Capital Controls

Capital controls are legal restrictions on moving money across a country's border. They take many forms — limits on how much foreign currency a resident may buy, approval requirements for transfers abroad, taxes on inflows, minimum holding periods for foreign investment, restrictions on non-residents holding the domestic currency — and they are imposed, tightened and lifted by governments and central banks as policy. Their effect on a currency market is direct. Controls limit who may hold the currency and on what terms, which limits who can be on the other side of a trade in it. That is why currencies under tight controls tend to have thin or non-existent markets outside their own jurisdiction, wider quoted spreads where a market does exist, and prices that can diverge from whatever the domestic rate says. Controls can also change at short notice, so the set in force at any moment is a matter for the country's central bank and financial regulator, whose published rules are the only reliable statement of what is currently permitted.