look at it a bit closer.
First, commercial banks need to borrow money from the central bank. Second, commercial banks then must go out and loan money to other businesses or individual people. They can literally charge whatever interest rate they want to as long as someone is willing to pay it.
The rate that a commercial bank would charge a borrower is typically based on how risky the individual person or business is. The more risk involved in the loan, the more interest they will charge to compensate them for taking on that higher level of risk. They may also choose to be competitive with the overall market and charge whatever the going rates are for commercial loans and personal mortgages at the time.
What the central bank does have control over is the Discount Rate which is the rate that the Fed charges to commercial banks to borrow money from it. This interest rate will always be much lower than personal consumers will get for personal loans. After all, the commercial bank needs to make a profit to survive! And the central bank needs commercial banks to take on the risk of loaning out money because the central bank would otherwise have to take on the risk itself which could be pretty destabilizing if there were some financial crisis on the horizon.
The Fed also has control over the federal funds rate. This is the interest rate that other banks charge each other for overnight federal loans. For example, if the Fed reduces the discount rate then more banks would take money to re-loan out. This has the net effect of more money injected into the economy.
This works because interest rates are basically the cost of money. When rates are lowered the cost of money and doing business goes down. This means that the money supply will naturally increase. If rates are moved higher than the cost of money and doing business goes up which at a certain point would naturally reduce the money supply.
The problem with interest rates and reserve requirements is that their results can take longer to filter through to the economy than the central bank would like. This is where the third core area comes in.
3. Open Market Operation
Open market operations are a way of affecting the money supply by buying or selling securities. These securities would mostly be government securities such as treasuries and bonds.
If the Fed wants to inject money directly into the financial markets then they will literally go out into the financial market and buy back government bonds from commercial companies that own them. When the Fed buys these bonds it gives the sellers of these bonds money in return. The idea is that this fresh injection of money will make its way back into the economy because the sellers of the bonds have more cash to do other things.
When the Fed wants to decrease the money supply it does so by selling bonds into the market. This is the same as removing money from the financial markets in exchange for these new government bonds. Companies will buy these bonds because the Fed promises a guaranteed annual rate of return to these companies who bought the bonds
4. Overnight Repurchasing Agreement
Open market operations have traditionally been reserved for times when urgent action is needed for fast results. However, the Fed does also engage in a more common form of operation. This is known as the overnight repurchase agreement. It is called REPO for short.
A Fed REPO basically alters the money supply for a very short period of time by temporarily buying or selling government bonds overnight.
Most central banks around the world do not limit themselves to only buying government bonds. There are many historical ways in which central banks have intervened. For example, in 2007 during the Great Financial Crisis, the Fed bought hundreds of billions of dollars worth of subprime mortgages. This increased the money supply and added a huge amount of badly needed liquidity to the savaged subprime market at the time.
Most traders do not pay much attention to the Fed’s daily REPO but the fact is that these types of operations can have a huge impact on the finances of investors and companies so it’s definitely worth at least knowing what they mean because they are a regular routine.
Europe – European Central Bank (ECB)
ECB Structure
The European Central Bank, or ECB for short, was established in 1999. The group within this central bank that decides monetary policy is called the Governing Council. The council consists of 6 members from the executive board of the ECB and the individual governors from each of the Euro area member nation central banks.
This means that all countries including Germany, France, and Spain have a spot at the table to ensure their voices are heard. This ensures that when policies are made they are designed with all Euro Zone members in mind. It’s important to make sure that no one policy is drafted that will adversely impact a specific member nation but benefits others greatly.
ECB Provides Forward Guidance
The ECB likes to provide the market with forward guidance just like the Federal Reserve does. This is their way of attempting to control price stability within the Euro currency.
The ECB’s Mandate
The ECB’s mandate is price stability and sustainable growth within the Eurozone. However, they also strive to maintain an annual CPI (consumer price index) of just below 2%. They do this because, as an export dependent economy, the ECB has a vested interest in preventing the Euro currency value from getting too high. This is because having a high Euro value could hurt the exporting companies within the Eurozone. Exporting companies are more profitable if they are paid with higher-value currencies.
