Currency intervention is one of the main instruments. Currency intervention

Foreign exchange interventions are carried out by central banks in agreement with major national and foreign financial institutions. These operations are carried out to manage exchange rate volatility, increase the savings of a state bank in a specific currency, and increase the volume of import-export of capital.

Features of interventions and legislative norms

The actions of large financial players are carried out in domestic or global markets. Central banks of one country, regulators and treasuries of other countries coordinate their activities with each other. Planned currency interventions are announced in advance.

In the Russian Federation, such currency transactions are regulated by Art. 35 Federal Law “On the Central Bank of the Russian Federation (Bank of Russia)”.

Goals

The purposes for using these instruments depend on the exchange rate regime. If a fixed exchange rate regime is established, the Bank of Russia intervenes to fulfill its obligations to maintain the level or limits of fluctuations. With a floating exchange rate, the sale and purchase of currency is carried out by the Central Bank of the Russian Federation to maintain a stable exchange rate.

Reasons for carrying out foreign exchange interventions:

  • the need to change the negative dynamics of exchange rates. A similar situation may arise due to various circumstances - the bankruptcy of large banks, natural disasters, stock exchange collapse and others;
  • accumulation of international reserves;
  • ensuring high liquidity of the foreign exchange market to prevent high volatility of the national currency exchange rate.
  • The need to curb inflationary processes that arise when the country's trade balance is deficit.

The main instruments of foreign exchange interventions are carrying out conversion activities on spot markets, as well as on over-the-counter foreign exchange markets. The Central Bank of Russia is intervening in the foreign exchange market of the Moscow Exchange.

Kinds

The following types of foreign exchange interventions are distinguished:

  • Verbal. The Central Bank declares its desire to buy up the currency over a period of time, and this information increases the interest of traders in this currency.
  • Real straight lines are one-sided. The central bank announces a major foreign exchange transaction, indicating the amount and direction of currency movement. Such intervention is effective in the short term, but if the trade balance is unstable, its effectiveness decreases.
  • Real direct multilaterals. Foreign exchange intervention, in which banks of two or more countries enter into an agreement among themselves to achieve the desired exchange rate.
  • Sterilized and unsterilized. By conducting a non-sterilized intervention, the bank allows transactions with foreign currencies on the domestic foreign exchange market. With sterilized intervention, there is no impact on the money supply, but its effect is compensated by various monetary policy measures.

One of the simplest ways to influence the exchange rate is the currency intervention of the Central Bank. Currency intervention is the purchase and sale of national currency by the Central Bank to achieve the required exchange rate of the national currency.

Needless to say, an increase or decrease in demand for the national currency on the part of foreign exchange market participants leads to an increase or decrease in quotes.

Why do central banks conduct currency interventions? Let's look at this problem from the point of view of the national economy in training webinars from Forex broker Gerchik & Co. In brief, we will now tell you in this article.

Japan is usually cited as an example, whose Central Bank carries out frequent interventions in order to stabilize the profits of its exporters. But we will look at Russia.

Russia is a country that exports resources and imports a large number of imported goods. Of course, everyone is pleased when the ruble exchange rate is at a high level against the American dollar. Many feel proud of the country, and it is profitable to travel abroad - you can buy more dollars and euros. But for companies that export raw materials, the expensive ruble is very unprofitable.

The fact is that, for example, oil has to be sold for cheap dollars, while workers’ salaries and other expenses have to be paid for expensive rubles. And since our budget is very dependent on exporters of raw materials, a shortfall in income with an expensive ruble is practically guaranteed.

Let's see how exporters' income depends on the ruble exchange rate using an example. Let's say a ton of oil costs $1,000. The company's total costs per ton of oil are 20,000 rubles. at a dollar price of 25 rubles, the company’s gross profit will be: 25*1000-20000=5000 rubles. If a dollar costs 30 rubles, then the gross profit will be 30*1000-20000=10000 rubles. That is, if the price of the dollar is only 20% higher, then the profit will double. Approximately the same mathematics takes place in the real economy.

