How to Trade Forex with Government Interventions in the Forex Market «

How to Trade Forex with Government Interventions in the Forex Market


Governments or monetary authorities always try to take actions in order to influence the exchange rate of their currencies relative to others. It is beneficial for traders because such interventions represent good trading opportunities to traders. Thus, traders need to know how to trade forex around government interventions and make profit by making use of the volatility properly.

What is intervention in forex trading?

In order to have a better understanding of how to trade forex at the time of government intervention, traders should first know what intervention is. Intervention is an attempt by a government or its monetary authorities such as central banks in order to maintain and stabilize the forex rates by buying or selling certain currencies.

When the governments choose to intervene in the currency valuation?

In order to know how to trade forex when there is government intervention, traders need to know when government interventions occur. When there is a sudden, unexpected and rapid value changes in a currency that is against the expectation of the government and it is difficult for the underlying government or the central banks to respond immediately and take any actions to curb or ease the influence of the sudden changes quickly, then the government intervention may take place. Take the USD/JPY currency pair for example; between 2000 and 2003, the Bank of Japan intervened several times in order to keep the yen valued lower than the dollar for they were afraid of an increase in the value of the yen, which may make exports relatively more expensive than imports. In 2001, Japan intervened and spent more than $28 billion to halt the yen from appreciating and they spent a record high, $33 billion, in order to keep the yen down in 2002.

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How to trade forex and make a profit around government intervention?

It is not rare that a great number of countries intervene in order to influence the forex rate of certain currencies. Therefore, traders need to know how to trade forex and make profit around government interventions. Interventions present interesting opportunities for traders. Traders can predict whether there will be an intervention; if they predict that there will be interventions, they can take actions beforehand in order to make money. If there is national debt or tragedy, it indicates that a currency forex traders are targeting is more likely to be valued lower. For example, the U.S. budget deficit causes the dollar to fall rapidly in relation to the yen, whose value, in turn, surges rapidly. In such circumstances, traders may predict there is a likelihood that an intervention will occur, which is possible to result in sharp price movements in a short term. This represents a good opportunity for traders to make good money by taking a position before the intervention and exiting the position after the effects of the intervention take place.

 

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