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KEY FOREX FUNDAMENTALS
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Technical and fundamental analysis are the primary methods used to analyze forex markets when making trading decisions. Both are extremely important aspects of forex investing and new investors should take the time to learn and understand market forces before attempting to trade the forex market.
Fundamental analysis in the forex market focuses on economic indicators, asset markets and political developments that determine forces of supply and demand as it pertains to foreign currency valuation. Economic indicators include data and economic releases pertaining to interest rates, inflation, unemployment, money supply and productivity. Asset markets include stocks, bonds and real estate. Political developments include any financial, social or political event that can impact the level of confidence in a nation’s government (and ultimately the confidence in that nation's currency).
Technical analysis focuses more on price action and volume to forecast future price direction. Analytic studies and indicators based on mathematical formulas are used to analyze historical pricing data to predict future price direction. If you would like more information on technical analysis techniques and studies, please visit our section on Technical Analysis.
We have listed a few key fundamentals for each of the main foreign currencies as they relate to the U.S. Dollar. Please click on a link below for currency fundamentals:
Key Fundamentals Impacting the U.S. Dollar
Federal Reserve Bank (Fed): The U.S. Central Bank has full independence in setting monetary policy to achieve maximum non-inflationary growth. The Fed’s chief policy signals are: open market operations, the Discount Rate and the Fed Funds rate.
Federal Open Market Committee (FOMC):
The FOMC is responsible for making decisions on monetary policy, including the crucial interest rate announcements it makes 8 times a year. The 12-member committee is made up of 7 members of the Board of Governors; the president of the Federal Reserve Bank of New York; while the remaining four seats carry one-year term each, in a rotating selection of the presidents of the 11 other Reserve Banks.Interest Rates:
Fed Funds Rate: Clearly the most important interest rate. It is the rate that depositary institutions charge each other for overnight loans. The Fed announces changes in the Fed Funds rate when it wishes to send clear monetary policy signals. These announcements normally have large impact on all stock, bond and currency markets.Discount Rate:
The interest rate at which the Fed charges commercial banks for emergency liquidity purposes. Although this is more of a symbolic rate, changes in it imply clear policy signals. The Discount Rate is almost always less than the Fed Funds Rate.10-year Treasury Note:
Since isuance of the 30-year Treasury Bond was discontinued in October 2001, the 10-year Treasury note has become the benchmark, or the bellwether treasury instrument for long term interest rates. It is the most important indicator of markets¡¦ expectations on inflation. Markets most commonly use the yield (rather than price) when referring to the level of the bond. As in all bonds, the yield on the 10-year treasury is inversely related to the price. There is no clear-cut relation between the long bond and the US dollar. But the following relation usually holds: A fall in the value of the bond (rise in the yield) due to inflationary concerns may pressure the dollar. These concerns could arise from strong economic data.Nonetheless, as the supply of 30-year bonds began to shrink following the US Treasury's refunding operations (buy back its debt), the 30-year bond's role as a benchmark had gradually given way to its 10-year counterpart. Depending on the stage of the economic cycle, strong economic data could have varying impacts on the dollar. In an environment where inflation is not a threat, strong economic data may boost the dollar. But at times when the threat of inflation (higher interest rates) is most urgent, strong data normally hurt the dollar, by means of the resulting sell-off in bonds.
Being a benchmark asset-class, the 10-year note is normally impacted by shifting capital flows triggered by global considerations. Financial/political turmoil in emerging markets could be a possible booster for US treasuries due to their safe nature, thereby, helping the dollar.
3-month Eurodollar Deposits:
Eurodollar deposits are bank accounts deposited in a country other than the country of the currency. Ex: Japanese Yen accounts deposited outside Japan are called "Euroyen". Similarly, euro-denominated accounts deposited outside the Eurozone are called "EuroEuros". The interest rate on 3-month dollar-denominated deposits held in banks outside the US. It serves as a valuable benchmark for determining interest rate differentials to help estimate exchange rates. To illustrate USD/JPY as a theoretical example, the greater the interest rate differential in favor of the eurodollar against the euroyen deposit, the more likely USD/JPY will receive a boost. Sometimes, this relation does not hold due to the confluence of other factors.10-year yields:
FX markets usually refer to the 10-year note when comparing its yield with that on similar bonds overseas, namely the Euro (German 10-year bund), Japan (10-year JGB) and the UK (10-year gilt). The spread differential (difference in yields) between the yield on 10-year US Treasury note and that on non US bonds, impacts the exchange rate. A higher US yield usually benefits the US dollar against foreign currencies.Treasury:
The US Treasury is responsible for issuing government debt and for making
decisions on the fiscal budget. The Treasury has no say in monetary policy, but
its statements on the dollar have an major influence on the currency. The Key
Treasury Officials are:
Economic Data: The most important economic data items released in
the US are: labor report (payrolls, unemployment rate and average hourly
earnings), CPI, PPI, GDP, international trade, ECI, NAPM, productivity,
industrial production, housing starts, housing permits and consumer confidence.
