Tag: Central Banks

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Forex Course

156. Why Interest Rates Matter While Trading Forex Currency Pairs

Introduction

Introduction

Introduction

The interest rate is one of the major fundamental indicators of a currency pair. Any increase in interest rate is a positive sign for an economy. However, there are some other factors that a trader should know.

What is the Interest Rate?

The interest rate is the charge that the Central Bank takes on loans and advances to control the money supply. The interest rate is usually revised quarterly based on the economic condition of a country.

The main aim of changing the interest rate is to control inflation and stabilize the country’s currency exchange rate. The interest rate is one of the most significant fundamental indicators for a country that directly affects the country’s economy both inside and outside.

Image Source: https://www.ecb.europa.eu/

When the country’s economic condition is excellent, and the targeted inflation is achieved, the central bank tries to discourage people from taking loans from the Central by increasing the interest rate.

On the other hand, when the economic condition is not right, Central Bank tries to expand the country’s economic activity by attracting people to take more money from the bank with a cheaper interest rate.

How interest Rate Impact on a Currency Pair?

In the forex market, traders usually trade in currency pairs instead of a single currency. Therefore, they should evaluate two separate countries’ economic conditions to determine which country is more reliable. Based on this knowledge, we can say that increasing the country’s interest rate will influence the currency to be strong against other currencies.

For example, we want to take a trade in the USDCHF pair, and we are waiting for the USD’s interest rate decision. When the news came, we saw that the Federal Reserve increased the interest rate from 2% to 2.5%. As a result, the USD became stronger immediately against the CHF, and the USDCHF goes up.

This is how the interest rate impacts on a currency. However, the opposite reaction might happen when the Federal Reserve decreases the interest rate from 2 % to 1.5% instead of increasing. In that case, the EURUSD might be stronger and move higher.

How to Make a Profit from the Interest Rate Change?

Making money from interest rates is an effective and solid way to trade based on the fundamental analysis. However, as a trader, we should focus on other fundamental releases and events to understand a currency pair’s overall structure. The significant economic releases of a country are interrelated. For example, if the inflation and GDP are good, an increase in interest rate is evident for the central bank.

Therefore, before taking a trade based on the interest, we should focus on what the other fundamental releases are telling about the currency.

Conclusion

After the above discussion, we can say that the interest rate is the most significant fundamental indicator of a currency pair. However, as the forex market consists of several uncertainties, we should focus on money management strongly. We may face some market conditions where the price might react against our expectations. So, the only way to make a consistent growth of our trading balance is to follow strong trade management.

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Forex Course

154. Understanding Hawkish and Dovish Central Banks

Introduction

Introduction

Introduction

The movement in a currency pair depends on several factors. Hawkish and Dovish Central bank is one of them. Besides economic releases, there are some events where Central provides an outlook and projection of the economy. Therefore, if the projection is excellent, it will create a positive impact on the currency market. If the projection is terrible, it will create a negative impact on the currency market.

What is Hawkish Central Bank?

If the economic condition is good, the central bank will raise the interest rate to achieve the inflation target. The hawkish central bank means providing a positive statement regarding the country’s present and upcoming economic conditions, like the economy is getting stable or the inflation is under control.

Let’s say the US economy is getting stronger with a decreased unemployment rate and the controlled inflation target. In this situation, the central bank will provide an official statement saying that the economic condition is favorable, known as the hawkish tone.

What is the Dovish Central bank?

If the economic condition is wrong, the central bank will cut the interest rate and provide a dovish tone. The dovish central bank means providing an outlook of the economy, stating that the economy is facing difficulty to achieve the economic goal.

Let’s say that the European economy is struggling to achieve the targeted inflation level. Moreover, the unemployment rate is increasing. In this situation, the central bank is likely to provide a dovish tone starting that it is planning for a rate cut.

However, the dovish and hawkish tone might cover several factors, as mentioned in the table below:

Decision

Hawkish

Dovish
Objective Reduce inflation Stimulate the economy
Monetary Policy Tighten Loosen
Economic Growth Projection Strong Weak
Current Inflation increasing Decreasing
Interest Rate Increase Decrease
Currency Effect Strong Weak

How Hawkish and Dovish Tone Affect the Forex Market

The hawkish and dovish central bank has both long term and short term impact on the currency market. If the US Federal Reserve provides a hawkish tone, we might see the US Dollar become stronger against most currencies. Therefore, if we want to trade on a short term basis, we can move to the 5-minute chart and take trades based on a suitable trading strategy.