On the other hand, if the ruble is weak, then another problem arises: inflation. Let’s say a product that is imported into a country costs $1. If a dollar costs 20 rubles, then the product will cost 20 rubles in the store (plus various surcharges). If the ruble weakens to an exchange rate of 30 rubles for 1 dollar, then the same product will no longer cost 20 rubles, but 30. There is inflation.

Such sharp jumps in inflation are undesirable for the economy, therefore, if a country is more dependent on imports (import of goods) than on exports (export of goods), then the Central Bank will undertake foreign exchange interventions to purchase national currency for foreign currency. In addition, foreign exchange intervention may be necessary if the price of an exported product falls. If we look at the chart of oil and the ruble, we will see that when the price of oil falls, the dollar exchange rate increases sharply.

This can be partly explained by the fact that the ruble is being specially devalued so that exporters do not suffer so much from the decline in the cost of raw materials. How do central banks intervene? Before carrying out an actual intervention, the Central Bank often states in advance its intention to intervene. This is called "verbal intervention".

Verbal intervention can significantly reduce the Central Bank’s expenses for buying and selling currency, because informs other participants in the foreign exchange market and thereby creates additional demand for national or foreign currency.

The central bank can buy currency on its own behalf (direct intervention) or conduct its operations through a network of commercial banks (hidden intervention). Hidden intervention can be carried out in order to disguise its intentions from the general public, for example, the Central Bank needs currency at a certain price and in order not to create excessive demand from other participants, the Central Bank buys currency hidden.

Carried out through the sale or purchase by the bank of large quantities of foreign currency. Currency 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 influence of a country's central bank on the foreign exchange market and exchange rate by purchasing or selling large quantities of foreign currency.

Currency intervention- joint regulation of currency relations between the participating countries, specifically expressed in a common currency policy towards third countries. Currency intervention is carried out with the active participation and assistance of member states of regional zones, within which a relatively stable exchange rate ratio is ensured. In this case, central banks or treasuries of participating countries are used in operations on the foreign exchange market in order to influence the exchange rates of their own country or a foreign one through the sale or purchase of foreign currency or gold. Currency intervention is, in form and in essence, a large-scale currency transaction carried out within a certain, usually short-term period.

In the Russian Federation, the term “currency intervention” is usually used in connection 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 on the foreign exchange market and thereby affecting the purchasing power of money , exchange rates and the country's economy as a whole. And vice versa, 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, so if there are large disturbances in the balance of payments system, foreign exchange intervention can ultimately lead to the depletion of the country's foreign exchange reserves without preventing the depreciation of the national currency.

Intervention in Forex

Participation of the Central Bank in the process of controlling prices on the foreign exchange market, through the purchase or sale of 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, and the opposite actions are carried out to weaken the national currency. Today, the Central Banks of countries such as China, Russia, Japan, etc. often take similar actions.

see also

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See what “Currency intervention” is in other dictionaries:

    The intervention of central banks or the treasury of individual countries in operations on the foreign exchange market in order to influence the dynamics of the exchange rate of the national or foreign currency. Dictionary of financial terms. Currency intervention Currency intervention... ... Financial Dictionary

    See Foreign Exchange Intervention Dictionary of Business Terms. Akademik.ru. 2001... Dictionary of business terms

    A significant one-time targeted impact of the country’s central bank on the foreign exchange market and exchange rate, carried out through the sale or purchase by the bank of large quantities of foreign currency. Currency intervention is carried out to… … Economic dictionary- Intervention of the central bank in operations on the foreign exchange market in order to influence the exchange rate of the national currency through the purchase and sale of foreign currency; one of the ways to implement monetary policy. [OAO RAO "UES of Russia" STO... ... Technical Translator's Guide

