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Understanding Currency Manipulation

By bhaskarndas | Indian Currency Market | 28 Aug 2020

On Aug 05, 2019, USA labelled China as a “Currency Manipulator”. This move made by the USA had sent ripples in the markets, and the result was mayhem which everybody experienced in Aug and September in 2019. Forex, stock market and other relevant markets were too much volatile and had sharp moves. But what is the meaning of Currency Manipulator? Why the USA labelled China as a Currency Manipulator? These are the questions which still people ask on various social media platforms. In this article, I will try to decode the term “Currency Manipulator” and also try to explain what effect it could have on the currency markets.

What is Currency Manipulation?

Any institutional body or someone is said to have indulged in currency manipulation when they rejig the exchange price of one currency against the other. Usually, currency manipulation is a work of large institutions or government bodies. As the supply of any currency in the market is sufficient for normal people and the average trader, they do not stand in the definition of currency manipulation. The reason is simple: its quite impossible for a single person in his/her capacity and dealing through own funds to manipulate a single currency or basket of currencies. However, if the same person has been bestowed powers by the large financial institution, be it private or government can manipulate a single currency or basket of currencies by using the same powers. Generally, a country’s central bank or central regulatory authority carries out large scale manipulations. Even Private banks and groups of banks are known to either work in their respective capacity or are complicit in massive currency manipulation operations carried out globally.

If you are surprised that private banks or group of banks together can’t manipulate the exchange quotes then check out this article. So coming back to our main topic “currency manipulator.”

What are the ways by which currency manipulation is achieved?

Ok, this question has to be answered in two different parts. The first one covers the private banks, and the second one covers the Government agencies, Financial regulators and central banks.

Currency Manipulation by Private Banks

These are some of the dirty banks who frequently indulge in currency manipulation

  1. J. P Morgan
  2. Morgan Stanley
  3. Deutsche Bank
  4. Barclays
  5. Citigroup
  6. Julius Baer
  7. Royal Bank of Scotland
  8. Lloyds
  9. HSBC, etc.

The bank traders have several names for these banks. The names such as “The Cartel”, “The Bandits’ Club”, “One Team, One Dream” and “The Mafia” are frequently used to call these banks.

The traders who work for these banks have a very easy job. There are tools which enable them to get the number of shorts and longs across the globe for currency pairs. The traders then have to take the opposite trade. Most manipulated pair is the EURUSD and followed by most of the pairs where USD is paired. Tools such as IG sentiment Index make their life quite easy, and the banks know where the bad money is sitting.


Image source : dailyfx

The above IG sentiment index shows the number of shorts vs the number of longs and the price movement of EURUSD. If you closely observe the chart as soon as the traders become bearish, the banks have gone long. This behaviour is shown towards the end of the chart. Let us check another chart here.


image source: dailyfx

The above IG Sentiment index for GBPUSD clearly shows from the beginning that the moment the traders are turning bearish, the prices are rising and vice-versa. This indicates that the moment majority of the traders have turned bullish, the banks have shorted the pair whereas when the traders have turned bearish, the banks have gone long on the pair.
This is a rampant practice which is carried out by the banks on a daily basis though the extent of it could be small or large depending on the banks’ requirements.

Currency Manipulation by Government agencies, regulators and Central banks

This is something which almost every Government and its agencies do, including the central banks. There are several ways and instruments by which this achieved as any Government and its agencies have more power as compared to a group of private banks to exercise these manipulations. The idea is to provide stability to local currency. When Government agencies or the Government itself through Central banks carry out manipulation, then it is considered under the ‘protectionism policy’ of the country or in favour of national interest. The mechanisms used by these entities may not fall under the purview of local laws or in short, are quite legal. Still, in the international market, these practices could be considered illegal resulting in the country’s currency listing in the ‘currency manipulator list’. The mechanism used by these Government entities are :

  1. Change in monetary policies and thereby change in interest rates
  2. Bulk buying or selling of Treasury Bonds
  3. Bulk buying and selling of other Foreign assets
  4. Quantitative easing
  5. Raising anti-dumping and import duties, etc.

These mechanisms could also be deployed to gain undue advantage in international trades where one nation could gain an advantage at the expense of another nation by manipulating the currency exchange.

