It seems a new school of thought has emerged among forex traders: Central Banks’ demand for foreign exchange. While traders employing fundamental analysis have long taken this into account, it has achieved a new level of recognition following the revaluation of the Chinese Yuan. The central tenet of this school holds the value of a nation’s currency is directly correlated with foreign demand for that currency. Since Central Banks are often the largest holders of foreign exchange, they play an important role in this type of analysis.

In the wake of the Yuan revaluation and declining demand for USD, forex traders have attempted to identify the currencies that Central Banks will increase their future holdings in. As the Euro continues its precipitous decline, many traders have shifted their attention to the Canadian Dollar, which has appreciated 30% over the last few years. Moreover, the Canadian economy appears strong, and will be helped by rising commodity prices. As a result, many traders are making huge bets on the Canadian Dollar. Reuters reports:

“I don’t see central banks reversing this policy. They’ve become more sophisticated rather than less. The age of central banks only having one or two currencies is over,” said Jeremy Friesen, senior currency strategist at RBC Capital Markets.

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