How is the exchange rate of the Central Bank of the Russian Federation formed, on the "Forex" and on the MICEX?

The exchange rate is constantly in a state of fluctuation, therefore, in order to avoid financial and economic risks, it is necessary to understand the forecasting mechanism and the mechanism that explains how the exchange rate is formed.

This issue is especially urgent today, when Russia seeks to get out of the dollar dependence by pursuing an independent policy. To understand some of the difficulties arising on this thorny path, it is necessary to understand how the exchange rate is formed in Russia and around the world.

A bit of history

Until the thirties of the last century, in most countries, the so-called gold standard operated. According to him, the gold was set in gold. Governments had to change their currencies to gold. To support the system, a strict correlation was introduced between the money supply within the country and its gold reserve. According to the gold content, their courses were formed. For example, one US dollar set twenty-three and twenty-two hundredths of a grain of gold, and one British pound - one hundred and thirteen grains, that is, four as many as eighty-seven hundredths of the time. According to these calculations, the rate was determined, where one pound was 4.87 dollars.

Gold and currency system

After the thirties and the Great Depression in America, most countries installed a gold and currency system, where the exchange rates were formed due to the ratio of the reserve currency, which became the dollar. The International Monetary Fund , created in 1944, contributed to the stability of currency exchange rates . Due to contributions from there, loans were extended to states experiencing financial difficulties.

System of floating exchange rates

How is the exchange rate formed? In the seventies, the system of floating exchange rates replaced the gold and currency system. Its meaning lies in the formation of exchange rates at the expense of supply and demand, as securities on the exchange. However, the exchange rate did not become completely free. When a certain limit was reached, the state had parity (as from 1979 in Europe), and the country's central bank, by coordinating its actions with other countries, officially changed the course. If the change was in the direction of decrease, then there was a revaluation, and increases - devaluation. The limit was reached with changes of several percent, but in the nineties it increased to fifteen percent.

Revaluation and devaluation are not the only ways of state intervention in the process, explaining how the exchange rate is formed. To avoid strong fluctuations, they introduce so-called currency interventions, where, if the exchange rate falls, they buy it, and if on the contrary - they sell.

The mechanism is far from always successful, since the owners of the national currency abroad are not subject to the instructions of their governments. For example, if the US raises the rate on a loan, then the credit rate of monetary units outside the US remains the same, which makes them more attractive.

General factors influencing the formation of exchange rates

How is the exchange rate formed at the exchange, in banks and in the states as a whole.

1. Export and import. The higher the price compared to the foreign prices in the country, the greater the import. Thus, the price of foreign currency will be high.

   With the growth of income, the demand for imports will increase, which will cause a reduction in the price of the national currency.

   On the other hand, with high national income abroad, the price of foreign currency is declining.

2. Movement of capital. If the investor wants to get more foreign cash, deposits, shares, bonds and liabilities, the price of foreign currency increases.

   On the other hand, payments to a state strengthen the exchange rate of its currency.

3. Data output and waiting for data output. These data include: the publication by the host countries of economic indicators, statements about changes in interest rates, economic reviews and other.

4. Activity of funds. A huge force that affects the movement of exchange rates is taken by funds when investing in certain currencies. They have large means that can make the course move in any direction.

5. Activities of exporters and importers. They are users of the foreign exchange market interested in selling and buying foreign currency. However, this impact is insignificant and short-term, because the volumes of their foreign trade transactions are negligible in comparison with the total volume of operations in the foreign exchange market.

6. Statements of politicians. At various meetings, summits, press conferences, and so on, such performances are monitored on-line, after which the currency market reacts immediately, depending on the strength of the statements.

   Everyone remembers the end of 2014, when Russian President Vladimir Putin, with his speech, instantly stabilized the ruble ("spoke the course"), thus stopping his swift fall.

7. Activities of central banks. The mechanism of its influence is described below.

central bank

Let's consider how the Central Bank's exchange rate is formed.

The influence of states on the foreign exchange market is carried out through central banks. As already noted, it is extremely rare that the state does not intervene at all in a currency exchange operation (the state of free navigation). As a rule, they from time to time affect the course (the state of dirty swimming), thus affecting how the Central Bank's exchange rate is formed.

In the interests of production and consumption, the state is directly and indirectly regulated. Direct regulation takes place with a discount policy and currency interventions. Indirect regulation is carried out through the level of inflation, the amount of money in circulation and other.

TSB RF

Further on, how the exchange rate of the Central Bank of the Russian Federation is being formed.

Daily, except for weekends, the Central Bank of the Russian Federation sets the rates for most currencies to the ruble. The dollar to the ruble is determined on the basis of how the auctions were held on the eve of the Moscow Interbank Currency Exchange. The same applies to the euro. The remaining currencies are formed through cross-rates, that is, the relationship between the ruble and another currency, based on the relationship to the dollar.

The way the Central Bank's currency is being formed is also influenced by imports and exports. If you sell more goods than you buy, it is better that the national currency is cheaper, and vice versa.

The central bank sets the rate for more than thirty types of currencies. This is the dollar, euro, yuan, franc, yen, hryvnia and others.

Since 2005, the Central Bank of the Russian Federation has moved to the bi-currency basket of the dollar-euro. It is believed that in this way more flexible regulation is achieved and the growth of volatility is realized. The rate is calculated from the ratio in the Forex markets of the dollar-euro currency pair and on the MICEX quotations of the ruble against the euro.

Banks

How is the exchange rate in banks formed? Other banks have the right to establish their own courses. They basically offer to buy currency at a lower cost, and sell - more expensive than the price offered by the Central Bank.

MICEX

How the exchange rate is formed on the MICEX is also an interesting question.

Trades in foreign currency on the Moscow Interbank Currency Exchange are regulated by the Central Bank of the Russian Federation, which exercises its functions on the basis of the federal law on state purchases, the federal law on currency regulation and control.

Forex Trading

It is difficult for an ignorant person to understand how the exchange rate is formed on Forex.

In the international forex market, the price is determined through the struggle of buyers (or bulls) and sellers (or bears). Individuals can not influence the situation in this market. Only the International Monetary Fund and central banks can influence the price dynamics, and only in the short term.

The patterns explaining how the exchange rate is formed here are as follows:

• When the demand for currency increases, its price also increases, and when demand decreases, then, accordingly, the price decreases.

• When the supply grows for currency, its value falls, and when the supply decreases, the price, on the contrary, increases.