What is Currency Intervention? Global Currency Intervention in Charts

The word “currency intervention” conjures up images of heated market movements and a tense market situation filled with warnings of a reversal, which may be enough to make some people nervous.

In this article, we will explain the basic meaning of foreign exchange intervention and foreign exchange interventions conducted in various countries around the world.

── Contents ──

What is currency intervention?
Specific Examples of Foreign Exchange Intervention – Intervention by the Bank of Japan to Sell the Yen
Specific Examples of Currency Intervention Around the World
Money fiasco caused by central banks

What is currency intervention?

Foreign exchange intervention is a foreign exchange transaction by a country’s central bank (in the case of Japan, the Bank of Japan) to stabilize the value of its currency, and is properly called “foreign exchange equalization operations.

In the normal foreign exchange market, sudden price fluctuations may occur from time to time, but the market usually calms down quickly and extreme fluctuations in exchange rates are unlikely to occur.

However, due to serious financial problems or major events that shake the economy, speculative buying and selling and panic among market participants may occur, resulting in very large and one-sided trend markets.

Because these panicked, large, short-term movements in exchange rates can have a negative impact on a country’s economy, government authorities plan to stabilize the market by intervening in currency markets.

For example, if the exchange rate is falling sharply, they will buy to keep it from falling further. If the exchange rate is appreciating significantly, the central bank will sell a large amount of its currency to prevent further appreciation.

This massive buying and selling of the central bank’s currency moves the exchange rate and sends a strong message to market participants that the government will not allow the exchange rate to fall (or rise) any further.

There are various ways to intervene in foreign exchange markets, including the following, in addition to direct intervention by the central bank through direct transactions.

Verbal intervention: where government leaders, senior finance ministry officials, and other financial officials intervene to restrain the market by voicing their opinions and requests regarding the exchange rate.
Undercover intervention: Intervention is conducted in secret (also called covert intervention) without disclosing the fact that intervention is being conducted.
Coordinated intervention: Intervention in the foreign exchange market against the same currency by the central banks of several countries in cooperation.
Entrusted intervention: When the Bank of Japan intervenes in the foreign exchange market, for example, it asks another country’s central bank to intervene on its behalf in the London or U.S. markets at night or late at night.

However, it is extremely difficult to decisively change exchange rates through currency intervention, and its effects tend to be temporary.

What is verbal intervention?

Verbal intervention is an intentional attempt by government leaders or senior officials of the Ministry of Finance to move the exchange rate by making statements about the exchange rate situation.

Verbal intervention is a form of intervention in which monetary authorities announce to market participants their opinions and desires regarding the level of the exchange rate, and is not actual intervention by a central bank such as the Bank of Japan.

In general, verbal intervention is not very effective, but it can have an impact on the market when not only one country but multiple countries make coordinated announcements in the event of an international financial crisis or other such event.

When a key figure makes a comment that is contrary to the market consensus (a majority opinion with which there is a conspicuous agreement), the sense of surprise can cause unexpectedly violent price movements.

Surprise comments by key figures on the currency market can be well intentioned, or they can be inadvertent comments that are sensationalized by the media.

What is coordinated intervention?

Coordinated intervention is a form of foreign exchange intervention (the use of force to manipulate exchange rates by buying and selling vast amounts of currency) by government authorities.

It refers to intervention by the central banks of multiple countries cooperating to intervene by “placing a large volume of sell or buy orders” against the currency to be intervened in.

The scale of intervention is larger than intervention by the central bank of a single country alone, and the timing of intervention can be set more widely by taking advantage of time differences among the intervening countries, which tends to have a greater impact on international currency markets.

For example, in the case of the Bank of Japan’s intervention in the Japanese yen, the intervention is sometimes carried out late at night or early in the morning in cooperation with EU countries in order to catch institutional investors and other large traders in the market by surprise.

One example of coordinated intervention is the case in March 2011 during the Great East Japan Earthquake.

The dollar plummeted to the 76-yen level (the yen soared) in the early morning hours of March 17, 2011, due to the selling spree launched against the Japanese yen after the earthquake.

In response to this sudden rise in the yen, the Japanese government planned to normalize the exchange rate by intervening in the market, and approached the G7 nations to obtain an agreement for coordinated intervention.

As a result, the dollar returned to the 81-yen level.

In reality, however, not all cases go as smoothly as this, and there are cases where the interests and agendas of various countries intersect, resulting in a lack of alignment and ineffective intervention.

What is a commissioned intervention?

One intervention method is called “Entrusted Intervention”.

Entrusted intervention is when a central bank that wishes to intervene in a currency market asks the central bank of another country to intervene on its behalf.

For example, when the Bank of Japan intervenes in currency markets, it cannot intervene directly in the European or U.S. markets at night or late at night, so it asks the central banks of other countries to intervene on its behalf.

The BOJ mainly intervenes with the ECB in the European market, the BOE in the London market, and the FED in the New York market.