    Currency intervention- (English currency intervention) purchase and sale of foreign currency by the central bank of issue on the foreign exchange market to influence the exchange rate of the national currency and the total demand and supply of money... Encyclopedia of Law

    CURRENCY INTERVENTION- 1) operations of central (issuing) banks to buy and sell the currencies of their countries in order to maintain its exchange rate; 2) intervention of the central bank in operations on the foreign exchange market in order to influence the exchange rate of the national currency through the purchase... ... Legal encyclopedia

    currency intervention- a significant one-time targeted impact of the country’s central bank on the foreign exchange market and exchange rate, carried out through the sale or purchase by the bank of large quantities of foreign currency. Currency intervention is carried out to… … Dictionary of economic terms

Currency intervention is a one-time large-scale transaction involving the purchase or sale of foreign currency by the Central Bank of the state. Manipulation pursues one single goal - adjusting the exchange rate of the national currency in the foreign exchange market solely in the interests of the state. In most situations, the purpose of intervention is to strengthen the national currency relative to the foreign one. In more rare cases, the transaction is carried out with the aim of weakening the currency.

Introduction to the concept of intervention

Currency intervention is usually used as the main lever regulating monetary policy. Large purchases or sales of foreign currency are initiated by the central banks of countries. Through such actions, central banks of states are able to significantly influence the movement of the foreign exchange market and the exchange rate of a certain monetary unit. Currency intervention by the central bank of any country implies joint regulation of currency relations, in which IMF member states take part. This is expressed in the unidirectionality of actions towards third world countries. The intervention is carried out in the active interaction of different states, which are responsible for ensuring the stability of the exchange rate of a particular currency in a particular region. Not only banks, but also treasuries can be involved in the process of making large transactions. The impact can be exerted not only on the national currency, but also on the foreign one. The purchase or sale of foreign currency may be supported by similar manipulations with gold. The procedure has a clearly defined time frame and is carried out within the agreed time frame.

The Central Bank has the authority to participate in exercising control over prices on exchange markets through the acquisition or sale of gold and foreign exchange reserves that it owns. The strengthening of the currency is facilitated by the sale of gold and foreign exchange reserves, and the weakening must be preceded by purchases. Such manipulations are actively practiced in Russia, Japan and China.

Intervention Examples: Japan

There are a huge number of examples of financial manipulation in history. Thus, in 2011, Japan was forced to take measures to reduce the value of its currency due to economic problems in the US and EU countries. The head of the Japanese Ministry of Finance said that the yen is overvalued against the dollar and other currencies due to a large amount of speculation in the foreign exchange market. The exchange rate of the country's national currency reflected a false picture of the state of its economy. The result of negotiations with the Central Banks of Western countries was the decision to conduct a joint intervention. During 2011, Japan purchased large quantities of foreign currency several times, injecting its national currency into the foreign exchange market. Trillions of yen, introduced into global financial circulation, made it possible to reduce the exchange rate by 2% and balance the economy.

Intervention in Russia

The second striking example can be observed in Russia. Until 1995, the Central Bank of the Russian Federation maintained the exchange rate of the national currency through sales of foreign currency. Since July 1995, the financial institution has adopted the concept of a currency corridor. Its goal was to maintain the value of the ruble in a range between fixed minimums and maximums for a certain period of time. Due to changes in the world economy, such a decision could not be maintained in an active state for a long time. The outdated model of monetary policy became useless by 2008. It was from this period that the decision was made to introduce a dual-currency corridor. This monetary policy model is based on the ratio of the Russian national currency to the dollar and euro. With her help, the course was detailed. If we look at it globally, the introduction of a currency corridor implies an adjustment of the ruble exchange rate against foreign currencies through financial manipulation, also known as foreign exchange intervention.