Does Indian private and public banks also carry out currency manipulations?

So far, there are no single data to support the above question. But to an extent, every single entity carries our manipulation work which could be legal in the eye of the country’s regulators and laws while it could be illegal at the global level. But the possibility of rampant practices of manipulation to be adopted by the Indian banks can’t be denied in the future. The latest RBI circular, which allows select banks to participate in 24X7 forex markets raises the possibility for the future currency manipulation practices that could be adopted by these banks. But right now there is no data to support the above question.

Who creates the Currency Manipulator List?

The USA creates the currency manipulator list.

Which act is implemented while creating the list?

Well, there is no act for creating the list, but 1988 Omnibus Foreign Trade and Competitiveness Act requires the US Treasury to analyze the exchange rate policies of foreign countries with the USA annually. Based on this analysis the USA decides whether the country has been involved in the exchange rate manipulation between USD and the respective currency

As the Wikipedia says

Under the 1988 Omnibus Foreign Trade and Competitiveness Act, the United States Secretary of the Treasury is required to “analyze on an annual basis the exchange rate policies of foreign countries … and consider whether countries manipulate the exchange rate between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade” and that “If the Secretary considers that such manipulation is occurring with respect to countries that have material global current account surpluses; and have significant bilateral trade surpluses with the United States, the Secretary of the Treasury shall take action to initiate negotiations with such foreign countries on an expedited basis, in the International Monetary Fund or bilaterally, for the purpose of ensuring that such countries regularly and promptly adjust the rate of exchange between their currencies and the United States dollar to permit effective balance of payments.

What are the impacts of currency manipulation?

There are two parts to this question:

a) Impacts due to private banks

When Private Banks do currency manipulation, the immediate impact is felt by the retail traders and investors. Massive manipulation can lead to market crashes or spike. These practices also create the environment of massive volatility resulting in margin calls to both types of traders (long and short).

b) Impacts due to Government and central bank policies

Well, it could have both positive and negative impacts and would require separate article which will discuss in detail all the pros and cons. However, some specific points could be highlighted here. For example, imposing high import duty on similar kinds of the item can indirectly promote local products with the same quality as compared to imported item. Radial Tires frequently are subject to the anti-dumping duty to promote the local Tire manufacturers.

Frequently reducing the interest rates could have both negative and positive impact. Lowering of interest rates means the local currency becomes not attractive for investment but at the same time helps domestic industries to borrow at cheap interest rates.

Severe sanctions could be placed on the country which has made to the list of the currency manipulator. Sanctions such as trade sanctions ban on the country to trade in international business zones etc. are some of the severe implications. These Sanctions could be imposed by the USA, IMF and other international bodies. The best case is the USA sanctioning China and putting the country under “The Currency Manipulator List”.

Does RBI carry out Currency Manipulation?

Too some extent yes RBI does currency manipulation but to consider it as a legal or illegal activity is quite complex and not easy to decide. We are not concerned over the legality or illegality of the actions carried by RBI. This article tries to analyze what is Currency Manipulation and its implication.

The central bank frequently intervenes to stabilize the Rupee. These interventions come when there is an appreciation or depreciation of more than 1% in a single day. Thus RBI intervenes to provide liquidity and stabilize the volatility in the currency’s movement.

How RBI intervenes?

There are several ways to carry out intervention or currency manipulation. Out of these two of the most deployed strategies are :

  1. Buying and selling treasury bonds of foreign governments.
  2. Buying and selling of Currency Contracts through open markets.

Should traders worry about these currency manipulations?

Well, again its a complex question and depends on the pair you love to trade. Most famous is the dirtiest. EURUSD and GBPUSD are the popular currency pairs and also the most manipulated pairs it becomes quite difficult to trade when technical indicators and fundamentals indicate a good trade but manipulation could spoil the mood.

If you are trading in USDINR pairs, then any movement above 1% during the morning hours is sure to be spoiled by RBI intervention. You are good as long as the pair movement is restricted within 0.33–0.45%. But RBI doesn’t manipulate to extreme levels like the dirty group of banks mentioned above.

Any comment, correction and feedback are welcome.

This article first appeared in

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