Moreover, the hawkish or dovish tone will indicate the overall outlook of a country’s economy that might help traders understand the upcoming market direction. For example, suppose the CPI, GDP, export-import, and other fundamental indicators are favorable. In that case, the central bank will provide a hawkish tone, and traders can take trades in a specific direction until there is a dovish tone.

Conclusion

Hawkish and dovish central banks directly affect the price of a currency pair; therefore, traders should keep an eye on the economic calendar to know when the event will happen. Moreover, during the central bank meeting and press conference, the market becomes volatile, affecting running trades. Moreover, the central bank releases a note after the website’s meeting where traders can read to know the dovish and hawkish tone.

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Forex Course

153. The Affect Of Monetary Policy On the Forex Market

Introduction

Introduction

Introduction

Fundamental analysis is one of the most reliable forex trading strategies in the world that considers economic releases and events. In fundamental analysis, many indicators provide a possibility of upcoming movement in a currency pair. Besides the economic release, some events like monetary policy decisions create an immediate impact on a currency pair.

What is Monetary Policy?

Monetary policy is an action or decision taken by the central bank to control the money supply and achieve the economic sustainability and macroeconomic goal. Every country has a strategic goal based on the current performance and upcoming economic growth of the economy. Therefore, most of the central bank changes the interest rate based on the economic condition.

Usually, the central bank sits quarterly for a monetary policy meeting to discuss the following four core areas:

  • Guideline for the money market
  • Interest rate decision.
  • Monetary policy measurement.
  • The outlook of the economic and financial developments.

How Monetary Policy Affects the Forex Market?

In a monetary policy meeting, the central bank discusses the present economic condition of a country. Therefore, any hawkish tone may create an immediate bullish impact on a particular currency. On the other hand, a dovish tone may create an immediate negative impact on a particular currency in any trading pair.

Besides the immediate effect, there is a long-term impact on the price of a currency pair. We know that any strength in an economy indicates a stronger currency. For example, if the ECB (European Central Bank) provides some consecutive outlook of the European economy saying that the inflation is under control, and the interest rate increased, which is likely to increase again in the next quarter. In that case, the influential European economy may create a Bullish impact on EURUSD, EURAUD, or EURJPY pair.

Moreover, there is some case where the central bank cut the interest rate where traders and analysts were expecting a rate hike. In this scenario, investors may shock at the news, and the effect might be stronger than before.

How to Trade Based on Monetary Policy Statement?

There is two way to trade based on the monetary policy decision. The first one is based on the immediate market effect, which is known as news trading. On the other hand, traders can evaluate the economic condition based on the recent monetary policy statement and see how the economy is growing in the long run. Based on this market scenario, traders can find a long term direction in the market based on economic performance as per the monetary policy statement.

Another way of trading based on the monetary policy decision is the fundamental divergence. If one fundamental indicator does not support another fundamental indicator, it creates fundamental divergence. For example, the US interest rate is increasing based on the strong employment report, but inflation does not support the rate hike. In this situation, traders can take trades with the possibility that the rate hike’s effect will not sustain.

Summary

Let’s summarize the effect of monetary policy in the forex market:

  • Monetary policy meeting happens quarterly where the central bank takes interest rate decision.
  • In the monetary policy meeting, the central bank provides an outlook of the economic and financial developments.
  • A hawkish tone makes the currency stronger, while the dovish tone makes the currency weaker.
  • Traders can identify the fundamental divergence based on the decision on monetary policy meeting.
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Forex Fundamental Analysis

The Importance of ‘Loan Growth’ as a Forex Macro Economic Indicator

Introduction Loan Growth is a suitable parameter for us to check whether the monetary strategies implemented by the Central Authorities are coming into play yet or not. Loan Growth also helps us to gauge the health of the economy in terms of liquidity. Loan Growth percentage serves as a litmus test, especially in a capitalist […]

Introduction Loan Growth is a suitable parameter for us to check whether the monetary strategies implemented by the Central Authorities are coming into play yet or not. Loan Growth also helps us to gauge the health of the economy in terms of liquidity. Loan Growth percentage serves as a litmus test, especially in a capitalist […]

Introduction

Loan Growth is a suitable parameter for us to check whether the monetary strategies implemented by the Central Authorities are coming into play yet or not. Loan Growth also helps us to gauge the health of the economy in terms of liquidity. Loan Growth percentage serves as a litmus test, especially in a capitalist economy, where credit and inflation primarily drive the economy forward.