Mechanism for increasing the exchange rate of the national currency

In order to increase the exchange rate of the national currency, intervention is carried out in the foreign exchange market. The Central Bank is actively selling dollars. Alternatively, any other convertible currency can be sold. As a result, there is an oversupply of it in the financial market. At the same time, the national currency is being purchased, which automatically stimulates the active formation of demand for it. The exchange rate is depreciated by selling the national currency in order to fully satisfy the demand that has formed in the market. At the same time, foreign banknotes are being bought up, which becomes a prerequisite for the formation of an artificial deficit.

Types of interventions

There are two types of foreign exchange intervention. A fictitious procedure, also known as a verbal procedure, is a kind of rumor, a “decoy,” which is initiated by the Central Bank in order to have a certain influence on the movement of the foreign exchange market. Sometimes false information is enough to radically change the situation on the foreign exchange market. The procedure can also be used as an amplifier for real financial manipulation. The actual format of the procedure is carried out by the Central Bank. At the end of the event, reliable data and figures reflecting the amount of funds spent by the financial institution are published in the media. It is a common practice to combine the actions of several banks to achieve a mutually beneficial effect.

Specifics of application of interventions

Verbal currency intervention is used much more often than real one. The desired effect can be achieved solely thanks to the surprise factor. Manipulation is not a common practice in financial policy. At the same time, some states, in particular Japan, are very aggressive on this issue. Currency interventions (the Central Bank can carry them out only by prior agreement) can be aimed both at strengthening the current trend in the market, and with the expectation of its reversal. As practice shows, in the latter case, achieving the goal is very problematic.

Under what conditions is it important to carry out financial manipulation or why the actions of the Central Bank of the Russian Federation were ineffective

Against the backdrop of the events of the end of last year and the beginning of 2015, Russia actively used and continues to use financial leverage in its practice. The latest currency interventions of the Central Bank of the Russian Federation ended in failure due to the fact that for the measure to be effective there must be some support. Firstly, this is the confidence of foreign exchange market participants in the bank’s policy, which must necessarily be long-term in nature. In parallel, an active change in economic indicators must be carried out. The bank must have a large amount of gold and foreign exchange reserves and financial resources. Against the background of falling oil prices in the world, the Central Bank of the Russian Federation cannot boast of decent reserves. The discrepancy between the budget, which emphasized the cost of fuel within $60, and the actual situation, played a big role. Currency interventions of the Central Bank of the Russian Federation today, due to the current circumstances, are practically meaningless.

The relationship between money supply and interventions in the United States

The US central bank's foreign exchange intervention in foreign markets is regulated by the Federal Reserve's foreign operations manager in New York. It, in turn, is controlled by representatives of the Federal Open Market Committee. The procedure and duration of financial manipulations are determined by the State Treasury of America. The US Reserve System brings this tool to life. More recently, intervention was perceived as one of the instruments for conducting financial and credit policy of countries. Today it has become obvious that intervention has a direct impact on internal monetary reserves, and therefore on the money supply in circulation. The Fed, by purchasing one currency, sends a large number of dollars to the market. The reserve increases by the size of the purchased assets, and the amount of infused funds is multiplied by the money multiplier. A decrease in the value of the dollar due to an increase in the money supply reduces economic interest rates. Demand is decreasing. In the domestic market the situation is the opposite. The depreciation of the exchange rate leads to increased demand for imports. Holders of large investment portfolios freeze in anticipation of the currency's growth, thereby reducing operations with the latter on long time frames. The effect that can be achieved thanks to the intervention of the Central Bank in the foreign exchange market of the external type does not always coincide with positive phenomena in the domestic economy.

Interventions in Russia

Let's consider the situation on the territory of Russia. The country is characterized by a raw material type of economy, which does not allow imports to contribute to the growth of the national currency. That is why currency interventions by the Bank of Russia and systematic injections of dollars and euros into the market are mandatory. If this is not done, there is a high risk of the collapse of the institution. But the current situation in 2015 led to the fact that the currency interventions of the Central Bank of the Russian Federation have now become completely useless. Disorders in the country's balance of payments have depleted reserves. About $5 billion poured into the international market in order to support the ruble since the beginning of December last year did not bring the expected effect and went virtually unnoticed by market participants. Already on November 10, 2014, due to the inability to control the exchange rate, the ruble was allowed to float freely. The Central Bank of the Russian Federation carries out currency interventions in extremely rare cases.