Stock Market:
The three major stock indices are the Dow Jones Industrials Index (Dow), S&P 500, and NASDAQ. The Dow is the most influential index on the dollar. Since the mid-1990s, the index has shown a strong positive correlation with the greenback as foreign investors purchased US equities. Three major forces affect the Dow: 1) Corporate earnings, forecast and actual; 2) Interest rate expectations and; 3) Global considerations. Consequently, these factors channel their way through the dollarCross Rate Effect:
The dollar’s value against one currency is sometimes impacted by another currency pair (exchange rate) that may not involve the dollar. To illustrate, a sharp rise in the yen against the euro (falling EUR/JPY) could cause a general decline in the euro, including a fall in EUR/USD.Fed Funds Rate Futures Contract:
Interest rate expectations can be made through the Fed Funds rate in the futures market. The contract’s value shows what the Fed Funds interest rate (overnight rate) is expected to be in the future, depending on the maturity of the contract. Hence, the contract is a valuable barometer of market expectation vis-?vis Federal Reserve policy. The rate is obtained by substracting the contract’s value from 100, and comparing the result to the prevailing Fed Funds rate in the cash/spot market.3-month Eurodollar Futures Contract:
While the Fed Funds futures contract reflects Fed Funds rate expectations into the future, the 3-month Eurodollar contract does the same for the interest rate on 3-month eurodollar deposits. To illustrate, the difference between futures contracts on the 3-month eurodollar and euroyen deposits is an essential variable in determining USD/JPY expectations.
Factors Affecting EUR/USD
The Eurozone:
The 12 countries that have adopted the euro in order of GDP: Germany, France, Italy, Spain, Netherlands, Belgium, Austria, Finland, Portugal, Ireland, Luxembourg and Greece.European Central Bank:
Controls monetary policy for the eurozone. The decision making body is the Governing Council, which consists of the Executive Board and the governors of the national central banks. The Executive Board consists of the ECB President, Vice-President, and four other members.ECB Policy
Targets: The ECB has a primary objective of price stability. It has two
main "pillars" of monetary policy. The first one is the outlook for price
developments and risks to price stability. Price stability is defined as an
increase of the Harmonized Index of Consumer Prices (HICP) of below 2%. While
the HICP is very important, a broad number of indicators and forecasts are used
to determine the medium term threat to price stability. The second pillar is
monetary growth as measured by M3. The ECB has a "reference value" of 4.5%
annual growth for M3.
The ECB holds a Council meeting every other Thursday to make announcements on
interest rates. At each first meeting of the month, the ECB holds a press
conference in which it gives its outlook on monetary policy and the economy as a
whole.
Interest Rates: The ECB’s refinancing rate is the Bank’s key short-term interest rate used for managing liquidity. The difference between the refinancing rate and the US Fed Funds rate is a good indicator for the EUR/USD.
3-month Eurodeposit (Euribor): Eurodollar deposits are bank accounts deposited in a country other than the country of the currency. Ex: Japanese Yen accounts deposited outside Japan are called "Euroyen". Similarly, euro-denominated accounts deposited outside the Eurozone are called "EuroEuros". The interest rate on 3-month Euribor, deposits held in banks outside the Eurozone. It serves as a valuable benchmark for determining interest rate differentials to help estimate exchange rates. Using a theoretical example on EUR/USD, the greater the interest rate differential in favor of the euribor against the eurodollar deposit, the more likely EUR/USD is to rise. Sometimes, this relation does not hold due to the confluence of other factors.
10-Year Government Bonds: Another important driver of the EUR/$ exchange rate is the difference in interest rates between the US and Eurozone. The German 10-year Bund is normally used as the benchmark. Since the rate on the 10-year Bund is below that of the US 10-year note, a narrowing of the spread (i.e. rise in Germany yields or fall in US yields or both) is theoretically expected to favor the EUR/$ rate. A widening in the spread, will act against the exchange rate. So the 10-year US-German spread is a good number to be aware of. The trend in this number is usually more important than the absolute value. The interest rate differential, of course, is usually related to the growth outlook of the US and eurozone, which is another fundamental driver of the exchange rate.
