Foreign exchange intervention is carried out to regulate the exchange rate of foreign currencies in the interests of the state.
Foreign exchange intervention - joint regulation of foreign exchange relations between the participating countries, specifically expressed in a single foreign exchange policy in relation to third countries. Foreign exchange intervention is carried out with the active participation and assistance of the member states of regional zones, within which a relatively stable ratio of exchange rates is ensured. At the same time, the central banks or treasuries of the participating countries are used in operations on foreign exchange market, in order to influence the exchange rates of their own country, or foreign, by selling or buying foreign currency or gold. Foreign exchange intervention is in form and in essence large in scale currency transaction, carried out within a certain, usually short-term period.
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✪ Lesson 12. What is Central Bank Intervention?
✪ Investor's ABC: Foreign exchange intervention
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Types of foreign exchange intervention
Foreign exchange interventions by central banks have an impact on the value of a given currency, along with monetary policy and interest rates. It should be noted that foreign exchange interventions have a very large impact on exchange rates. For example, the 1985 Plaza Agreement played a large role in the more than fifty percent devaluation of the US dollar.
What is currency intervention? Central banks deliberately buy or sell currencies on the open market in order to influence their value. In some cases, it is believed that if the central bank intervenes, then it is using its last trump card. Sometimes foreign exchange interventions are carried out to stabilize markets.
Before undertaking foreign exchange intervention (remember that banks have a limited amount of money), some governments may turn to an easier form of intervention. There is such a thing as verbal intervention. In this case, there is absolutely no need to sell or buy currencies.
There are many examples of verbal intervention today. Even before the current rally in the US dollar / Japanese yen pair began, many Japanese officials were "hinting" to the markets that they were worried about the high value of the yen. In parallel, there were statements that the Bank of Japan is ready to carry out quantitative easing.
Among different types foreign exchange interventions distinguish unilateral, that is, such interventions that are carried out by central banks independently from others. This type of foreign exchange intervention is considered the most ineffective. There are also joint foreign exchange interventions. This is a more serious signal for the markets. Indeed, in this case, two central banks will "correct" the situation. Such actions are more effective. As for multilateral foreign exchange intervention, it is the most effective instrument in the hands of central banks. If they manage to negotiate such an intervention, the markets will respect that move. Indeed, such measures may well lead to a change in long-term trends.
As for the degree of influence on the markets of interventions, it all depends on how the markets relate to a particular government. For example, Noda's government did not command respect from the markets. But with the arrival of Abe, everything seems to have changed (we are talking about Japan).
As for the effectiveness of foreign exchange interventions, it should be borne in mind that if the monetary policy changes in the same direction as the intervention is carried out, then the effect can be serious. For example, when the value of the currency is low, the central bank decides to raise interest rates and carry out a foreign exchange intervention - the result will not be long in coming.
Bank of Russia interventions
V Russian Federation the term "foreign exchange intervention" is usually used in conjunction with the task of maintaining the Russian ruble, its stable exchange rate against the US dollar, when the Central Bank of the Russian Federation sells dollars and / or euros in order to prevent the ruble from falling in the foreign exchange market and thereby affect purchasing power money, exchange rates and on the country's economy as a whole. Conversely, the purchase of foreign currency by the Bank of Russia entails a drop in the rate Russian ruble... For interventions, as a rule, official foreign exchange reserves are used, therefore, in case of large disturbances in the balance of payments system, foreign exchange intervention can ultimately lead to the depletion of a country's foreign exchange reserves, without preventing the depreciation of the national currency.
Forex Intervention
Participation of the Central Bank in the process of controlling prices on the foreign exchange market by buying or selling its own gold and foreign exchange reserves. As a rule, in order to strengthen the national currency, the Central Bank conducts a series of sales of foreign gold and foreign exchange reserves, the opposite actions are carried out to weaken the national currency. Today, such actions are often taken by the Central Banks of countries such as China, Russia, Ukraine, Japan, etc.
Foreign exchange intervention- This is one of the main methods of monetary policy of central state banks. Such a procedure is the fact of the sale and purchase of foreign currency by the main bank of state significance with the aim of directly influencing the supply of money, the total demand and the average rate of the national currency.