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 indicators, and the support of the Central Bank by leading players in the financial market.

One of the key instruments in the country's banking system is foreign exchange intervention. This term is often used by traders, financial analysts, and politicians.

Currency intervention - what is it? In our own words, we can call it an urgent measure to regulate exchange rates in the interests of the state (several states). It consists of 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 Central Bank’s last trump card.”

What factors influence the effectiveness of this “trump card”?

  • The Central Bank has enough financial reserves
  • There is a clear need for change in global economic indicators
  • The Central Bank's policy is shared by leading players in the national financial market

If several states unite at once in order to influence the economic system of third countries, they may begin to buy/sell foreign currency or gold. Thus, they will carry out international monetary intervention.

This measure of influence is also applied for the purposes of

  • slowing rate changes
  • supporting the value of financial assets (liquidity)
  • control the level of risk (volatility)
  • preventing/creating conditions for the export/import of capital
  • accumulation of foreign exchange reserves

This is how the Central Bank determined the goals of its foreign exchange operations - participants in a survey of the Bank for International Settlements in 2013 (see Table 1)

*S.R. Moiseev. Currency interventions. Motives of central banks and their tools. - “Money and Credit”, No. 3, 2016

Types of foreign exchange interventions

So, currency intervention is a lever with which the state influences the country’s economy. Experts distinguish two main types of it: 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 changes in exchange rates. The technology is simple: without any official confirmation, information about possible changes in the currency market is released to the masses. For example, politicians or officials of the Ministry of Finance (Treasury), the Central Bank give an oral negative assessment of the situation in the money market or threaten 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 that are also interested in this process may be involved. It differs from 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 involves the country’s gold and foreign exchange reserves, if there are 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 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 the Central Bank purchases national currency, its exchange rate is planned to decrease or increase
  • "smoothing"- if the exchange rate falls, the decrease in the national currency should be smooth, and if it grows, then the increase should be gradual
  • "turn"- implies a reversal of the trend of the national currency, when “an increase (decrease) in the exchange rate in the previous period and its decrease (increase) in the present follow the purchase (sale) of the national currency” (S. Moiseev, Doctor of Economics, Director of the Department of Financial stability of the Bank of Russia)

In Russia, from February 1, 2009 to November 10, 2014, quite a lot of interventions were carried out. According to analysts, the Central Bank intervened in market operations every second day out of 1,439 trading days (see Fig. 1).

This is the most successful period in the last 17 years, since 80% of the Central Bank’s actions were considered 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 one’s favor (see Table 2)

**S.R. Moiseev. Currency 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 to weaken the national currency - the yen. The reason is difficulties in the economy of the United States and the European Union, which also affected the Land of the Rising Sun.

Active actions were preceded by a statement by the country's Minister of Finance that, due to speculation in the money market, the yen exchange rate was overvalued in relation to foreign currencies, which did 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 “injection” of several trillions of yen into the market reduced the exchange rate of the Japanese national currency by 2% and balanced its economy (see Fig. 2)

2. For several years now, the authorities of Belarus have been taking measures to strengthen the exchange rate of the Belarusian ruble. The economy of this country is closely connected with the Russian one, so it is fully affected by foreign sanctions, import substitution, and the global economic crisis.

In 2015, Prime Minister of Belarus A. Kobyakov announced his readiness to introduce urgent measures in order to “smooth out” exchange rate fluctuations. However, he noted that the gold reserves will not be affected. Thus, the Prime Minister actually explained the situation at the trading of the Belarusian Currency and Stock Exchange: when the next decline in the Belarusian ruble begins, the volume of currency trading on it increases - that is, currency intervention is carried out.