What is Loan Growth?

Loan: It is a debt incurred by an individual or entity. The lender is generally a bank, financial institution, or the Government. The lender credits the borrower a sum of money. The borrower agrees to specific terms and conditions that can include finance charges, interest payments, due dates, and other conditions.

Loans can be secured or unsecured. In secured loans, the loan is given out against collateral with a financial value like a property, mortgages, or securities, etc.

Loan Growth: Loan Growth refers to the percentage increase in the number of loans issued overall by banks in a particular region over a particular time frame. The time frame can be monthly, semi-annual, or annual.

Most modern economies today we see are capitalist economies, i.e., they grow through capitalism. A capitalist economy requires money to expand and grow. Hence, credit is an inevitable fuel required for economic growth.

How can the Loan Growth numbers be used for analysis?

A healthy increase in the percentage of Loans is suitable for a stable and healthy economy. But as with any case, there is no perfect economy, and there are two sides of analysis to Loan Growth.

First Scenario

A healthy economy means it is growing at a stable rate year over year with mild inflation each year. Credit fuels economic growth in this type of economy. In this type of economy, an increase in the number of loans taken can be considered a positive sign for the economy.

Businesses can grow beyond just cash in hand. Householders can purchase homes without saving the entire cost before purchase. Governments can meet their spending needs without relying solely on tax revenues. Be it a business, householder, or a Government can smoothen out their economic activities in terms of money. They will take credit when in deficit and payback when in surplus.

An increase in Loan Growth can imply that more people are creditworthy, and more businesses are taking credit to expand and grow. Both of these scenarios are good for the GDP and is a good sign for the economy.

Second Scenario

The first scenario takes into the assumption that the economy is strong and stable. In reality, currently, most of the developed nations are struggling to maintain their economic growth. For example, the United States debt to GDP ratio is above 100%, which indicates that even if the entire GDP were given out to repay the debt, it would still be in some debt. Most of the developed nations have taken substantial credits to keep the economy from ticking over.

Keeping economic growth and global competency in mind, most countries have invested heavily in overgrowing in the short-term. By taking on more and more debts, countries may have achieved the necessary growth and needs now but have pushed their problems to the future.

Economists argue that eventually, there would be a time when countries cannot afford any more debt and would be backed into a corner. The only way out then would be at a considerable cost of losing out more than what they had made. Studies also show that rapid loan growth than the long term average also has seen an increase in underperforming or bad loans.

It is also essential to know that increase in Loan Growth should be accompanied by the fact that no bad loans are given out. Giving loans to people and businesses who do not have the eligibility but just because money is lying around is also a problem.

In the United States itself, the Government has been injecting money into the economy since the financial crisis in the form of Money Supply and Quantitative Easing programs to inflate their way out of depression or recession. Until now, the Government has not been able to reduce debt and is only taking on more debt to sustain the current growth.

An increase in loans is good or bad for the economy remains debatable for many. Without credit, sector growth is almost unimaginable in present times. For our analysis, we can use the Loan Growth rate as a litmus test to see whether the injected money from the Central Authorities has started reaching the public and businesses.

When the Central Authorities want to inflate the economy, they reduce interest rates by injecting money into the interbank market. The injected money takes time to get into the economy, and loans are one form in which this money gets circulated.

Overall, for our analysis, once Loan Growth shows increasing numbers, we can assume that the injected money is reaching the intended sectors, and consequent effects could be predicted on businesses and consumers. Loan Growth is indicative of a growing economy in general and is more prominent in developing countries.

Impact on Currency

Loan Growth is a by-product of a reduction in interest rates from the Central Banks of the country and an increase in employment and business growth. An increase in Loans indicates that money is “cheaper” to borrow. It is inflationary for the economy and is given out to induce growth (which may or may not happen).

An increase in Loan Growth depreciates currency as more money is competing against the same set of goods and services. A decrease in Loan growth appreciates the currency as the reduced liquidity forces goods and services to come at reduced prices.

Overall, Loan Growth is a low-impact indicator, as the Central Bank’s interest rates are the leading indicators, and the desired effect from increased loans can be traced from other leading indicators like Consumer and Business surveys.