Objectives of foreign exchange intervention
These actions are targeted and are carried out by the main financial institution of the country at a time when the exchange rate of the national currency is subject to sharp fluctuations. In some understanding, it is fashionable to consider intervention as an intrusion or intervention in a certain process.
Foreign exchange operations in the form of interventions are positioned as one of the main financial instruments, which is implemented in case of implementation of a certain monetary strategy of the state. If a floating regime arises, which assumes that the formation of the exchange rate occurs spontaneously and directly depends on a number of factors in the market, then one has to resort to resolving the situation by performing foreign exchange interventions.
For the normal implementation of operations of this type, banks must use the accumulated reserve currencies, which are called the funds of countries that are very strong and economically stable. Such units are stable and have a high level of liquidity. Today these are the US dollar, euro, Swiss franc, Japanese yen, British pound sterling.
Objectives of foreign exchange interventions
The initial task of conducting foreign exchange interventions is to protect the economic interests of the state. Such an operation can be considered as a lever for regulating the country's monetary policy. In order to increase the stability of its own currency and stabilize its exchange rate, the state bank must buy the maximum amount of the national currency and sell as much foreign currency as possible. As a result of such actions, the demand for the dollar will fall, and for the ruble, accordingly, will grow significantly.
Provided that the rate of the national currency falls steadily, the main state bank should buy the maximum amount of foreign currency. In this case, the ruble is being sold. As a result, the dollar should rise and the national currency should fall. Taking appropriate measures in a timely manner can help stabilize economic situation in a single country and avoid a critical drop in the national currency rate.
It cannot be argued that foreign exchange interventions are market-based methods. But despite this, some countries have successfully used such a tool to this day. In particular, the Japanese government regularly resorts to this type of operation.
Conditions Needed for Successful Currency Intervention
For a successful currency intervention, a number of conditions must be met. The main one is the trusting attitude of persons who are direct market participants to the policy of the main state bank... The main financial institution of the country, in turn, must have a sufficient number of Money so that the operation can be carried out without too much difficulty.
Currency intervention is a term denoting the actions of the Central Bank to change the exchange rate of the national currency. Used to influence the country's economy. Success depends on the availability of financial reserves, the need for changes in economic performance, support of the Central Bank by leading players financial market.
One of the key tools in banking system the country is foreign exchange intervention. This term is often used by traders, financial analysts, politicians.
Foreign exchange intervention - what is it? In your own words, you can call it an urgent measure to regulate the exchange rate in the interests of the state (several states). It consists in buying (selling) a large number of foreign banknotes at attractive prices from the population for a limited period of time. The goal is to weaken or support the national currency. In professional circles, it is often called "the last trump card of the Central Bank."
What factors influence the effectiveness of this "trump card"?
- The Central Bank has sufficient financial reserves
- There is a pronounced need for changes in global economic indicators
- The Central Bank's policy is shared by the leading players in the national financial market
If several states at once unite in order to influence economic system third countries, they can start buying / selling foreign currency or gold. Thus, they will carry out international foreign exchange intervention.
This measure of influence is also applied for the purpose of
- slowing down course changes
- maintaining the value of financial assets (liquidity)
- control of the level of risk (volatility)
- obstructing / creating conditions for the export / import of capital
- accumulation of foreign exchange reserves
This is how the Central Bank determined the goals of their foreign exchange operations - the participants in the Bank's survey international settlements in 2013 (see Table 1)
* S.R. Moiseev. Foreign exchange intervention. The motives of central banks and their tools. - "Money and Credit", No. 3, 2016
Types of foreign exchange intervention
So, foreign exchange intervention is the lever by which the state influences the country's economy. Experts distinguish between two main types: verbal and real.
Verbal is carried out by the Central Bank much more often and consists in the predictability of the market reaction to any rumor about a change in the exchange rate. The technology is simple: without any official confirmation, information about a possible change in the currency market is launched to the masses. For example, politicians or officials of the Ministry of Finance (Treasury), the Central Bank give an oral negative assessment of the current situation in the money market or threaten with real intervention (buying or selling foreign money). This method is the cheapest, because it does not involve the use of gold and foreign exchange reserves, but it is not always effective. Rumors "work" only in those countries where the Central Bank has repeatedly carried out real actions for the short-term purchase / sale of foreign banknotes.
