What is foreign exchange intervention?
Foreign exchange intervention is an action that suppresses sudden fluctuations in currencies. For example, if the yen depreciates rapidly, intervention may be carried out to buy the Japanese yen and sell the dollar.
The purpose is to suppress sudden fluctuations rather than "maintaining a certain level."
| situation | Examples of interventions | aim |
|---|---|---|
| Rapid depreciation of the yen | Buy yen/sell dollar | Suppress the acceleration of yen depreciation |
| The yen is rapidly appreciating | Selling yen/buying dollars | Soften the blow to exporting companies |
Why is currency intervention important?
In conclusion, foreign exchange intervention has the potential to significantly move short-term market prices. The reason is that market participants judge that the government has acted.
The following assets are particularly susceptible:
- FX
- Foreign currency denominated assets
- Export-related stocks
- Overseas ETFs/Investment Trusts
- Asset appraisal value in yen
However, intervention alone does not necessarily change long-term trends. If assumptions such as interest rate differentials, prices, the economy, and the trade balance do not change, the market may return to its original direction.
Advantages and disadvantages
The advantage of foreign exchange intervention is that it makes it easy to suppress sudden fluctuations. This has the effect of cooling down the overheated market.
On the other hand, there are also disadvantages.
- Effects tend to be temporary
- There is a sense of uncertainty in the market
- There are constraints such as foreign exchange reserves.
- Easy to induce investors to cut their losses
In other words, intervention is not a “panacea.” It is realistic to think of it as a speed adjustment in the market.
What should investors look at?
In practice, we look at the “context” rather than the intervention itself.
There are three points to check.
- Is the exchange rate changing suddenly?
- Has the direction of the interest rate differential changed?
- Is your asset allocation biased?
A common mistake beginners make is buying and selling only on intervention news. In the short term, price movements are wild and predictions are likely to be off.
If you have assets denominated in foreign currencies, please check the following:
| Investor situation | Guidelines for action |
|---|---|
| Long term investment in progress | Don't sell in a hurry |
| High foreign currency ratio | Confirm the risk of yen appreciation |
| FX short term trading | lower leverage |
| accumulated investment | Easy to maintain policy |
Summary
- Foreign exchange intervention is a policy to suppress sudden exchange rate fluctuations
- It has a big impact on short-term market prices.
- Long-term trends are easily determined by interest rate differentials and economic conditions.
- Don't buy or sell based on news alone
- Check foreign currency ratio and risk tolerance
As for your actions, if you see an intervention report, check your asset allocation before buying or selling.