Economic
Data: The most important economic data is from Germany, the largest
economy, and from the euro-wide statistics, still in their infancy. The key data
are usually GDP, inflation (CPI and HICP), Industrial Production, and
Unemployment. From Germany in particular, a key piece of data is the IFO survey,
which is a widely watched indicator of business confidence. Also important are
the budget deficits of the individual countries, which according to the
Stability and Growth Pact, must be kept below 3% of GDP. Countries also have
targets for reducing their deficits further, and failure to meet these targets
will likely be detrimental to the euro (as we saw with Italy’s loosening of its
budget deficit guidelines).
Cross Rate Effect: The EUR/$ exchange rate is sometimes impacted
by movements in cross exchange rates (non-dollar exchange rates) such as EUR/JPY
or EUR/JPY. To illustrate: EUR/USD could fall as a result of significantly
positive news in Japan, that filters through a falling EUR/JPY rate. Even
though, $/JPY may be declining, euro weakness spills onto a falling EURUSD.
3-month Euro Futures Contract (Euribor): The contract reflects markets expectations on 3-month euro-Euro deposits (euribor) into the future. The difference between futures contracts on the 3-month cash eurodollar and on the euro-Euro deposit is an essential variable in determining EUR/USD expectations.
Other Indicators: There is a strong negative correlation between EUR/USD and USD/CHF, reflecting a steadily similar relation between the euro and the Swiss franc. This is because the Swiss economy is largely dependent upon the Eurozone economies. In most cases, a spike (dip) in EUR/USD is accompanied by a dip (spike) in EUR/CHF. The inverse also usually holds. This relationship sometimes fails to hold in the event of data or factors pertaining solely to either of the currencies.
Political Factors: As with all exchange rates, EUR/USD is susceptible to political instability such as a threat to coalition governments in France, Germany or Italy. Political or financial instability in Russia is also a red flag for EUR/USD, because of the substantial amount of Germany investment directed to Russia.
Factors Affecting GBP/USD
Bank of England (BoE):
Under the Bank of England Act of June 1997, the BoE obtained operational independence in setting monetary policy to deliver price stability and to support the government’s growth and employment objectives.In fall 2003, the
BoE changed its inflation target from RPI-X to the European Union’s harmonised
index of consumer prices (HICP), currently used by the European Central Bank.
Estimates find the 2.5% RPIX inflation to be the approximate equivalent of 1.75%
in HICP inflation rate.
Monetary Policy Committee (MPC): The BoE's Committee responsible
for making decisions on interest rates.
Interest Rates: The Central Bank's main interest rate is the minimum lending rate (base rate), which it uses to send clear signals on monetary policy changes at thefirst week of every month. Changes in the base rate usually have a large impact on sterling. The BoE also sets monetary policy through its daily market operations used to change the dealing rates at which it buys government bills from discount houses (specialized institutions in trading money market instruments).
Gilts: Government bonds known as gilt-edged securities. The spread differential (difference in yields) between the yield on the 10-year gilt and that on the 10-year US Treasury note usually impacts the exchange rate. The spread differential between gilts and German bunds is also important, as it impacts the EUR/GBP exchange rate, which could affect GBP/USD (see cross-rate effect).
3-month Eurosterling Deposits: Eurodollar deposits are bank accounts deposited in a country other than the country of the currency. Ex: Japanese Yen accounts deposited outside Japan are called "Euroyen". Similarly, euro-denominated accounts deposited outside the Eurozone are called "EuroEuros". The interest rate on 3-month sterling-denominated deposits held in banks outside the UK. It serves as a valuable benchmark for determining interest rate differentials to help estimate exchange rates. Using a theoretical example on GBP/USD, the greater the interest rate differential in favor of the eurodollar against the eurosterling deposit, the more likely GBP/USD is to fall. Sometimes, this relation does not hold due to the confluence of other factors.
Treasury: The Treasury's role in setting monetary policy diminished markedly since the Bank of England Act of June 1997. Yet, the Treasury still sets the inflation target for the BoE and makes key appointments at the Central Bank.