A real intervention is a serious action, widely covered in the media, with the publication of all data on the funds spent, goals, and results. For its implementation, the Central Banks of other states, also interested in this process, can be involved. It differs from the verbal in that it is carried out exclusively through commercial banks... Moreover, each financial market player acts on behalf of the Central Bank.
In addition, it carries a number of risks: since it always uses the country's gold and foreign exchange reserves, in case of serious violations in the balance of payments system, they can be depleted, without preventing the fall of the national currency.
How to determine the success of a foreign exchange intervention
To determine the effectiveness of the "last trump card of the Central Bank", it is customary to use the following criteria:
- "direction"- when buying the national currency of the Central Bank, its rate is planned to decrease or increase
- "smoothing"- when the exchange rate falls, the decrease in the national currency should be smooth, and if it grows, then the increase should be gradual
- "Reversal"- implies a reversal of the trend of the national currency, when “increase (decrease) exchange rate in the previous period and its decrease (increase) in the present follows the purchase (sale) of the national currency "(S. Moiseev, Doctor of Economics, Director of the Financial Stability Department of the Bank of Russia)
In Russia, from February 1, 2009 to November 10, 2014, quite a few interventions were carried out. According to analysts, the Central Bank intervened in market operations every second day out of 1439 trading days (see Fig. 1).
This is the most successful period over the past 17 years, since 80% of the actions of the Central Bank were found to be effective according to one of the criteria. In 50% of cases, it was possible to smooth out exchange rate fluctuations, in 25% - to reverse the exchange rate dynamics in our favor (see Table 2)
** S.R. Moiseev. Foreign exchange interventions: international practice and the effectiveness of interventions ”. - "Money and Credit", No. 5, 2016.
Examples from history
1. In 2011, the Japanese authorities set a course for the weakening of the national currency - the yen. The basis is the difficulties in the economy of the United States and the European Union, which also affected the Land of the Rising Sun.
The active actions were preceded by a statement by the country's finance minister that, due to speculation in the money market, the yen rate is overvalued against foreign currency, which does not correspond to the state of the state's economy.
It was decided to regulate it with the help of several large transactions for the purchase of foreign banknotes. As a result, the “stuffing” of several trillion yen into the market depreciated the Japanese national currency by 2% and balanced its economy (see Fig. 2)
2. For several years, the authorities of Belarus have been taking measures to strengthen the course Belarusian ruble... The economy of this country is closely connected with the Russian one, therefore, it is fully influenced by foreign sanctions, and import substitution, and the global economic crisis.
In 2015, the Prime Minister of Belarus A. Kobyakov announced his readiness to introduce urgent measures in order to “smooth out” exchange rate fluctuations. At the same time, he noted that the gold reserve would not be affected. Thus, the Prime Minister actually explained the situation at the auctions of the Belarusian Currency and Stock Exchange: when the next decline in the Belarusian ruble begins, the volume of currency trades increases on it - that is, a currency intervention is carried out.
Foreign exchange intervention- significant one-time targeted impact central bank countries on the foreign exchange market and the exchange rate, carried out through the sale or purchase of large consignments of foreign currency by the bank. Foreign exchange intervention is carried out to regulate the exchange rate of foreign currencies in the interests of the state. In short, foreign exchange intervention is the impact of a country's central bank on the foreign exchange market and exchange rate by purchasing or selling large quantities of foreign exchange.
Currency intervention is the joint regulation of currency relations between the participating countries, specifically expressed in a single monetary policy in relation to third countries. Foreign exchange intervention is carried out with the active participation and assistance of the member states of regional zones, within which a relatively stable ratio of exchange rates is ensured. At the same time, the central banks or treasuries of the participating countries are used in operations in the foreign exchange market in order to influence the exchange rates of their own country or foreign by selling or buying foreign currency or gold. Foreign exchange intervention is in form and in essence a large-scale foreign exchange operation carried out within a certain, usually short-term period.
In the Russian Federation, the term "foreign exchange intervention" is usually used in conjunction with the task of maintaining the Russian ruble, its stable exchange rate against the US dollar, when the Central Bank of the Russian Federation sells dollars in order to prevent the ruble from falling in the foreign exchange market and thereby affect the purchasing power of money , exchange rates and on the country's economy as a whole. Conversely, the purchase of foreign currency by the Central Bank of the Russian Federation entails a fall in the exchange rate of the Russian ruble. For interventions, as a rule, official foreign exchange reserves are used, therefore, in case of large disturbances in the balance of payments system, foreign exchange intervention can ultimately lead to the depletion of a country's foreign exchange reserves, without preventing the depreciation of the national currency.
