The Central Banks in this lesson are not quite as large as the previous 4 we looked at in the last article but they definitely do have an impact on the Forex market quite often. And because of this fact, we want to pay close attention to them as well. Let's take a look behind the curtain and learn about who these central banks are now.
In this Article:
- Switzerland – Swiss National Bank (SNB)
- Canada – The Bank of Canada (BOC)
- Australia – The Reserve Bank of Australia (RBA)
- New Zealand – The Reserve Bank of New Zealand (RBNZ)
- Switzerland – Swiss National Bank (SNB)
SNB Structure:
The SNB is actually a publicly listed company that people can buy shares in which is different from most other central banks.
The Governing Board consists of three members and their deputies and is responsible for the operational management of the SNB.
The Bank Council oversees and controls the conduct of business by the National Bank. It consists of 11 members. Six members, including the President and Vice-President, are appointed by the Federal Council, and five by the Shareholders’ Meeting. The Bank Council sets up four committees from its own ranks: an Audit Committee, a Risk Committee, a Remuneration Committee and an Appointment Committee.
SNB Monetary Policy:
The SNB’s monetary policy strategy consists of three elements.
- The SNB states how it defines price stability. This statement changes over time as news and events shape the economy.
- It bases its monetary policy decisions on a medium-term inflation forecast. This can be interpreted as 6 months to 2 years.
- It sets an operational target range for its chosen reference interest rate, which is typically based on the three-month Libor. This means that the SNB uses an interest rate band rather than a specific target rate like most other central banks.
The Swiss National Bank conducts the country’s monetary policy as an independent central bank. It's obligated by the Constitution to act in accordance with the interests of the country as a whole. Its primary goal is to ensure price stability, while taking the prevailing economic situation into account. In so doing, it hopes to create a solid environment for economic growth.
The SNB is one of the less active central banks meeting only once every three months. However, if they have something to be concerned about they will meet more frequently.
Exports are King:
Like Japan or the Euro Zone, Switzerland is also very export dependant which means that the SNB does not like seeing its currency become too strong. Therefore, its general bias is to be more conservative with interest rate hikes.
The main thing working against them in this regard is that many investors see the currency and the country as a stable thing to invest in which naturally causes the Swiss Franc to strengthen.
Canada – The Bank of Canada (BOC)
BOC Structure:
The Bank of Canada has a similar structure to most of the other central banks. Monetary policy within the BOC is made by a consensus vote by a governing council that consists of the BOC governor, the senior deputy governor, and 4 deputy governors.
The BOC meets 8 times per year. It’s very rare that they would call a non-scheduled meeting unless there was a major concern in the financial markets. They did do this quite a lot in the Great Financial Crisis that kicked off in 2007.
BOC Monetary Policy Mandates:
Canada's monetary policy framework consists of two key components that work together; the inflation control target and the flexible exchange rate. This makes their mandate to preserve the value of the currency by maintaining an inflation target between 1% and 3%.
You can read to your heart's content on their website. There will be lots there that will fill in any gaps.
Australia – The Reserve Bank of Australia (RBA)
RBA Structure:
The RBA monetary policy committee consists of the central bank governor, the deputy governor, the secretary to the treasurer, and 6 independent members appointed by the government.
They meet 11 times per year, usually on the first Thursday of each month with the exception of January.
RBA Mandates:
The mandate of the RBA is to ensure the stability of the currency, maintaining of full employment, and economic prosperity and welfare for the people of Australia.
To achieve these statutory objectives they have an inflation target of between 2% and 3% per year.
An interesting note is that the Australian and New Zealand currencies are sometimes referred to as the Antipodeans. We have struggled to find out why they are called that but you will hear them referred to as Antipodeans from time to time. The best thing we can come up with is the Antipodeans were a group of Australian modern artists back in the 1950-60’s that spoke like cats or some weird stuff like that. We really don’t know, maybe you can email us a better definition and help us understand better….Team work!
New Zealand – The Reserve Bank of New Zealand (RBNZ)
RBNZ Structure:
Unlike all other major central banks that we have discussed so far, the RBNZ has a structure that gives the decision making power on monetary policy to the central bank governor alone. The rest of the members act only as advisors to the governor.
They typically meet 8 times per year.
RBNZ Mandate:
Its mandate is to maintain price stability and avoid instability of economic output, interest rates, and exchange rates.
The RBNZ has an inflation target of between 1% and 3%. It focuses hard on this target because failure to meet it could result in the governor of the RBNZ losing his or her job.
There are of course other central banks that you can trade around but the ones presented here are the major ones that will present us most of our trading opportunities. Once you get comfortable with how to analyse a central bank then you might want to check out some of the Scandinavian central banks or Mexico as their currencies are liquid enough to trade and are increasing in popularity with retail traders.
Up Next:
We are going to make a slight detour from central banks and talk about why the U.S. Dollar is so important to the entire FX market.