Economic Reports

Since Loan Growth is not a significant economic indicator, official publications for significant countries are not explicitly published but can be obtained through reports analysis. For our reference, the Trading Economics website consolidates the Credit Growth in different sectors for data available countries on its official website. Since it is a consolidation, frequency and time of publication vary from country to country.

Sources of Loan Growth

Loan Growth consolidated available data for different countries are available here.

“The impact of bank lending on Palestine economic growth: an econometric analysis of time series data” has been referenced for this article.

How Loan Growth Affects The Price Charts

Loan growth is not a statistic. Most forex traders keep an eye when making their trades. The lack of interest is because it is considered a their-tier leading indicator. It is, however, essential to know how the release of this fundamental economic indicator affects the forex price charts.

In the EU, loan growth data is released monthly by the European Central Bank about 28 days after the month ends. It represents the change in the total value of new loans issued to consumers and businesses in the private sector. The most recent release was on July 27, 2020, 8.00 AM GMT can be accessed here. A more in-depth review of the economic news release can be accessed at the ECB website.

Below is a screengrab of the Forex Factory website. On the right, we can see a legend that indicates the level of impact the Fundamental Indicator has on the EUR.

As can be seen, low impact is expected on the EUR.

The screengrab below is of the most recent change in the loan growth in the EU. In June 2020, private loans grew by 3% as compared to the same period in 2019. This change represented a flat growth from the previous release. Based on our fundamental analysis, this should be positive for the EUR.

Now, let’s see how this positive news release made an impact on the Forex price charts.

EUR/USD: Before Loan Growth release on July 27, 2020, 
Just Before 8.00 AM GMT

From the above chart, the EUR/USD pair is trading on a neutral trend before the data release. The candles are forming around the flattening 20-period Moving Average. This trend is an indication of relative market inactivity.

EUR/USD: After Loan Growth release on July 27, 
2020, 8.00 AM GMT

After the news release, the pair forms a 15-minute bullish candle as EUR becomes stronger as expected. However, the news release was not strong enough to cause a shift in the pair’s trend since the pair continued to trade in the previously observed neutral trend.

Now let’s see how this news release impacted other major currency pairs.

EUR/JPY: Before Loan Growth release on July 27, 2020, 
Just Before 8.00 AM GMT

Before the news release, EUR/JPY traded in a similar neutral trend as observed with the EUR/USD with the candles forming around a flattening 20-period Moving Average.

EUR/JPY: After Loan Growth release on July 27, 
2020, 8.00 AM GMT

As observed with the EUR/USD pair, EUR/JPY formed a 15-minute bullish candle after the news release as expected. The subsequent trend does now significantly shift.

EUR/CAD: Before Loan Growth release on July 27, 2020, 
Just Before 8.00 AM GMT

EUR/CAD: After Loan Growth release on July 27, 2020, 
8.00 AM GMT

The EUR/CAD pair shows a similar neutral trading pattern as the EUR/USD and EUR/JPY pair before the news release. After the news release, the pair forms a 15-minute bullish candle but later continued trading in the earlier observed neutral trend as the 20-period Moving Average flattens.

The release of the loan growth data has an instant short-term effect on the EUR. The data is, however, not significant enough to cause any relevant shift in the prevailing market trend.

Categories
Forex Fundamental Analysis

What Can We Infer From A Country’s Central Bank Balance Sheet?

Introduction

Introduction

Introduction

Banks Balance Sheets are useful to ascertain the financial performance of the banks; this is correlated as an economic indicator when the bank in question is the Central Bank of the nation, for example, The Federal Reserve Bank of the United States. A Bank’s Balance Sheet can help us analyze its financial activities in terms of how much money has gone in and out of the banks and in what form, which can have different consequences on the economy. Hence, Analyzing a Bank’s Balance Sheet is useful for investors and also for our fundamental analysis.

What is Bank’s Balance Sheet?

A Bank’s Balance Sheet is a comprehensive summary of its total assets and liabilities. Assets here refer to financial instruments that BRING-IN revenue and liabilities refer to those for which the Banks need to pay off.  In simpler words, assets are what the bank “OWNS” and liabilities are what a company “OWES.”

Banking is a highly leveraged business. Banks make a profit solely out of the interest they receive on the lent out loans and the interest they pay out on the money deposited into their banks. Depositors would typically be general populations opening a savings account for their income and business firms having current accounts usually to maintain and run their holdings.

A Bank’s Balance Sheet has two important categories that divide the entire data, i.e., Assets and Liabilities. For the common man, liability would be a home loan which takes away a portion of his income and an asset would be the home itself on which he may or may not receive rent.