Forex Intervention
Participation of the Central Bank in the process of controlling prices on the foreign exchange market by buying or selling its own gold and foreign exchange reserves. As a rule, to strengthen the national currency, the Central Bank conducts a series of sales of foreign gold and foreign exchange reserves, the opposite actions are carried out to weaken the national currency. Today, such actions are often taken by the Central Banks of countries such as China, Russia, Japan, etc.
To raise the exchange rate of the national currency, the national bank must sell foreign currencies, buying up the national one. Thus, the demand for foreign currency decreases, and, consequently, the exchange rate of the national currency increases.
In order to lower the rate of the national currency, the reserve bank sells the national currency, buying up foreign currency. This leads to an increase in the foreign exchange rate and a decrease in the national currency rate.
Foreign exchange interventions can be divided into several types:
Verbal or Sham Intervention. The rumor about possible bank intervention is also having an impact on the currency market. The central bank simply triggers a rumor about an impending bogus intervention, which contributes to the emergence of the necessary reaction. Often, to enhance real banking intervention, they speak of verbal intervention.
Real intervention... In this case, the operation is carried out openly, on its own behalf. After that, data is published on how much money was spent on its implementation. Sometimes banks of two countries are involved, for which the change in the exchange rate is of mutual interest. Also, real intervention is carried out through various private banks, which perform the operation on behalf of the reserve bank.
It is worth noting the fact that verbal intervention is carried out much more often than real, since it has a greater effect due to the unexpectedness of the implementation.
Frequent intervention is not a market-based method of regulating the exchange rate of the national currency. But, nevertheless, for example, the Bank of Japan continues to pursue an aggressive banking policy.
In addition, interventions can be classified towards.
Market intervention- intervention aimed at accelerating the change in the exchange rate in the direction of the already outlined, but weak trend of its movement.
Market intervention- intervention aimed at returning the exchange rate to the previous level, that is, at initiating the movement of the national currency rate against the emerging trend. Sometimes it ends in failure.
In order for a foreign exchange intervention to be successful, several conditions must be met:
1. Adequate confidence on the part of market participants in the long-term policy of the Central Bank.
2. Significant change in fundamental economic indicators.
3. The need for a large amount of financial reserves in the Central Bank.
Quite often, foreign exchange interventions in the world market are carried out by more than one reserve bank, and a number of banks different countries according to their agreement among themselves.
An example is the decision of the G7 to support the Japanese economy and make it more competitive by lowering the Japanese currency against the US dollar after the earthquake. On March 18, 2011, as a result of the concerted action of the Bank of Japan, the Central Bank of Europe and the Federal Reserve System of the United States of America, the price of the Japanese currency was reduced by more than 2% within a few minutes.
In addition to dramatic agreed changes in exchange rates, foreign exchange interventions can be used to control the volatility (volatility) of the exchange rate, reducing the rate of its change, maintaining the liquidity of the foreign exchange market, opposing or facilitating the import or export of capital, as well as for the accumulation of reserves of the Central Bank in a certain currency.
Likewise, the Russian Central Bank periodically conducts foreign exchange interventions to manage the exchange rate of the Russian ruble against the euro and the currency of the United States. Until July 8, 1995, the Bank of Russia held back the Russian ruble rate by means of foreign exchange interventions, as a rule, by selling foreign currency. On July 8, 1995, the so-called currency corridor was introduced - the minimum and maximum rate of the Russian ruble against the dollar declared by the bank for a certain period. Since 2008, a dual-currency corridor has been established - in relation to the dollar and the euro. Actually currency corridor- This is a statement by the regulator that it is ready to conduct foreign exchange interventions, buying the national currency if its quotation touches the lower border, and selling if the upper one is reached.
Typically, central banks announce their plans for foreign exchange interventions in advance and publicly. Keeping track of such news is extremely important for investors, especially for participants. Forex market since a position open against such a major speculator of the foreign exchange market as the central bank can lead to catastrophic financial consequences 30.