ECB Meetings
The ECB meets most months of the year. When they make changes to policies they also host a press conference to go along with their statement and explain to the markets why they chose to make certain policy changes. As a trader, you know that something important is going to happen if the ECB calls a press conference with the release of their minutes because they have obviously changed some parts of their policies.
These press conferences will start with prepared remarks and typically have a question-and-answer session after. If you are day trading it’s very important to listen out for any questions about monetary policy that may happen because these questions tend to lead to unscripted answers that may be important to your trades.
United Kingdom – The Bank of England (BOE)
BOE Structure
The structure of the Bank of England includes the Monetary Policy Committee or MPC for short. The MPC is a 9 member committee consisting of a governor, 2 deputy governors, 2 executive directors, and 4 outside economic experts.
The BOE is frequently touted as one of the most effective central banks in the world because they have never once defaulted on its debt. This is impressive because they have had a rather long history on the global financial scene.
The BOE meets monthly to discuss and adjust monetary policy. If they choose to meet more than once per month then this is an indication that there are some major concerns that the BOE is presently facing. These are times that traders get some really nice trading opportunities with lower risk than normal because the price tends to move further and stronger for much longer than it would do under normal circumstances. When the market gets concerned about something the price moves tend to be cleaner and more aggressive.
BOE Mandate
Their mandate is to maintain monetary and financial stability within the United Kingdom. The BOE monetary policy mandate is to keep prices stable and to maintain confidence in their currency. They want to have confidence in their currency because the UK does business with a large number of other countries. The UK is blessed with a very favourable geographic location that is great for international trade. To accomplish this they have an inflation target of 2%.
If inflation gets higher than the 2% level the central bank will look to curb inflation to a level below 2%. This will in turn prompt them to again take measures to boost inflation back up when they have achieved their goals. Most major central banks are targeting roughly 2% growth within their economies per year.
Japan – The Bank of Japan (BOJ)
BOJ Structure
The structure of the BOJ consists of a Monetary Policy Committee which is made up of the BOJ governor, 2 deputy governors, and 6 other members that are hand-picked by the governors.
They typically meet once per month. However, they have been known to meet twice per month on occasion if they feel there is enough concern about what is happening within the Japanese economy.
Because Japan is very dependent on exports the BOJ has an even more active interest than the ECB does in preventing its country from having an excessively strong currency. The BOJ has been known to come into the markets and artificially weaken its own currency by selling Yen against U.S. Dollars and Euros.
BOJ Jawboning
The BOJ has been known to be a particularly vocal central bank when it feels concerned about excess currency volatility and strength. It's very common to hear the members jawbone the Yen currency saying that the price is too high and if it doesn’t come down they will step in and take some action to prevent any further strengthening.
Sometimes the market will trade in line with this language and sometimes it won't. The way we can figure out how the market will trade jawboning from the BOJ is by knowing how much credibility the BOJ has with the market at that time. If they have not followed through on the last few threats then the market will probably not trade in line with the language. But if they have followed through on recent threats then you can bet that the market will listen and act very carefully. Sometimes traders just have to do what they are told!
BOJ Mandate
Its mandate is to maintain price stability and ensure the stability of the financial system. This means that inflation is the bank's top focus. At the time of this writing, Japan has had near 0% inflation for more than 2 decades so inflation is almost always the most important thing to the BOJ.
Switzerland – Swiss National Bank (SNB)
SNB Structure
The SNB is actually a publicly listed company in Switzerland where people can buy and sell their shares. This is quite unique and different from most other central banks.
The Governing Board consists of three governing members and their three deputies. These people are responsible for the operational management of the SNB.
The Bank Council oversees and controls the conduct of business by the National Bank. It consists of 11 members. Six members, including the President and Vice-President, are appointed by the Federal Council, and five by the Shareholders’ Meeting.