Assets | The assets of a bank can be the following
Reserves

Banks are to follow mandates as dictated by the Central Banks to maintain a certain amount of their total deposits as reserves, which cannot be used to lend out loans in order to maintain solvency during critical times. This mandate also makes sure banks maintain enough cash to meet the withdrawal demands daily at all times.

Loans

For the common man, a loan would be a liability, but for a bank, it is an asset as it brings in revenue in the form of interest. Banks can give credit to the general public, business firms, or even government through bonds. A loan is one of the primary sources of a bank’s income, and the proportion of loans to deposits can make or break a bank when they do not balance out.

Excess loans and fewer deposits can result in insufficient funds to meet withdrawal needs, and excess deposits can eat away the profit margin as the fewer loans do not generate enough revenue to balance out deposit rate amounts.

Cash

The liquid money that the banks maintain to run everyday operations and to show healthy solvency is the most precious of all assets as they can be traded without any loss of value directly without any lag.

Securities

Banks often purchase securities like the Treasury Bonds for which they receive interests regularly, which adds to their total assets.

Fixed Assets

Banks of decent size and scale often diversify their assets by purchasing fixed assets like real estate or gold deposits, which appreciate over time and match up with inflation and act as alternate forms of their other assets.

Balances at Central Banks

Banks are also required to maintain a certain proportion of balances in Central Banks.

Liabilities | The liabilities of a bank could be the following
Deposits

Money deposited by customers who can be people or business organizations.

Money owed to Other Banks

Banks lend each other money in the interbank market when they are either excess or short of their reserves.

Money owed to Bondholders

People owning bonds of banks receive money from the bank, and this generally includes shares and dividends that banks need to pay out as per bond agreement.

Owner’s Equity

Money that belongs to people who invested during the start of the company and helped it run.

Why Bank’s Balance Sheet?

In our context, we need to see the Central Bank’s Balance Sheet, which tells us what open market operations are being conducted by them, which can give us clues about the money circulation conditions in the economy. Since Money Supply metrics like M0, M1, M2 all originate at the Central Bank of a country, their actions and mandates can have a ripple effect in the entire banking system of the nation.

Hence, Central Banks are at the very heart of the Money Supply of a country. With their operations, they can pull out money from the economy or push new money into the system to ensure a smooth run of the economy.

How can the Balance Sheet numbers be used for analysis?

Central Bank activities have a direct influence on inflation and deflation. The Federal Bank in the United States for the past few years has been an active purchaser of bonds as part of the Quantitative Easing Programme, and this has led to a low-interest-rate environment and inflationary conditions. When the Fed releases money into the system on such large scales, it allows banks to lend more money to people and thereby to stimulate the economy. Withdrawal of money by selling their bonds could result in deflationary conditions likewise.

Besides this, what bonds the Fed purchasing is also important, as they have been continuously buying the government bonds to transfer government debt onto themselves, to help the government-run and be able to pay their interest bills in this low-interest-rate environment.

Impact on Currency

The Central Bank’s Balance sheet as a percentage of GDP is just another form of Government debt to GDP ratio, with the only difference being here the debt is owed to the Central Bank. When the debt of government goes beyond 80%, here the only viable choice is to maintain this inflationary condition and low-interest-rate environment.

A decreasing percentage of balance to GDP indicates a growing economy and strengthening of the currency, and an increasing proportion of the same shows an oncoming recessionary period, which is depreciating for the economy.

Economic Reports

In the United States, the Fed’s Balance Sheets are released on Thursday at 4:30 PM every week. Their balance sheet is included in the Federal Reserve’s H.4.1 statistical release titled, “Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks,” available on the official website.

There are also quarterly reports available for the same, measured as a percentage of GDP in the St. Louis FRED website, which is also a useful tool to monitor the bank’s activity.

Sources of Bank’s Balance Sheets

Below are the official Fed’s Balance Sheet reports – Fed Bal Sheet

Pictorial representation of the same is available in a comprehensive manner in the official website of FRED – FRED – Bal Sheet

Factors affecting Reserve Balances weekly reports can be found here – Thursday Fed Report

The news announcement of this fundamental Forex driver doesn’t have a great impact on the price charts. But we can look at the numbers of Government Debt to GDP ratio as mentioned above to trade the market. Cheers!

