Translated from Russian by Google Translate
2 Сентябрь 2009

Everything you wanted to know about foreign exchange intervention

If you have to assess and predict the foreign exchange market using fundamental analysis, Forex, you probably already heard such a thing as intervention. This mechanism allows the central banks to keep abreast of the national economy. However, for individual traders are forex currency transactions play a vital role, as their currency basket could include just the currency, which try to influence central banks.

Currency intervention - it is buying or selling currencies in the Forex market. There are two features. First, the operation is performed by the central bank of the country. Secondly, in such transactions involving huge amounts of money that could «shake» Forex market. The purpose of the intervention - to raise or lower the value of national currency.


Foreign exchange intervention makes sense to hold in those cases where the national currency is under pressure: it is either excessively increases or decreases excessively. Moreover, very often such behavior may be due to foreign currency operations concerned.

Consequences devaluation:

1. One of the possible consequences - increasing deficits. Balance of payments - is the ratio between incoming and outgoing cash flows from the country, for a certain period of time. When the volume of goods that are imported into the country will exceed the amount of goods that are exported from the country, it leads to current account deficits. To fill the vacuum has arisen money the government has to attract foreign investment.

But the problem lies in the fact that they may not be enough to close the existing «hole» in the budget. This will lead to the need, to raise interest rates. This is done in order to promote the growth of the national currency. But such actions may affect the overall economic situation of the country.

2. Reduction of the exchange rate will affect the price of imported goods, which (price) will grow. If the price rise for imported goods, it would worsen inflationary pressures. Again, the Central Bank will raise interest rates, and this will be reflected in the stock markets, as, indeed, and the general economic situation in the country. Another possible outcome - the exchange rate depreciation.

3. The depreciation of the currency would reduce the value of national currency against the currencies of the partner countries. This in turn will lead to higher prices for export commodities. This development is particularly devastating for countries that are export-oriented.

Of course, like forex exchange transactions have several disadvantages, but at the same time, they are a powerful deterrent to the growth of the national currency. But for some countries, the excessive growth of the national currency altogether unacceptable. One of the countries, which often resorts to such action is Japan.

Types of foreign exchange intervention:

1. Operating. This type of intervention conducted by the Central Bank. This operation is usually carried out on behalf of the Ministry of Finance.

2. Note. With this type of influence on the exchange rate experienced any forex trader, who had already for some time to bargain. It is expressed in the fact that prominent politicians to publicly express their opinions regarding the current situation in the country.

Depending on the degree of pessimism statements by politicians, the exchange rate is prone to significant fluctuations. As a rule, policy or verbally suggest that there should be a physical intervention, or simply say that the current exchange rate is overvalued.

Certainly, this type of intervention is the easiest, because it does not require any real financial cost. But the significance of such manipulation should be evaluated depending on the characteristics of a particular State, where different types of foreign exchange intervention - a normal practice.

3. Agreed. This type of intervention is carried out through joint actions of different countries who are interested in changing the exchange rate of the country, for which certain actions are carried out. Concerted intervention is carried out by internal resources of the participating countries. The result of this type of intervention will depend on the number of countries involved in its conduct and the amount of funds involved in this operation.

By the way, concerted intervention may take the form of joint public statements of several politicians from various countries about any events. That is, concerted intervention may also be verbal.

4. Sterilized. The peculiarity of this type of intervention is that the central bank, after it compensates for it through monetary policy. It can be as engaging in transactions on the open market, and changing the discount rate.

Sample. In 1985 was carried out large-scale intervention. Then the countries that were part of the Big Seven have joined together to become a barrier to strong growth of the dollar. The purpose intended to achieve by selling the dollar for other currencies. At that time these actions were quite successful due to the fact that all countries that participated in this event, previously coordinated their actions, and monetary policy of these countries was carried out very smoothly. As a result of this intervention significantly increased the rate of EUR / JPY, which in turn has made the Japanese currency more attractive compared to the dollar.

To be continued …