For business owners, offering benefits is a key retention and attraction tool, especially Manipulation by central banks The exchange rate of a currency reflects the economic stability of a country. A stable and strong exchange rate is generally preferred by investors across the globe. However, there may be situations where the exchange rate becomes too strong or weak according to the assessment made by the country's central bank. An extremely strong currency would affect exports and encourage imports, thereby leading to a trade deficit. Likewise, an extremely weak currency would increase the cost of imported goods, which may include raw materials as well. This would weaken the economy further. Therefore, in order to bring the exchange rate of a currency to a desired level, central banks manipulate the currencies by three ways. If the deviation is only small, strongly worded statements would shift the market’s sentiment towards the currency in favor of the central bank’s expectation. If that does not work out, then central bank’s usually hike or lower the prevailing interest rates. A currency becomes more attractive to investors when there is a hike in interest rates and vice versa. Therefore, a hike in interest rates generally propels the exchange rate of a currency upwards. The value of a currency falls when a central bank slashes the benchmark interest rates. If these two methods do not work, then central banks intervene in the market and bring the exchange rate of a currency to the desired level. However, this would work only when there is economic stability in the country. The central bank of a country with a strong economy will have practically unlimited financial strength. The Swiss National Bank is a classic example of this case. The Swiss National Bank held the exchange rate of the franc against the euro at or below 1.20 for a period of over three years ended 2015. Having failed to weaken the exchange rates through the implementation of negative interest rates, the SNB actively intervenes in the market to ensure the franc does not strengthen further. In such cases, a retail trader should avoid trading against the objective of the bank as it would end in a loss. If the economy is not strong, then the central bank will not be able to manipulate the currency as its buying power will be very much limited. Solution To prevent manipulation of the fix rates, the window time has already been increased to five minutes. This makes it difficult for even big players to manipulate the market. Region wise, central banks in some countries have started using a different methodology to arrive at reference rates for the domestic currency. For example, in India, the exchange rate for US dollar against Indian rupee is polled from the select list of contributing banks at a randomly chosen five minute window between 11:30 and 12:30 IST every weekday (excluding bank holidays in Mumbai). The new system came into existence from 2014. China has also changed the manner in which the yuan’s exchange rate is calculated. Therefore, manipulating the fix rate is no longer attractive, compared to the risk. The entire process of manipulating the fix rate was done in a confident manner because banks shared their order book with each other. If a huge order, which offsets the order placed by banks, is executed by a large individual trader or institution, then the whole plan will break apart quickly. Since the time window for calculating the fix rate has been increased, banks will be extremely hesitant to venture into such activities again. We should also remember that banks changed the exchange rate of a currency pair by about 30 pips during the period of manipulation discussed here. So, a retail trader who is playing by the book will hardly lose anything. Since banks trade hundreds of millions of dollars, such a small difference in fix rate would make a huge difference in their net profits. The manipulation done by brokers can be avoided by doing adequate background checks before opening a trading account. Furthermore, to avoid dealing with a Forex broker who is involved in stop hunting, a trader can use multiple demo accounts to compare exchange rates quoted during volatile hours or when major economic data is released. This would enable a trader to assess the Forex broker and also understand the spread offered. To judge a broker, traders can also compare the price shown by the company’s terminal with the price feed of Reuters and Bloomberg. Conclusion Big banks still have the capability to manipulate the foreign exchange market. However, the net impact on the exchange rate will be a matter of only 20-30 pips. Furthermore, regulators have plugged most of the loopholes to avoid a repeat of such incidents. Top banks have realized that they can no longer afford such misadventures. So, retail traders have nothing to worry about it. However, selecting a proper Forex broker is a must to avoid price manipulation that may cost dearly soon.