The Bank Council sets up four committees from its own ranks: an Audit Committee, a Risk Committee, a Remuneration Committee and an Appointment Committee.
SNB Monetary Policy
The SNB’s monetary policy strategy consists of three elements.
- The SNB states how it defines price stability. This statement changes over time as news and events shape the economy.
- It bases its monetary policy decisions on a medium-term inflation forecast. This can be interpreted as 6 months to 2 years.
- It sets an operational target range for its chosen reference interest rate, which is typically based on the three-month Libor. This means that the SNB uses an interest rate band for their inflation target rather than a specific target rate like most other central banks.
The Swiss National Bank conducts the country’s monetary policy as an independent central bank. It's obligated by the Constitution to act in accordance with the interests of the country as a whole. Its primary goal is to ensure price stability while taking the prevailing economic situation into account. In so doing, it hopes to create a positive environment for economic growth.
The SNB is one of the less active central banks meeting only once every three months. However, if they have something to be concerned about they will meet more frequently.
Switzerland and Exports
Like Japan or the Euro Zone, Switzerland is also very export dependent which means that the SNB does not like seeing its currency become too strong. Therefore, its general bias is to be more conservative with interest rate hikes.
The main thing working against them in this regard is that many investors see the currency and the country as a stable thing to invest in which naturally causes the Swiss Franc to strengthen over time. At the time of this writing, the SNB has not been afraid to push investors away by taking their interest rate into negative territory. This means that they actually charge you for holding Swiss Francs. Currently, in mid 2018, the rate is sitting at -0.75%! Talk about not welcoming investment!
Canada – The Bank of Canada (BOC)
BOC Structure
The Bank of Canada has a similar structure to most of the other central banks. Monetary policy within the BOC is made by a consensus vote by a governing council that consists of the BOC governor, the senior deputy governor, and 4 deputy governors.
The BOC meets 8 times per year. It’s very rare that they would call a non-scheduled meeting unless there was a major concern in the financial markets. However, they did do this quite a lot in the Great Financial Crisis that kicked off in 2007. But these were extraordinary times that called for extraordinary action.
BOC Monetary Policy Mandates
Canada's monetary policy framework consists of two key components that work together:
- The inflation control target and
- The flexible exchange rate.
This makes their mandate to preserve the value of the currency by maintaining an inflation target between 1% and 3%.
Australia – The Reserve Bank of Australia (RBA)
RBA Structure
The RBA monetary policy committee consists of the central bank governor, the deputy governor, the secretary to the treasurer, and 6 independent members appointed by the Australian government.
They meet 11 times per year, usually on the first Thursday of each month with the exception of January.
RBA Mandates
The mandate of the RBA is to ensure the stability of the currency, maintain full employment, and economic prosperity and welfare for the people of Australia. To achieve these statutory objectives they have an inflation target of between 2% and 3% per year.
An interesting note is that the Australian and New Zealand currencies are sometimes referred to as the Antipodeans.
New Zealand – The Reserve Bank of New Zealand (RBNZ)
RBNZ Structure
Unlike all other major central banks that we have discussed so far, the RBNZ has a structure that gives the decision-making power on monetary policy to the central bank governor alone. The rest of the members act only as advisors to the governor.
They typically meet 8 times per year.
RBNZ Mandate
Its mandate is to maintain price stability and avoid instability of economic output, interest rates, and exchange rates.
The RBNZ has an inflation target of between 1% and 3%. It focuses hard on this target because failure to meet it could result in the governor of the RBNZ getting fired by the government.
Other Central Banks
There are of course other central banks that you can trade around but the ones presented here are the major ones that will present traders with the majority of their trading opportunities. Once you get comfortable with how to analyze a central bank you then might want to check out some of the Scandinavian central banks or Mexico as their currencies are liquid enough to trade and are increasing in popularity with brokers and retail traders.