In recent years, the dynamics of the central bank have become more and more sought after by investors. Generally speaking, the central bank is the maker and executor of the national monetary policy, and it is also a tool for the state to intervene in the economy. The difference between the central bank and other banks is that the business of the central bank is not for profit, but for the realization of national macroeconomic goals. Since 2008, the space for global economic development has gradually peaked, and the speed of development has also fallen back for a while. Unclear economic trend and domestic economic pressure make the central bank's actions more and more frequent, and the impact on the exchange rate is also increasing. The timing of the announcement of the central bank's interest rate decision has an impact on the entire foreign exchange market that far exceeds the volatility caused by the release of some economic data.
Why Central Bank Intervention?
The central bank is responsible for issuing domestic currency, setting the amount of money supply, holding and dispatching foreign exchange reserves, and maintaining the internal and external value of the domestic currency. The central bank is one of the main participants in the foreign exchange market, but its main purpose of participating in the foreign exchange market is to maintain the stability of the exchange rate and reasonably adjust the amount of international reserves. At a certain level or limited to a certain level range. Under the floating exchange rate system, the central bank is often forced to buy or sell foreign exchange to intervene in the foreign exchange market in order to maintain market order. When a certain exchange rate is overvalued or undervalued for a long time and has a negative impact on the economy, the central bank will intervene in the exchange rate by buying or selling the currency. The central bank plays a very important role in foreign exchange transactions, especially for those central banks with sufficient free exchange reserves, their ability to intervene is very significant. The central bank intervenes in the foreign exchange market mainly in two ways: indirect intervention and direct intervention.
There are three types of indirect intervention: 1. Open market operations: activities to adjust the money supply by buying or selling securities; 2. Adjusting the rediscount rate: Commercial banks apply for loans from the central bank to directly change the currency 3. Adjust the reserve ratio: The reserve is the deposit of the financial institution in the central bank, and the adjustment of the reserve ratio will directly affect the deposit amount of the financial institution. Indirect intervention is to directly affect the money supply in the market by adjusting some financial policies and standards, and then affect the currency exchange rate. The direct intervention of the central bank means that the central bank, as the main body of the foreign exchange market, participates in the trading of foreign exchange, thereby affecting the trend of the foreign exchange rate.
In most cases, the central bank's intervention is limited to the scope of stabilizing the exchange rate. The purpose of central bank intervention may be to reverse the direction of the exchange rate, or simply to test the direction of the market, or it may try to manipulate the appreciation and depreciation of the exchange rate. Both the intentions and actions of central banks should be considered important market factors in the forex market.
Objectives of Central Bank Intervention in the Forex Market
Generally speaking, when the price of the foreign exchange market is abnormally large, or fluctuates violently in the same direction for several consecutive days, the central bank often directly intervenes in the market and conducts foreign exchange transactions through commercial banks in an attempt to alleviate the violent fluctuations in the foreign exchange market. There are many theoretical explanations for why the central bank intervenes in the foreign exchange market, and there are roughly three reasons accepted by most people.
First, abnormal exchange rate fluctuations are often related to international capital flows, which will lead to unnecessary fluctuations in industrial production and macroeconomic development. Therefore, a stable exchange rate will help stabilize the national economy and prices. Now the flow of international capital across borders is not only large in scale, but also through many channels, and the artificial obstacles encountered are very small. Industrial countries began to relax financial regulations in the late 1970s, further facilitating international capital flows. Under the condition of floating exchange rate system, the most direct result of the large-scale flow of international capital is the price fluctuation in the foreign exchange market. If a large amount of capital flows into Germany, the exchange rate of the Deutsche Mark in the foreign exchange market will rise, and if a large amount of capital flows out of the United States, the exchange rate of the U.S. dollar in the foreign exchange market will inevitably fall. On the other hand, if people expect the exchange rate of a certain country's currency to rise, capital will inevitably flow to that country.
The correlation between capital flows and changes in the foreign exchange market has an important impact on a country's national economic industry allocation and prices. For example, when a large amount of capital outflows from a country, causing the exchange rate of the domestic currency to fall, or when people expect the exchange rate of the domestic currency to fall, leading to capital outflow, the industrial allocation and prices of this country will inevitably appear in favor of those who have links with foreign trade. changes in the industry. From the perspective of foreign trade, the industries of any country can be divided into industries that can conduct foreign trade and industries that cannot conduct foreign trade. The former, such as manufacturing, produces products that can be exported and imported, while the latter, such as certain service industries, must be produced and consumed locally. When capital flows out and the currency depreciates, the prices of the industrial sectors that can conduct foreign trade will rise. If the wages in this sector do not rise at the same pace, it will be profitable to add production in this sector, and exports will therefore However, judging from the domestic industrial structure, capital will flow from non-trading industries to trading industries. If this is a long-term phenomenon, the country's national economy may be out of proportion. Therefore, industrial countries and central banks do not want to see the exchange rate of their own currencies deviate from what they think is the equilibrium price for a long time. This is one of the reasons central banks directly intervene in markets when their own currencies are persistently weak or too strong.