Conversely, the BOJ may intervene in foreign exchange markets on behalf of foreign banks, which is sometimes referred to as “reverse mandate intervention”.

Unlike “coordinated intervention,” which requires the Bank of Japan to intervene in line with the economic considerations of each country, this type of intervention is considered to be commissioned intervention in accordance with the opening hours of the foreign exchange market.

Nevertheless, it is undeniable that circumstances among countries are involved, so there may be exchanges and bargaining that we cannot know about, although not as much as in the case of coordinated intervention.

Specific Examples of Foreign Exchange Intervention – Intervention by the Bank of Japan to Sell the Yen

As a specific example of currency intervention in Japan, let us look at the speculative price movements triggered by the Great East Japan Earthquake of 2011 and the currency intervention (yen selling intervention) that took place in response.

In theory, the Bank of Japan can print and issue an unlimited number of Japanese banknotes on its own, allowing it to intervene to sell as many yen as necessary without limit.

In reality, however, international criticism of the Bank of Japan’s preferential treatment of its own currency is inevitable, and in recent years, the effectiveness of currency intervention has been limited and questionable, so there have been fewer and fewer opportunities for such intervention to become public.

The chart below is a daily chart of the dollar-yen (click on the chart to enlarge).

The Bank of Japan’s intervention to sell the yen amid speculative buying of the yen following the Great East Japan Earthquake of 2011 is well illustrated.

On March 18, 2012, the BOJ spent 692.5 billion yen, on August 5, 2012, 4,512.9 billion yen, and on October 31, 2012, 8,072.2 billion yen to “sell the yen and buy the dollar.

Although the yen’s appreciation was held back in the short term, it did nothing to change the trend (speculation and mood) of market participants.

Incidentally, the Japanese government’s (Bank of Japan’s) “sell-yen-buy-dollar” intervention has been criticized as a preferential treatment for some industries (mainly the auto industry) because, in effect, it can be viewed as a subsidy for Japanese exporters.

Specific Examples of Currency Intervention Around the World

Let us now look specifically at the currency interventions that took place around the same time around the world.

Up until 2011, emerging economies, especially in Asia and Eastern Europe, were showing steady development thanks to abundant investment money from all over the world.

Under such circumstances, each emerging country tried to attract even more investment money by inducing its currency to depreciate as much as possible.

This is because when a country’s currency becomes cheaper, its labor costs and manufacturing costs are lower than those of other countries, making it more attractive as an investment destination.

This led to a “currency depreciation race” among the emerging economies.

A global stock market crash occurs and money flees emerging economies

In the beginning of 2011, the Great East Japan Earthquake, followed by a global stock market crash, plunged global financial markets into a state of turmoil.

Investment money around the world was on edge.

Where the heck should I direct my investment money ……?
At the very least, we should pull our money out of potentially risky countries.
I’m also worried about the currencies (contingency yen and gold) to which we can turn for refuge, so let’s switch to U.S. dollars. ……

When such a negative mood prevails, funds invested in emerging markets around the world will be converted to U.S. dollars and then flee – in other words, currencies of emerging countries will be sold and the U.S. dollar will be bought.

As a result, the currencies of the emerging markets plummeted against the U.S. dollar.

Currency intervention by central banks of various countries to “strengthen their own currencies” begins

Now, when this happens, monetary authorities in emerging economies will take a 180-degree turn.

Until then, emerging economies had adopted policies to induce their currencies to depreciate (currency depreciation competition) in order to secure international competitiveness – in other words, to take advantage of labor and manufacturing costs.

However, they reversed this policy and now, in order to prevent their currencies from plummeting (i.e., to make their currencies strong), they entered into a “race to intervene in foreign exchange markets.

Simply put, they had been saying that it was more convenient to have a weak currency, but now they are saying that they do not want their currency to be too weak.

Let’s take a look back at the actual charts of foreign exchange intervention in each of the emerging economies.

Intervention by Singaporean banks

*Click to enlarge.

This is a daily chart of the dollar/Singapore dollar.

At the end of September 2011, in one week alone, the value of the dollar dropped 4.3% (up on the chart), which was the biggest drop ever.

The chart shows that it went up fiercely in this September alone, which clearly shows the tremendous outflow of investment money out of the country at that time.

After the currency intervention from the end of September to the beginning of October, the price went down while going up and down violently.

However, it is natural to see this not only as an effect of the intervention but also as an overreaction of market participants to it.

Reference　アジア通貨動向（23日）＝まちまち、韓国はじめ複数の当局がドル売り介入｜ロイター

Foreign exchange intervention by the Reserve Bank of India in the Indian rupee exchange rate

This is a daily chart of the dollar/Indian rupee.

This chart of the Indian rupee also blatantly shows the September 2011 investment money pullback.

It is a very convincing chart that “currency intervention cannot reverse a major trend.” However, it is amazing that we were able to range for such a long period of time.

Incidentally, we will break below the range soon after entering November, but this is a typical case of a “false breakout” in the opposite direction of the trend.