Sterling and EMU Membership: British Prime Minister Tony Blair often impacts the sterling when he makes vital references regarding Britain’s possible membership into the single European currency, the euro. In order for Britain to join the single currency, UK interest rates will have to converge down to the levels of the Eurozone. If the British people vote in favor of adopting the euro (vote expected after 2001), the sterling will have to decline against the euro so as to achieve sufficient trade advantage for British industry. Thus, any signs (speeches, remarks or polls) indicating a closer UK to the euro, is expected to have a downward impact on the sterling.
Economic Data: The most important economic data items released in the UK are: GDP, Claimant unemployment (number of unemployed); claimant unemployment rate; average earnings; RPI-X/HICP; retail sales; PPI/output; CIPS purchasing managers surveys (manufacturing and services); money supply (M4); balance of payments and housing prices; and BoE Quarterly Inflation Report. As stated earlier, the minutes of the Bank of England’s MPC meetings are also market movers.
3-month
Eurosterling Futures Contract (short sterling): The contract reflects
markets expectations on 3-month euro sterling into the future. The difference
between futures contracts on the 3-month eurodollar and eurosterling deposits is
an essential variable in determining GBP/USD expectations.
FTSE-100: Britain's leading stock index. Unlike in the US or
Japan, Britain's main stock index has relatively less influence on the currency.
Nevertheless, the positive correlation between the FTSE-100 and the Dow Jones
Industrial Index is one of the strongest in the global markets.
Cross Rate Effect: GBP/USD is sometimes impacted by movements in
cross exchange rates (non-dollar exchange rates) such as EUR/GBP. To illustrate:
A rise in EUR/GBP (fall in sterling) -- triggered by strengthening expectations
of UK membership into the euro -- could lead to a decline in GBP/USD (cable).
Conversely, reports indicating that the UK may not join the single currency
project will hurt the EUR/GBP, thereby boosting cable.
Factors Affecting USD/JPY
Ministry of Finance:
The MoF is the single most important political and monetary institution in Japan. Its influence in guiding the currency is more significant than the ministries of finance of the US, UK or Germany, despite the gradual measures to decentralize decision-making. MoF officials often make statements regarding the economy that have notable impacts on the yen. These statements include verbal intervention aimed at avoiding undesirable appreciation/depreciation of the yen.Bank of Japan (BoJ): In 1998, Japan passed new laws giving the central Bank (BoJ) operational independence from the government (MoF). While complete control over monetary policy has shifted to the BoJ, the MoF remains in charge of foreign exchange policy.
Interest Rates: The Overnight Call Rate is the key short-term interbank rate. The call rate is controlled by the BoJ’s open market operations designed to manage liquidity. The BoJ uses the call rate to signal monetary policy changes, which impact the currency.
Japanese Government Bonds (JGBs): The BoJ buys 10 and 20-year JGBs every month to inject liquidity into the monetary system. The yield on the benchmark 10-year JGB serves as key indicator of long-term interest rates. The spread, or the difference between 10-year JGB yields and those on US 10-year treasury notes, is an important driver of the $/JPY exchange rates. Falling JGBs (rising JGB yields) usually boost the yen and impact USD/JPY.
Agency of State for Economic and Fiscal Policy: Officially replaces powerful Economic Planning Agency (EPA) on January 6, 2001. Agency responsible for formulating economic planning programs and coordinating economic policies including employment, international trade and foreign exchange.
Ministry of Economy, Trade and Industry (METI): The once influential Ministry of International Trade and Industry (MITI) has been renamed to the Ministry of Economy, Trade and Industry. It is the Government institution aimed at supporting the interests of Japanese industry and defending international trade competitiveness of Japanese corporations. METI’s power and visibility is not as significant as it used to be in the 1980s and early 1990s, when US-Japan trade issues were the "hottest" topics in FX markets.
Economic Data: The most important economic data items from Japan are: GDP; Tankan survey (quarterly business sentiment and expectations survey); international trade; unemployment; industrial production and money supply (M2+CDs).
Nikkei-225: Japan’s leading stock index. A reasonable decline in the yen usually lifts stocks of export-oriented companies, which tends to boost the overall stock index. The Nikkei-yen relationship is sometimes reversed, wherein a strong open market in the Nikkei tends to boost the yen (weighs on USD/JPY) as investors’ funds flow into yen-denominated stocks.
Cross Rate Effect: The USD/JPY exchange rate is sometimes impacted by movements in cross exchange rates (non-dollar exchange rates) such as EUR/JPY. To illustrate: A rising USD/JPY (rising dollar & a falling yen) could be a result of an appreciating EUR/JPY, rather than direct strength in the dollar. This rise in the cross rate could be highlighted due to contrasting sentiment between Japan and the Eurozone.