Another important impact of the correlation between capital flows and changes in the foreign exchange market on the national economy is that large capital outflows will increase the cost of domestic production capital formation, while large capital inflows may cause unnecessary inflationary pressures and affect long-term capital investment. . The United States has implemented a contractionary monetary policy and an expansionary fiscal policy since the early 1980s, resulting in a large amount of capital inflows, and the exchange rate of the U.S. dollar has gradually risen. In 1981 and 1982, the Federal Reserve Bank of the United States (Federal Reserve) completely adopted laissez-faire in the foreign exchange market. Attitude. In order to prevent capital outflows, Western European countries are often forced to directly intervene in the foreign exchange market when the exchange rates of European currencies continue to fall, and have repeatedly asked the US Federal Reserve to assist in the intervention.
Second, the central bank's direct intervention in the foreign exchange market is for the needs of domestic and foreign trade policies. The lower price of a country's currency in the foreign exchange market is bound to benefit the country's exports. The export issue is already a political issue in many industrial countries, which involves many aspects such as the employment level of many export industries, trade protectionist sentiment, and voters' attitude towards the government. No central bank wants to see its foreign trade surplus being seized by other countries because the exchange rate of its own currency is too low. Therefore, the central bank intervenes in the foreign exchange market for this purpose, which is mainly manifested in two aspects.
In order to protect exports, the central bank will directly intervene in the foreign exchange market when the domestic currency continues to strengthen. This is all the more justified for countries whose exports make up a significant share of their national economies. Before April 1992, the Australian dollar was bullish all the way, and the rise was flat. However, when the exchange rate of the Australian dollar against the U.S. dollar rose to 0.77 U.S. dollars on March 30, the Australian Central Bank immediately sold the Australian dollar to buy U.S. dollars in the market. Another example is that Germany is a major manufacturing exporter in the world. After the implementation of the floating exchange rate system in the 1970s, the exchange rate of the mark has risen along with the strength of the German economy. Monetary system in order to fix the mark within a range with the currencies of other member states of the European Community.
The importance of trade issues can be fully seen from the Bank of Japan's frequent intervention in the foreign exchange market. Since the 1980s, Japan's trade surplus with the United States has remained at an astronomical level every year. In 1991, it was 50 billion US dollars. It has become a political issue in the relationship between the United States and Japan. 1992 was the election year in the United States, and the trade protectionist sentiment against Japan in the United States was very strong. Members of Congress still criticized Japan for closing the US market in Congress. In order to ease the anti-Japanese sentiment in the United States, the Central Bank of Japan often makes speeches, calling for the strengthening of the yen, and checks the exchange rate situation from time to time to show its attitude. On January 17, 1992, the Central Bank of Japan suddenly sold yen to buy dollars in the market when the trend of dollar strengthening was formed, causing the exchange rate of the dollar to yen to rise from 128.35 yen to 124.05 yen in an instant. At that time, Japanese interest rates were relatively high, and the Japanese government had no intention of reducing interest rates. As for the reason for the intervention, the central bank just said that it wants the yen to strengthen. In the next three weeks, the Bank of Japan intervened in the foreign exchange market several times in the same way, selling yen to buy dollars. Except for this time on February 7, which was more obvious on the graph, the rest of the times were not very effective.
From the perspective of the development history of the international foreign exchange market, using the depreciation of the national currency to expand exports is a policy often adopted by many countries in the early days. It is called the "begging neighbor policy". When the economy is in recession, it often leads to trade wars between the two countries. Due to the various names of non-tariff trade barriers, this policy of artificially intervening in the foreign exchange market is rarely adopted, and it will obviously attract criticism from other countries.
Third, the central bank's intervention in the foreign exchange market is out of the consideration of curbing domestic inflation. The macroeconomic model proves that in the case of a floating exchange rate system, if a country’s currency exchange rate is lower than the equilibrium price for a long time, it will stimulate exports for a certain period of time, resulting in a surplus in foreign trade, but eventually it will cause domestic prices to rise and wages to rise. create inflationary pressures. When inflation is already high, this wage-price cycle may cause people to expect high inflation in the future, making it difficult for monetary authorities to implement anti-inflation policies. . Moreover, in some industrial countries, voters tend to cite inflationary pressures caused by the devaluation of their currencies as a symptom of macroeconomic mismanagement by government authorities. Therefore, after implementing the floating exchange rate system, many industrial countries regard the exchange rate of their own currencies as a closely monitored content when controlling inflation.