Categories
Crypto Guides

Do Cryptocurrencies Have The Potential To Be An Alternative Financial System?

Introduction

Introduction

Introduction

Bitcoin, the first cryptocurrency, bought a notion of decentralization in the market. Initially, it had a slow start, but later as the public began to understand the working of decentralized markets & the interest towards cryptos has increased. Its been ten years since Bitcoin’s inception, and currently, close to five thousand cryptocurrencies are existing in the market. The total market capitalization of all the cryptocurrencies combined is close to $195 Billion as of Dec 2019. The 24-hour transaction volume is around $78 Billion.

This kind of volume is enormous, but it can nowhere be compared to the gazillion amounts transaction volume that takes place in the Forex market. So it is safe to say there is a lot more that cryptos have to do to compete with the current financial system directly. But that doesn’t mean they don’t have the potential to do so. Hence, in this article, let’s discuss the pros of the decentralized financial system of cryptos and the cons of centralized current financial systems.

A bright future ahead?

Cryptocurrencies have features which prove to the extent that they do have room for being replaced with fiat currencies. The most crucial point of consideration is that cryptos cannot be quite easy as the fiat currencies, thanks to their decentralized and unregulated status. The technology that makes this possible is the blockchain network.

Moreover, cryptocurrencies could support the concept of universal basic income much better than the fiat currencies. In fact, some programs have already set an example by using cryptocurrencies as a means of distributing a universal basic income. Furthermore, cryptocurrencies could remove the existence of intermediaries in everyday transactions. This would eventually cut costs for businesses and help out the consumers.

Advantages Of Decentralized Financial Systems

✔️ Fraud prevention

Cryptocurrencies are powered by blockchain, which is an open-source ledger. Every single is recorded and recorded and verified through a consensus algorithm, so it is almost impossible to tamper with any transactions. This indeed is an enormous benefit of the decentralized financial system.

✔️ Shielded from government meddling

Decentralized financial systems, such as the cryptocurrencies, are not controlled by the government, central bank, or any other government body. This is a great advantage because when government meddles with currencies, it creates inflations or hyperinflation by devaluing, debasing, or printing too much currency in a short period of time.

✔️ Faster transactions

Decentralized-based cryptocurrency transactions are often much, much faster than the bank transactions. For bank wire transfers, the transaction time is around two days. But, in the case of cryptocurrencies transfers, it takes not more than a few minutes.

Disadvantages Of Centralized Financial System

❌ Regulations & Transaction Cost

There are limitations placed on how much of funds one can withdraw in a day & in a month. For instance, in the US, $2000 is the maximum withdrawal limit, and in some banks, it is less than $500. But when it comes to cryptos, it doesn’t matter. One can transfer any amount of funds without having to worry about the limits. Also, when it comes to the transaction cost, crypto transactions are way too cheaper than the typical bank fee.

❌ Payment Delays & Human Errors

Bank wire transfers typically take 1-5 days for the transactions to get processed. It also depends on various factors like the place from where you are sending money to. This is because each of the countries will have their own banks and hence different regulations. But cryptocurrencies do not have geographical boundaries like this. Transactions get executed almost immediately irrespective of where you live. Also, there is a possibility of the occurrence of minute errors as there is human involvement. But in the case of cryptos, users just have to copy-paste the corresponding address to perform their transactions. By doing this, there is very little chance of the occurrence of human errors.

Final Conclusion

The answer to the question ‘Do Cryptocurrencies Have The Potential To Be An Alternative Financial System?’ is NO as of today. But they do have the potential to be so. As of today, central banks are extremely powerful, and they can not be replaced with the current technology. One thing that we are sure about is that the cryptos have made an impact, and they have grabbed the attention of most of the central banks. We have also seen some of the central banks adopting blockchain technology to issue their own coins. So the most plausible prediction is that cryptocurrencies may play an active, supportive role in making the traditional banking processes extra cheaper, more transparent, and faster.

Categories
Forex Course

21. Who Are The Forex Market Movers?

Introduction
In the previous lesson, we discussed how the forex market is structured. Now, it is time to take this topic a little deeper. In this article, let’s understand the

Introduction
In the previous lesson, we discussed how the forex market is structured. Now, it is time to take this topic a little deeper. In this article, let’s understand the

Introduction

In the previous lesson, we discussed how the forex market is structured. Now, it is time to take this topic a little deeper. In this article, let’s understand the Forex market movers. The participants of the market during the late 20th century were quite less. But, as time passed by, the number of participants grew exponentially. The big players got bigger, and the small retail traders found their way into the market. And at present, the forex market is no less than an ocean.

