Politicians and Central Banks
Because there is no central body that governs the entire forex market, there is no way of knowing for sure who is active in the market and how much they are buying or selling. For example, a central bank may enter the market in an attempt to influence prices in order to achieve a economic or political advantage. It isn’t the preference of most governments to always have a strong currency. This is because it makes local export less competitive against its trading partners. To this end, a central bank may sell large amounts of its currency to cause devaluation.
A case in point, it is widely believed that Switzerland’s central bank had intervened in the markets to stem the appreciation of its currency against the Euro on March 11, 2009 and it has been rumored that it has done so on other occasions in 2010 (see Figure 1). However, it must be noted that because the forex market is so large, no one market player is able to control price movements for an extended period of time. But because central governors and finance ministers have the first look at economic data, traders tend to hang on their every word for some indication as to where exchange rates are likely to go.
Figure 1. Swiss Central Bank Market intervention.
In other instances a governing party may take steps to revalue its currency for political reasons. Politicians know voters rejoice when their currency is strong and exporters celebrate when it looses value. How and when they satisfy the competing groups depends, to a certain extent, on where they are in the political cycle. Election year usually brings talk about how important it is to have a strong currency, but politicians know that the economy is likely to struggle when exchange rates are high at least as far as the exporting sector is concerned.