The Central Bank’s Intervention
The central bank’s intervention is the most important fundamental change in the FX market both in the short-term or long-term. The intervention should be noted for short-term traders as it results in 150 to 250 pips of daily movements in just a few minutes.
For long-term traders, interventions can lead to significant changes in current trends. This is because the central bank conveys its current position (change in existing policies or adherence to existing policies) and intention to the market.
In general, intervention is an essential factor to observe as it can have a huge ripple effect on exchange rates in the FX market. Although the intervention occurs at an unexpected moment, the market already knows the need for intervention days or weeks before the intervention occurs.
FX Market Reflects Interventions Earlier
The direction of intervention is generally known to the market in advance because the central bank is already well aware of the excessive strength/weakness of its currency in the market. These interventions may provide traders with the opportunity to make a big profit, but some traders remain vigilant at this time.
We must note that the trend can quickly reverse by intervention because speculators can enter the market to prevent central bank intervention. Whether or not opposition forces in the market will block central bank intervention depends mainly on the number of interventions, past success rates, degree of intervention, the timing of intervention and economic conditions.
This intervention occurs more frequently in so-called developing countries such as Thailand, Malaysia, and Indonesia than in the G7 currency. The reason is that excessive appreciation of the currency’s value in these developing countries undermines its export competitiveness and hinders economic recovery. Market intervention in G7 countries does not occur frequently, but its effect is significant. Although interventions do not happen often, interventions are critical in fundamental trading because they result in rapid fluctuations in exchange rate movements.
What Traders Should Do!
1. Actively deal with interventions.
Use the central bank’s warnings as a signal. We may use a strategy to enter the market from a short-term low point by utilising government intervention’s invisible support lines.
2. Avoid dealing against intervention.
There are always people who act the opposite in society. However, trading against market intervention may be profitable but carry enormous risks.
With one central bank intervention, the exchange rate can quickly fluctuate by 100 to 200 pips or more. As a result, stop orders can be executed, which can lead to more significant movement.
3. Use stop orders when intervention acts as a risk factor.
Because of the nature of the market, where transactions occur 24 hours a day, interventions can occur at any time of the day. Stop orders must be made simultaneously with position entry. They are significant when there is a considerable risk factor for intervention.