Intervention by the Central Bank of Russia in the ruble market

This is a daily chart of the dollar/ruble.

The Russian ruble began to rise in August 2011, and we feel that there is a possibility of currency intervention in response to this rapid ruble selling situation, but since this kind of movement also occurs in profit-taking settlements of bought positions, it is a delicate matter to judge.

To begin with, it is believed that the Russian central bank has always intervened repeatedly against the euro and the U.S. dollar, so it is said that there have been many cases of unnatural rate movements.

Since the beginning of September, the rate has been rising sharply, showing an unrelenting withdrawal of investment money.

Reference　ロシア経済の現状と課題｜内閣府

Intervention by the Central Bank of Poland in the Zloty Market

Here is a daily chart of the dollar/zloty.

Let’s take a look at the currency intervention by the Central Bank of Poland in the zloty market.

Here, too, we can see a distinctive candlestick, which appears to be the impact of the intervention.

When Poland’s currency intervention was reported in the news, countries such as South Korea, Taiwan, Malaysia, and Indonesia, as well as the other countries introduced so far, had already intervened to buy their own currencies.

Poland followed suit.

Incidentally, around this time, Brazil’s currency, the real, had plunged to R$1.9500, its lowest level since July 15, 2009, and the news was “Is Brazil intervening in the currency market? was in the news.

Reference　ブラジル中銀がレアル支援に向け介入、27.5億ドルの通貨スワップ売却｜ロイター

Limited effect of currency intervention

As can be seen from the chart, intervention by itself does not cause a major change in the trend, but rather seems to be mainly intended as a “strong signal to the market” from the government or central bank.

In fact, there are cases in which intervention triggers a period of “stagnation,” which may lead to a major change in the mood of market participants.

If the overheated market can be cooled down to some extent in this way, it may be considered a blessing in disguise for those involved.

The Bank of Japan’s foreign exchange intervention in 2011, which I mentioned earlier, was similar in that it sold the yen on three occasions, although it was said to be “a drop in the bucket.

Extra: George Soros vs. Bank of England

When discussing foreign exchange intervention by central banks, one topic that cannot be left out is the money battle between George Soros, the king of hedge funds, and the Bank of England of the United Kingdom.

Soros, who saw that the pound had appreciated too much, launched an unprecedented sell-off against the British government, which wanted to preserve the value of the pound. Please refer to the following article for the details.

『ジョージ・ソロス』とは？ヘッジファンドの帝王のエピソードの数々

FXに限らず、相場の世界を知る人のなかで、もっとも有名な人物のひとり、それがジョージ・ソロスです。そのエピソードから、彼の人物像を追います。 FXにまつわる用語を解説していく「FX専門用語...

Money fiasco caused by central banks

There are two types of currency intervention: buying intervention and selling intervention.

In order to intervene to buy a currency, funds are needed to buy the currency of the home country.

For example, if the Japanese yen becomes too cheap, “yen-buying intervention” requires funds to buy yen – in other words, the U.S. dollar and other currencies (this is called foreign exchange reserves).

This means that once the U.S. dollar, which serves as the fund, is used up, intervention is no longer possible.

Intervention to sell its currency is (theoretically) unlimited

What about “selling yen” intervention, which is the opposite of currency buying intervention?

Selling yen to intervene” means that the BOJ exchanges its yen for US dollars in the foreign exchange market.

In theory, this means that the BOJ can intervene by selling yen indefinitely as long as it prints enough currency bills.

In fact, there is a country in the world that has actually done this in the past and continued to intervene to prevent its currency from appreciating beyond a certain level.

That is Switzerland, a country that is permanently neutral. This continuous “endless currency intervention” eventually led to a market turmoil and a great deal of controversy, which later became known as the “Swiss franc shock.

Please read the article below for more details.

What is Swiss Franc Shock? Traders Drowned in False Holy Grail Methods

The Swiss Franc Shock is the global upheaval in the foreign exchange market caused by the Swiss...

Intervention by the Czech Central Bank in the koruna market

The “endless currency intervention” by the Swiss Central Bank resulted in great tragedy and confusion. But then, there is another country in the world that did the same thing.

It is the Czech Republic.

The chart above is a weekly chart of the Euro/Koruna.

The Czech Central Bank has had “unlimited currency intervention against the euro” since November 7, 2013, which will be eliminated on April 6, 2017.

At that time, the market had anticipated this decision, so it did not cause as much turmoil as it did in Switzerland.

The impact was minimal, as companies that had benefited from the depreciation of the koruna currency were also preparing for a situation where currency intervention would end.

Perhaps the Czech government did not learn from history, but the market learned a great deal.

Reference　国立銀行が為替介入を終了、市場は安定して推移－輸出への影響も限定的な見通し－｜JETRO

The above is an explanation of foreign exchange intervention as FX terminology, and also a chart showing “global foreign exchange intervention” in an easy-to-understand manner.