The participants of the Forex market

The Forex is approximately a $5 trillion market. This kind of liquidity comes from several types of traders. Some of them come with large pockets, some with medium-sized capital and the rest to make a quick buck. Now, let’s get an insight into all of these participants.

Central Banks

Central Banks play a crucial role in the Forex market. The interest rate policies of the Central Banks influence the exchange rates to a large extent. They are also responsible for Forex fixing. They take action in the Forex market to stabilize and pump in the competitiveness of that country’s economy. Moreover, they participate in the currency exchange to manage the country’s foreign exchange reserves.

Commercial Banks

Many assume that commercial banks come under the central banks’ category. However, this isn’t true. The commercial banks are the most active participants in the FX market. They’ve got the biggest pockets out there and trade with considerably large quantities of lots. Due to this, they partially determine the exchange rates of the currencies as well. About 100 to 200 banks around the world assumed to ‘make’ the market. The commercial banks facilitate the services to the retail clients for conducting foreign commerce and making an international investment. The commercial banks include large, medium, and small-sized banks, and as a whole, these banks are referred to as the interbank market.

Foreign Exchange Brokers

Forex brokers also have their significance in the market. They are agents who facilitate trading between two parties. Note that these brokers are just matchmakers and are not really involved in determining the exchange rates of currencies. Brokers constantly keep an eye on the exchange rates and try matching the price of buyers and sellers to execute a trade.

Multi-National Companies

The MNCs are major participants in the FX markets, who do not come from the banking side. These companies usually participate in the forward or the futures markets. Their participation comes from the cash flow between different countries. MNCs typically set up contracts to pay or receive a fixed amount of foreign currency in the future date.

Retailers

The exponentially growing market in the Forex is the retail market. The retailers include smaller speculators and investors. Speculators, unlike the participants mentioned above, are not in genuine need of foreign currencies. Their motive from the market is simple. They buy or sell with a hope that the price will move in their favor and can end up with a profit. They get their orders placed by brokers who act as an intermediary between buyers and sellers. The power of retailers to move the market is minimal because their contribution to the volume traded in Forex is less than 6% of the total Forex volume.

These are the different participants who make up the entire Forex market. In the upcoming lesson, we shall open up more about the Forex brokers. Don’t forget to take the below quiz to check your learnings.

[wp_quiz id=”48275″]
Categories
Forex Educational Library

Financial Report Bank of Japan 2017

The Bank Of Japan Financial System Report

The Bank of Japan publishes the Financial System Report twice a year in order to assess the stability of the Japanese financial system and facilitate communication with interested parties who are concerned about such stability. The bank provides a regular and comprehensive assessment of the financial system with emphasis on detailing the structure of the system and the policies taken to achieve a robust system.

The bank uses the results of the report to plan the policy to be followed, ensuring the stability of the financial system and provide guidelines and warnings to financial institutions. The bank uses the results of international regulation and supervisory discussions.

In the April 2017 report, the bank reported a notable rise in the prices of the main stock indices and interest rates after the election of the new president of the United States. In Japan, there was also a rise in the stock market and the Yen depreciated. The bank continued with its policy of Quantitative and Qualitative Monetary Easing with Yield Curve Control

The internal loans of the financial institutions in circulation had increased close to 3% annually. There were no signs of overheating in the activity of the financial system nor the real estate market. In general, the financial system had maintained good stability since the crisis of 2008. The capital ratios required by financial institutions were above the level requested by the central bank and had sufficient capital for the risk to which they were exposed.

The results of the macroeconomic stress test indicated that financial institutions as a whole could be considered strong and resistant to economic stress situations. Developments in profits and capital of each institution in these situations of stress varied showing more robust institutions than others.

For the bank, the rise in the US stock market reflected better expectations of the economy and the administration of the new government. As a result of these better expectations about the United States, the dollar appreciated against the major currencies of the world.

In terms of the European financial markets, the stock market had maintained a good general performance coupled with low volatility. The most volatile period of the last two years occurred after the referendum of U.K.

Regarding the monetary policy of the Japanese central bank, the short-term interest rate remained close to 0% or in negative territory. The yields of the Japanese Government Bonds (JGB) continued to show a normal behaviour with the guidelines of market operations where the interest rate had been set at -0.1% and the target on yields on 10-year bonds was 0%. In the following graph, you can see how the yield curve of the JGB was.