Another example: Both EUR/JPY and EUR/USD rally because of a general strengthening in the euro. For some particular factors (such as better prospects in Japan), this could have a larger impact on the dollar than it does on the yen. As a result, USD/JPY weakens since the yen is relatively less hurt by the appreciating euro.
Factors Affecting USD/CHF
Swiss National Bank (SNB):
The Swiss Central Bank has maximum independence in setting monetary and exchange rate policy. Unlike most Central banks, the SNB does not use a specific money market rate to guide monetary conditions. Until fall 1999, the Bank used foreign exchange swaps and repurchase agreements as the main instruments to impact money supply and interest rates.Liquidity management has characteristically affected the Swiss franc due to the use of Foreign Exchange Swaps. If the Bank wishes to inject liquidity, it buys foreign currency (primarily dollars) against Swiss francs, thereby pressuring the currency.
As of December 1999, the Bank shifted from a monetarist approach (targeting money supply) to an inflation-based approach namely; a 2.00% annual inflation rate. The Bank will use a range in the 3-month London Interbank Offer Rate (LIBOR) to stir monetary policy in order to achieve the 2.00% inflation target.
SNB officials can affect the Swiss Franc by making occasional remarks on liquidity, money supply or the currency itself
Interest Rates:
The SNB uses the discount rate to announce changes in monetary policy. These changes have a significant impact on the currency. The discount rate, however, is rarely used at the Bank’s discount facility.3-month Euroswissfranc Deposits:
Eurodollar deposits are bank accounts deposited in a country other than the country of the currency. Ex: Japanese Yen accounts deposited outside Japan are called "Euroyen". Similarly, euro-denominated accounts deposited outside the Eurozone are called "EuroEuros". The interest rate on 3-month swiss-denominated deposits held in banks outside Switzerland. It serves as a valuable benchmark for determining interest rate differentials to help estimate exchange rates. Using a theoretical example on USD/CHF, the greater the interest rate differential in favor of the eurodollar against the euroswiss deposit, the more likely USD/CHF is to rise. Sometimes, this relation does not hold due to the confluence of other factors.Swiss franc’s Changing Role as a Safe-Haven Status:
The Swiss franc has historically enjoyed an advantageous role as a "safe" asset due to: SNB independence in preserving monetary stability; secrecy of the nation’s banking system; and the neutrality of Switzerland’s political position. Moreover, the SNB’s relatively hefty gold reserves had largely contributed to the franc’s solidity. Even as the currency’s international role starts to wane in the mid-1990s (partly due to the emergence of the dollar and fall in gold), the Swiss franc remains a valuable alternative in Forex markets.Economic Data:
The most important economic data items released in Switzerland are: M3 (broadest measure of money supply), CPI, unemployment, balance of payments, GDP and industrial production.Cross Rate Effect:
USD/CHF is sometimes impacted by movements in cross exchange rates (non-dollar exchange rates), such as EUR/CHF or GBP/CHF. To illustrate: A rise in GBP/CHF that is triggered by an interest rate hike in the UK, could extend franc’s weakness against other currencies, including the dollar.3-month Euroswiss Futures Contract:
The contract reflects markets expectations on 3-month euro swiss deposits into the future. The difference between futures contracts on the 3-month eurodollar and euroswiss eposits is an essential variable in determining USD/CHF expectations.Other factors:
Due to the proximity of the Swiss economy to the Eurozone (specifically Germany), the Swiss franc has exhibited a considerably positive correlation with the euro. The relationship is most prominent in the highly negative correlation between USD/CHF and EUR/USD. To illustrate, a sudden move in EUR/USD (triggered by a major fundamental factor) is most likely to cause an equally sharp move in USD/CHF in the opposite direction. The relationship between these two currency pairs is one the strongest in currency markets.
Factors Affecting USD/CAD
The Canadian Dollar:
Known as the "Loonie" because of the loon pictured on it. The Canadian dollar's exceptional position is highlighted by the fact that Canada's trade relationship with the US is the largest bilateral trade between in any 2 nations. Since nearly 80% of Canada's exports go to the US, the Canadian dollar is highly dependent on the strength of the world's largest economy. As a result, the USD/CAD rate often moves as a result of sentiment encompassing the US economy.The Canadian dollar is considered to be a "commodity currency" as commodities make up about half of Canada's total exports. But since these commodities are largely non-energy items, the Canadian dollar is generally more favorably impacted by a rise in non-energy products. Conversely, the currency is negatively impacted by a decline in the price of non-energy commodities. A rise in petroleum prices also weighs on the Canadian dollar as it erodes its purchasing power.
