(As written for My Paper on 15 August 2011. Click here to enlarge)

Every trader knows the importance of trading with the trend.

However, there is one indomitable force in the Forex Market that can temporarily over-ride the theory of trend. That force is known as Central Bank Intervention (CBI).

CBI occurs when central banks think that their currency is either trading too high or too low against a basket of major currencies. They then intervene forcefully by either buying or selling their own currency to bring rates to their desired levels.

Over the last two weeks, two central banks in particular, have signaled their intentions more than the rest: Japan and Switzerland.

As exporting nations, both Japan and Switzerland cannot afford to have a strong currency. A strong currency would affect overseas sales and erode corporate profits for some of their largest exporters.

In fact, car giant Toyota (based in Japan) and food giant Nestle (based in Switzerland) have lost billions simply because the Yen and the Franc have strengthened significantly.

On 4 August, Japan intervened in the Forex Market by selling over 4 trillion yen. This caused USD/JPY to sky-rocket over 300 pips in a matter of hours.

Interestingly enough, that move has been totally negated by the Forex Market, which has prompted Japanese Finance Minister Yoshihiko Noda to hint at another possible attempt.

“An unstable situation is continuing,” Noda said yesterday during a television talk show. “As foreign exchange market matters are my prerogative, I will continue to closely watch the markets and take bold action if it becomes necessary.”

Similarly, the Swiss National Bank (SNB) has dropped hints that it might intervene and weaken the Franc, which has soared 25% year-to-date against a basket of nine currencies. It has already boosted liquidity in money markets and cut borrowing costs to zero.

The Swiss government and the central bank are in “intense” talks over a possible franc target to stem currency gains, and may set such a target in the coming days, Swiss newspaper SonntagsZeitung reported.

This begs the question: why are the central banks telling us that they might intervene? Aren’t they concerned that traders will jump in for the free-ride?

In reality, central banks want traders to help. By signaling their intention, Japanese and Swiss central banks are hoping that traders will step in to help them weaken the Yen or the Franc; so that they wouldn’t need to finance the large-scale operation entirely on their own.

They are not really concerned if traders are making money out of the move, since their main concern is to stabilise the markets by regulating monetary policies.

It is for this reason that we are seeing USD/JPY, USD/CHF and EUR/CHF heading upwards since the start of the week.

Top News This Week

GBP Retail Sales. Thursday, 18 August 2011, 4.30pm. I expect figures to come in at 0.3% (previous figure was 0.7%).

Trade Call

Sell GBP/USD at 1.6230

On 11 August, GBP/USD reached a monthly low of 1.6108 on the hourly chart. Resistance is detected at 1.6308 and Support is at the last low of 1.6108. I expect the currency pair to continue to trade within this 200 pip range.

Our bias is for a short. A short is taken once prices drop to 1.6230. A protective stop is placed at 1.6320, a few pips above the previous high. We will take profit before prices reach the support level, exiting at 1.6130.

Entry Price = 1.6230
Stop Loss = 1.6320
Profit Target = 1.6130