Graph 82. Long-Term JGB yields (10 years) and JGB yield curve. Retrieved 5th March 2018 from https://www.boj.or.jp/en/research/brp/fsr/data/fsr170419a.pdf https://www.boj.or.jp/en/research/brp/fsr/data/fsr170419a.pdf

 

As for the Japanese stock market, it had shown an upward trend thanks to the good global performance of the shares, mainly in Europe and the United States. Since the end of 2016 and in 2017, the Japanese index had shown a stable behaviour without major changes.

The amount of credit risk of the main financial institutions had shown a downward trend. This was the result of improving the quality of the loans, which reflected a better dynamic of the economy in general. The following graph shows the decreasing trend of the risk of the main banking institutions.

Graph 83. Credit risk among financial institutions. Retrieved 5th March 2018 from https://www.boj.or.jp/en/research/brp/fsr/data/fsr170419a.pdf

 

In the second report of the year in October 2017, the bank noted that global volatility in the main financial markets remained low, along with positive but moderate economic growth, despite geopolitical tensions with North Korea and the United States. There were no significant changes in capital flows including flows destined for emerging markets.

In Japan, the monetary policy followed an accommodative path and the trend of loans granted had slowed due to a higher cost of loans in foreign currencies. Regarding the local financial market, the rate of growth of loans grew to 3%, and the demand for loans by small companies had improved.

The bank did not observe any financial imbalance in the assets and the financial entities. They continued using accommodative policies granting loans without major restrictions to the economy.

The real estate market showed no signs of overheating, but there was evidence of high prices in some places in Tokyo. In the stress scenarios applied by the central bank, if the financial market faced complex situations and the risk spread to the real economy, this could affect the real estate market.

The bank also did not observe greater imbalances in financial institutions or economic activity, so most commercial banks had good ratios between debt and capital, which made them resistant to stress situations as in the first delivery of 2017. The banks were robust in capital and liquidity regardless of the scenario in which the economy was located, due to a good rebalancing of the portfolios of the banks that have faced a greater demand for loans.

The benefits of Japanese banks have been decreasing, but this is happening at a general level in developed economies due to an environment of low-interest rates which was implemented by banks after the 2008 crisis. In Japan, they have also seen a decrease in the margins of profit of the banks due to the high competition between banks by the market, and in recent years have seen more exits of the market than entries of new banks.

A significant risk that the bank observed was the continuation of low-interest rates in the main economies in the world, which led to greater liquidity in the markets and investors taking more risk than desired by the bank’s board. Given the above, stocks in the United States and Europe had reached record highs, and valuation indicators P/E (Price/Earnings ratio) had reached historically high levels.

As in the April report, the volatility of the financial markets was low, which could mean an excess of market confidence at current valuations and an excessive risk taken by investors, coupled with greater investor leverage.  All this generated a greater risk than desired by the bank’s committee.

In terms of financial markets, the short and long-term interest rates remained stable as programmed by the monetary easing policy and share prices had risen moderately. The short-term interest rate remained in negative territory.

The Yen had depreciated against the Euro reflecting a decrease in uncertainties concerning political situations in Europe, and expectations of a reduction in the monetary policy of the European Central Bank (ECB). On the other hand, the Yen remained stable against the Dollar since the second half of 2017 and some investors expected an appreciation against the Dollar due to some political risks in the United States.

Finally, in the bank’s report, the committee stated that financial institutions had continued to increase their balance sheets reflecting an increase in deposits and the rebalancing of portfolios including risky assets. Assets and total debts of financial institutions increased to 236 trillion yen since 2012, and the portfolio was continuously balanced between bonds and shares.

In conclusion, with the reports issued in 2017 by the Bank of Japan, the financial system was resistant to stress situations tested by the bank, although as in most countries there are banks with better asset quality and portfolios, there are always recommendations for some specific banks. The economy grew moderately during 2017, and monetary policy remained accommodative to encourage banks to grant more loans and thus generate more growth which in the medium term would lead to inflation at 2%.

As mentioned previously, the bank saw some risks in international markets due to a euphoria unleashed, mainly in the stock markets, which could generate imbalances in the real estate sector of the economy. Regarding the Yen with respect to other currencies, the behaviour was stable during the year, although there were slight depreciations concerning the Euro and the Dollar.

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