You probably understand the larger picture in foreign exchange trading in terms of money supply; after all, you know it has to do with circulation. You know currencies can change within seconds because of computers. Investors have the power to change supply by buying or selling currencies. The situation has changed quite a bit because government treasuries no longer have as much power. In actuality printing of new currency is not as important as it used to be. It is instead a few keystrokes that can change money supply. You still have to watch out for government movements to ensure you are in the right position.
Foreign Exchange Trading: Treasury Movements
Any treasury around the world is in control of printing new money. In Australia, when new bank notes are made for better security or to replace the millions taken out of circulation due to damage, it is the treasury making this decision. Australian like the U.S. is considered a fiat currency in which there is no asset backing it. The treasury can decide to place an order for paper on the intention of printing new money and the foreign exchange trading market can change. The ink and presses are also added to the mix, so that new money is formed. Once it is ready to go the treasury puts it into circulation. There are times when the new bills are simply added without any money taken out. The treasury can decide that the money supply needs to increase. Most of the time the treasury is just flipping the switch to replace old bills with new ones. In times of economic turmoil in which the money supply needs to increase for stability purposes the treasury can get involved changing foreign exchange trading rates.
Foreign Exchange Trading: Central Bank Movements
The central bank will be a part of the treasury decision given that banks have the control in the overall forex market. Central banks have the ease of deciding whether to increase or decrease the money supply. It is even easier than flipping the printing presses on. Central banks can select a few keystrokes to suddenly change the circulation of money.
The U.S. is a good example, although you can look at Australia’s central bank too. The Fed when they wish to change the interest rate such as lowering it will put more money into the market. This is done by creating short term loans or repurchase agreements, where large banks undergo repo processes to put money into the market. The Fed is basically borrowing US Treasury money from a dealer, crediting the dealer’s account.
If interest rates need to increase, the Fed can reverse repo taking money out of circulation. When the central bank creates these moves no money is created or destroyed, which is why treasuries have less of a pull in the foreign exchange trading market. Central Banks have more control and will only ask for money to be made in specific circumstances. For you, as an investor, you have to be wary of central bank movements, especially relating to the currency pairs you will trade or the G7 like the U.S. and Australia.