The Bank of Canada (BoC): The central bank's main objectives are "low and stable inflation" and "safe and secure currency". The price stability objective is underlined by keeping a 2.0% inflation target as the mid point of the 1.0%-3.0% target range. While inflation is measured by the consumer price index, the Bank uses a measure of core inflation (excluding food and energy prices) as an operational guide for measuring the underlying inflation trend and to better assess future changes in the total CPI figure. The 1.0-3.0% target range is renewed every 5-years. The current period ends in 2006.
The Bank's Board of Directors is composed of a Governor, a Deputy Governor and twelve directors. In addition to those, a Deputy Minister of Finance shall also be present at the board's deliberations but shall not have the right to vote. Both the Governor and Deputy Governor are be appointed by the Directors to serve 7-year renewable terms. The Finance Minister appoints the Directors. If a difference of opinion on monetary policy arises between the Finance Minister and the Bank, the Minister may, after consultation with the Governor, give to the Governor a written notice that must be followed.
Monetary Policy: It was only November 2000, that the Bank of Canada began introducing a new system of eight pre-specified dates each year for announcing any changes in interest rates, departing from the previous practice whereby rate changes be adjusted on any business day. Rate announcements are normally made at 9 AM on either a Tuesday or Wednesday.
Interest
Rates: Canada's key interest rate for setting monetary policy is the
Overnight Rate, or cash rate. It serves as a benchmark for other interest rates
used by banks to lend and borrow funds. The Bank Rate, which stands 50-basis
points above the Overnight Range, is the interest rate the Bank charges banking
institutions for advances enabling them to hold funds overnight through the
Large Value Transfer System (LVTS). On the bottom side of the Overnight Rate
stands the rate at paid by the Bank on any LVTS balances held overnight by those
institutions.
Factors Affecting AUD/USD
Australian Dollar "Aussie":
The Australian Dollar is known as a "commodity currency" as it is closely tied to the prices of Gold, Copper, Nickel, Coal and Wool, all of which make up nearly 2/3 of total exports. Since these commodities account for large share of Australia's exports, the Aussie's fortunes are dependent upon the general trend in the price of these commodities. The currency usually benefits during an inflationary environment, when these commodities are leading the fray. Note for instance how the rise in gold prices in early 2002 was accompanied by a rise in the AUD/USD exchange rate. Both the currency and the metal backtracked in summer 2002 before both resuming their rally in Q4 2002.Australia's significant close relationship with Japan (20% of total Australian exports) and the Eurozone also explains why the Aussie moves in tandem with the euro and the yen. Thus, in currency markets, one notices a fairly inverse relation between the AUD/USD and USD/JPY exchange rates. Like the EUR/USD and GBP/USD exchange rates, the AUD/USD rate is expressed in US dollars represented by 1 Australian Dollar.
Reserve Bank of Australia (RBA): The Reserve Bank Act of 1959 provided the RBA independent responsibility over the central banking functions of Australia. The RBA's charter mandates the central bank to preserve the stability of the Australian dollar and maintain full employment. The bank's objectives were defined in 1993, when the Bank assumed operational independence. The objectives are based upon a forward-looking inflation target of 2-3% per annum. The target is set for the medium term in order to encourage sound and sustainable economic growth.
Reserve Bank Board: The Reserve Bank Board is responsible for the formulation of monetary policy. The Board meets eleven times a year on the first Tuesday of every month, with the exception of January. Interest rate decisions are usually announced one day after the meeting. The nine-member board is made up of three ex officio members; the Governor, the Deputy Governor, and the Secretary to the Department of the Treasury and six external members, appointed by the Treasurer. The Governor and Deputy Governor are appointed to terms of up to seven years, with eligibility for reappointment. The six external members are appointed to terms of up to five years.
Interest Rates: The RBA's key monetary policy tool is the overnight money market interest rate, expressed in terms of a target for the cash rate. The cash rate is the rate charged on overnight loans between financial institutions.
The Commonwealth Treasury: Although the RBA has assumed operational independence in 1993 along with the implementation of an inflation target, both the Bank's Governor and Deputy Governors have to be appointed by the Treasurer.
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