8/8/2019 Forex Market Participation

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FOREX MARKET PARTICIPATION

10 largest bank which make up the foreign exchange market....account for 75% of the over 3

trillion $ daily trading volume.

Central banks also participate in the foreign exchange market...2 reasons for participating:

1)to fixed or pegged the value of its currency to a particular level...the currency of some

developing countries are fixed and valued to the dollar or to some other currency or basket of 

currency....this is to try nd promote international competitiveness in the market  and a currency

environment which is more conducive to economic stability....

Eg...China...maintained a fixed value of currency against a US dollar

A central bank accomplishes this by.......buying there own currency when the value gets too weak,

creating more demand and therefore driving the value up....and selling the currency when the it

gets too strong creating a greater supply of the currency and therefore lowering  its value back to

the desired level.

2)is to protect the value of its floating currency from extreme movements

...japan,us,eurozone nd other major economies have floating exchange rates

The value of the currency is determined by market forces...although the value of this currency

flows freely in the mkt most of the time...

Currency strengths or weakness has a dramatic effects on the countries international

competitiveness....there r instances when central bank intervenes in the market even with the

major currencies..normally this is  only seen after a large one direction move in the market...to the

point where countries stability and competitiveness is seriously damaged

y It was six years ago when the Bank of Japan last intervened in the currency

market. In 15 months through March 2004, the BOJ sold ¥35 trillion yen ($421.7

billion) for dollars. What was the BOJ trying to accomplish? As noted back then 

Economy Trade and Industry Minister Takeo Hiranuma said "a dollar at ¥115.00 is

the ultimate life-and-death line for Japanese exporters".

Two comments:

Since then the yen has increased by 35% in value relative to the U.S. dollar and this hasn't

let to the "death" of Japan's export economy

Even after a year year+ long intervention effort the Bank of Japan ultimately failed to stem

a substantial appreciation of the yen.

Yen bulls may take some comfort in this history. However, currency investors should also

be aware that the Bank of Japan is generally considered to be a worthier opponent than

other central banks which have recently failed to halt a rise in their currencies.

 

 

 

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