Translated from Russian by Google Translate
2 Сентябрь 2009

Everything you wanted to know about foreign exchange intervention. Part 2

In a previous article, which was called «Everything you wanted to know about foreign exchange intervention», we examined the concept, types of foreign exchange intervention, and the effects of the intervention. Today, we once again touch on fundamental analysis of Forex and touch on some of the problems that are common to all types of foreign exchange intervention.


How to affect all types of foreign exchange intervention in the forex

General, very often confronted with the notion of «success» and «unsuccessful» intervention. At first glance it may seem that everything is very simple. But in reality it is not. First, we must touch upon the very notion of success. What is success and what is not? I can provide interesting information. It turns out that the average intervention is the order of 5-10 billion dollars. Note that this is only a medium-size intervention. So, it is considered that the central bank, which held an intervention at 5 billion U.S. dollars, and through this was able to raise the value of the national currency by 2% within half an hour, made a successful intervention.

And now the classic fundamental analysis of forex. Think for yourself. If the bank has such an intervention, and was able to influence, albeit short, currency rate, what it gives him an advantage? And such are the advantages. When the central bank periodically «lit» in the currency market, it allows him to perform verbal intervention. Again, that verbal intervention is applicable in this context means the ability of the central bank to influence the exchange rate through oral statements of the heads of the bank. This may be statements of intent to conduct any large-scale actions, which are capable of «push» Forex market.

Regarding the scope

Typically, the value of intervention in monetary terms, directly proportional to the movement which created the Forex market. The more money flows into the FX market at the time of the intervention, the greater the leap of the exchange rate may occur. Another nuance that you want to remember - is that a key role in carrying out currency intervention are central banks, because these banks tend to hold massive reserves of foreign currency. Therefore, these reserves at the Central Bank has a special hope, because the more of their value, the more opportunities for the bank and the higher its impact on the FX market.

For clarity, give an example. According to official figures, in 2000, the most powerful in terms of foreign exchange reserves were the central banks of Japan ($ 340 billion) and the European Central Bank ($ 260 billion).

Time of intervention

All types of foreign exchange intervention is much more profitable for the bank to conduct due to the factor of surprise. Surprise is great, crucial. If such an operation would find traders by surprise, then due to this bank will achieve activation orders, standing in close proximity to the current market quotations. That is, the success of the operation depends on the suddenness of the intervention. If the intervention is expected, it does not cause violent reaction of the market at the time of its implementation.

Driving force

In order for the unexpected intervention worked more efficiently, you must carry it in the direction of current price movements. Judge for yourself: if the bank intends to hold an intervention for 10 billion U.S. dollars, and the total amount of all committed transactions in the Forex market in a day is about 3 trln.doll. United States, then this is thrown cash flow in the form of 10 billion dollars. unlikely to significantly change the situation. Especially if the banks will play against the current movement.

To break that kind of money the trend is almost unreal. Therefore, banks are always trying to intervene in the direction of the existing traffic, not against it. As a rule, fertile ground for physical intervention in some cases prepared in advance, through verbal intervention.

Banks, which are competent to carry out intervention
As practice shows, the most significant figures in the foreign exchange market, central banks of Japan, Britain and the euro zone countries. For example, the United Kingdom depends on exports. Therefore, the Bank of England may hold a large-scale intervention by selling the pound against the euro. From such an operation, British industry would benefit greatly, since the goods that go for export to the countries of the euro area will drop significantly.

The most aggressive all kinds of currency intervention, especially physical, holds the Bank of Japan. And he always did as much as possible surprise in the quiet time of day when the market is not very active. The huge foreign exchange reserves of the Bank of Japan allow him to act aggressively enough during the intervention. Bank of Japan - the most influential bank in terms of intervention.

And finally I’ll provide some useful tips for traders

• Do not forget the strong support and resistance levels. After all, they are guided not only by individual traders, and banks. Quite often the banks that are planning an intervention, which aims to increase the exchange rate, are beginning to take her some support line, or somewhat below its
• Do not forget about the stop. Typically, when planning intervention analytical department of the bank is considering a way to plan the flight of many stops, standing close to critical levels. So set your foot above the resistance line and below the line support, but within reasonable limits, taking into account the rules of money management. But the main thing - protective orders should be!
• Be careful when trading currencies in relation to which conducted the intervention, or does exclude them from your shopping «diet». Remember that only one warrant, which may be the central bank and that will work unexpectedly for other players, could trigger a wave of committing new transactions.