What you need to know about currency interventions by the Central Bank of the Russian Federation
Currency interventions of the Central Bank - what is it and why is it needed
Currency rates are of interest to everyone today, even ordinary people. For a private investor, especially if he uses instruments denominated in foreign currency, this issue is critically important. It acquires particular importance in the context of international sanctions and the instability of the ruble. One of the ways of regulating the exchange rate of the national currency by the financial authorities is foreign exchange intervention.
The concept of foreign exchange intervention and why it is carried out
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Foreign exchange intervention is a tool monetary policy... It is used to strengthen or weaken the course of the national monetary unit through the purchase or sale of foreign currency on the open market . The goal is not just to "move" the course up or down. This is a way of monetary regulation of the economy as a whole. The method of intervention is based on the law of supply and demand, which means that it is of a market nature.
Like any other commodity, currency, the less it is on the market, the more expensive it is. And vice versa: the more, the cheaper.
There are other methods of regulating the exchange rate. For example, when the Central Bank wants to raise the ruble exchange rate, it issues large volumes and sells them on the market. This increases investor demand for rubles, which pushes the rate up. But as interventions, we consider precisely cash injections, when the Central Bank prints rubles or "throws" dollars into the market from its reserves. By the way, despite the fact that in the structure of reserves (NWF) the dollar has the same share as the euro, foreign exchange interventions are denominated in the US currency. This is due to the fact that 60% of international settlements are denominated in dollars (in euros - 20%, in yuan - 1.6%).
The main objectives of foreign exchange interventions:
- Influence the balance of supply and demand of currency and thereby–on the ruble exchange rate;
- Control the exchange rate, which undermines the stability of the economy, makes business nervous, undermines financial system;
- Reassuring foreign investors who are leaving Russian market in the event of a sharp depreciation of the ruble;
- Replenishment of foreign exchange reserves of the government and the Central Bank.
Monetary measures to regulate exchange rates are applied by all countries, but in different ways. It is important for export-oriented economies (like Japan) not to let their currency grow excessively, as this reduces the competitiveness of their products. This gives rise to such a phenomenon as "currency wars". An example is the US accusations against China, which is controlling the undervaluation of the yuan against the dollar. There are countries that cannot influence the exchange rate of their own currency, since they are members of economic unions such as the EEC and are subject to the decisions of the European Central Bank (ECB). This, in particular, weighs on Italy and Greece, which before the introduction of the euro were used to attracting investors and tourists at the expense of cheap lira and drachma.
Types of foreign exchange intervention
There are two main types of intervention.
- Monetary (cash) - real purchase or sale of foreign currency by the Ministry of Finance in favor of the Central Bank. It can be done in two ways:
- Direct intervention, when the Central Bank enters the market on its own behalf and announces it publicly;
- Covert intervention, when the Central Bank acts through its "subordinates" - commercial banks, supplying them with liquidity through repo auctions.
- Verbal intervention is a statement by financial authorities to which investors react. It is used when the regulator needs to correct market sentiment and move quotes in the desired direction. Verbal interventions can turn out to be fictitious, according to the principle “to promise is not to marry”. This method is used quite often, since it does not require real financial costs and is limited, in fact, by spreading rumors. Usually central banks announce their intentions and forecasts in advance. The most notable example is the statements of the US Federal Reserve System (FRS), according to the tone and half-hints of which the world market catches the movement of the rate of the main reserve currency. The difference between the Fed and the Central Bank of the Russian Federation is that public rhetoric is the first to influence world economy, while the statements of the second are of a local nature.
These information "stuffing" serves two purposes:
- to form market positions in the right direction, when expectations are included in the price long before the real actions of the regulator;
- prevent a market crash due to sudden decisions that investors and hedge funds are not ready for.
In terms of volume, interventions are large-scale. For example, for Russia it is several billion dollars a day. They can also be point-like, making small adjustments to the exchange rate dynamics. Of course, larger infusions are more effective. But they also carry a greater risk: if it is not possible to prevent a collapse, the currency may become unmanageable. In this case, the reserves will already be almost used up. This is what happened in the fall of 2014.
How foreign exchange interventions were applied in Russia
Since 1995, in the practice of the Central Bank, the so-called currency corridor has been used. He determined the upper and lower bounds of the dollar against the ruble. As soon as the exchange rate approached the upper limit, the regulator threw several billion dollars into the market, thereby sterilizing the toxic ruble mass. When approaching the lower boundaries, dollars were withdrawn from the market in the amount that provided a return on track. In 2005, the concept of a “bi-currency basket” was introduced, which included the weighted average rate of the euro and the dollar.
For the financial system, especially for its banking sector, it is not so much the exchange rate itself that is important as its stability and predictability. The economy will adapt to the high dollar rate sooner or later. But sharp jumps in volatility give rise to uncertainty in the market, even to the point of panic. Investors, banks and even industrial enterprises channel free liquidity not into business, but into the foreign exchange market. An example is currency speculation at the height of the crisis of 2014-2016, when, as a result of joint actions of the government, the Central Bank (and somewhere Rosneft), the dollar rose at the moment to 77 rubles (in exchange offices - up to 90).
Until November 2014, the Central Bank put out fires in the foreign exchange market, flooding them with dollars. For 11 months of 2014, more than $ 70 billion was spent for these purposes. At high such actions did not lead to depletion of reserves. But we remember that in the same year the price of black gold fell by almost 2 times. The regulator was effectively wasting supplies faster than it was replenishing. Under the threat of an absolute loss of foreign exchange reserves due to interventions, the Central Bank took a bold step and established a floating ruble exchange rate. Since then, there have been no foreign exchange interventions in the previous form, and the exchange rate band has been canceled. The Central Bank even stopped publishing relevant statistics on its website.
Formally, the ruble is free to float and foreign exchange interventions are no longer officially called that. However, in reality, they exist, they simply acquired a different form - the purchase of currency by the Ministry of Finance for the Central Bank. They have the same impact on the financial system, investment and business climate. With high oil prices (anything over $ 40), dollar liquidity is directed to replenish the NWF. If prices fall, the reserves will be printed out, and the purchase of foreign currency for them will cease.
Only one of the declared goals has left the priorities - maintaining the ruble exchange rate by large-scale foreign exchange injections. A strong ruble is not an attractive prospect for the government. Moreover, it is not interested in strengthening the Russian currency. Devaluation facilitates the implementation of the budget and the fulfillment of social obligations denominated in the national currency. It is also beneficial to exporters of energy resources, who receive revenue in an expensive dollar, and pay taxes and salaries in a cheap ruble.
The second effective means of regulating the ruble exchange rate is. In the event of a collapse of the ruble, the Central Bank sharply raises the rate, making funding for currency speculation too expensive. This was done in December 2014, when the rate "skyrocketed" from 10.5 to 17% overnight. This caused a shock on the market, but the collapse of the ruble was prevented. After all, the dollar exchange rate at that time was limited only by fantasy.
All of the above parameters should be taken into account when planning investments. For example, ruble inflation determines the share of foreign exchange instruments in the portfolio. The cost of borrowing affects the efficiency of investing in. The balance of inflow and outflow of foreign capital is a factor of the market value of shares, and key rate- profitability of investments in OFZ.
Now the regulator's foreign exchange interventions are directed in one direction - to buy up the dollar and against the ruble. This makes it possible to replenish gold and foreign exchange reserves, but the dollar exchange rate is therefore kept at a high level. Of course, there are other factors that can affect the strengthening of the national currency. Let's look at them from the perspective of the prospects for the Russian foreign exchange market. And we ourselves will give the most probable answer.
- Structural reforms and reduction of the share of the public sector (not foreseen in the foreseeable future);
- The growth of oil prices (does not depend on the will of the government and the Central Bank);
- Improving the external environment, investment climate (unrealistic under the conditions of sanctions).
Since these factors are beyond the control of the financial authorities, there are only two ways left in their arsenal - foreign exchange intervention and the key rate.
Conclusion
Having understood the mechanisms of intervention, it is easier for an investor to use official information on the volumes of bought / sold dollar liquidity to determine the prospects for the exchange rate. Based on this, I recommend not forgetting about currency diversification and regular rebalancing. investment portfolio... When rates jump down and up, I try to increase or decrease (respectively) the share of foreign exchange assets. Share in the comments your own understanding of the problem of regulating exchange rates.
Profit everyone!