The fluctuation of the British pound since the 1980s clearly shows the relationship between currency depreciation and inflation. In the 1970s, almost all industrial countries fell into double-digit inflation, and the pound was also doomed. Throughout the 1980s, the central banks of the United States and Western European countries were significantly effective, while the United Kingdom was less effective. After the establishment of the European Monetary System in 1979, the United Kingdom was always reluctant to join due to political and other factors during Mrs Thatcher's administration, and made great efforts to curb inflation in the country. In 1990, after more than 10 years, Britain finally announced to join the European Monetary System after John Major took office as prime minister. The primary reason is to maintain the exchange rate of the pound at a relatively high level through the European Monetary System, so that British inflation can be further controlled. But the good times didn't last long. In 1992, the European monetary system was in crisis, and the foreign exchange market dumped sterling, lira, etc., which finally led to the official depreciation of the Italian lira. Also based on anti-inflation considerations, the British government spent more than US$6 billion in market intervention, and the German central bank also spent more than US$12 billion in foreign exchange market intervention in order to maintain the value of the pound and the lira. As the pound continued to plummet and calls for depreciation of the pound in the European monetary system were high, the UK announced its withdrawal from the European monetary system without formally devaluing the pound.
A History of Central Bank Intervention Growth
The central bank joined the government's will to intervene in day-to-day exchange rate fluctuations in the foreign exchange market starting in the 1930s. After the United Kingdom abandoned the gold standard in 1931, the exchange rate of the pound fluctuated violently. By April 1932, the exchange rate of the pound had fallen by 30% compared with the exchange rate when it implemented the gold standard. In order to curb the impact of speculative short-term capital flows on the pound sterling exchange rate, the United Kingdom created the "exchange equalization account", which is a part of the treasury and owns all the gold and foreign exchange reserves used by the United Kingdom. Managed by the bank. Its mode of operation is: when gold or foreign exchange flows in from abroad, and when the exchange rate of the British pound generates upward pressure, the Ministry of Finance sells the securities of the fund and uses its pound income to buy gold or foreign exchange; When there is downward pressure on the exchange rate, the Ministry of Finance uses the gold or foreign exchange in the fund to buy pounds and buy securities from the market. Through the securities trading activities of the Ministry of Finance, not only the exchange rate of the British pound can be stabilized, but also it can prevent excessive changes in domestic monetary conditions caused by the inflow and outflow of gold and foreign exchange.
The UK managed to keep the pound exchange rate within a narrow range using the Exchange Stabilization Fund. Since then, this system has been promoted in various countries. The United States, Belgium, Canada, the Netherlands, Switzerland, France, etc. have implemented this system. The United States created the "Exchange Stabilization Fund" in April 1934, which was established by the Ministry of Finance from the US$2.8 billion income obtained from the increase in the official price of gold at that time. Of the $2 billion in funds, there is $1.8 billion in gold and $200 million in liquidity. Its mode of operation is: when foreign gold flows into the United States on a large scale, the Ministry of Finance issues gold securities to the Federal Reserve Bank to obtain US dollar funds, and uses these US dollar funds to purchase gold from the market. In the foreign exchange stabilization fund, due to too little liquidity, while gold flows in, the bank's reserves will also expand and become the basis for credit expansion. Therefore, the foreign exchange stabilization fund in the United States actually only plays the role of a gold transmission channel, and cannot buffer the impact of gold inflows and outflows on domestic finance.
The foreign exchange stabilization fund systems of Britain and the United States were implemented independently in the first few years. In September 1936, the United Kingdom, the United States, and France signed a currency agreement, and the foreign exchange stabilization funds of each country established contact and began the history of currency cooperation.
In the early days after World War II, one of the purposes of government intervention in the foreign exchange market was to restore the free convertibility of currencies. Under the Bretton Woods system, as countries implement a fixed exchange rate system linked to the US dollar, the stable exchange rate policy becomes the pillar of each country's exchange rate policy. Intervening in the foreign exchange market is the obligation of governments and an important means of stabilizing exchange rates. After the collapse of the fixed exchange rate system in 1973, the floating exchange rate system was generally adopted by industrialized countries. Although the governments of various countries no longer undertake the obligation to intervene in the foreign exchange market, countries increasingly manage the exchange rate by directly intervening in the foreign exchange market. The number of interventions and The scale is increasing day by day. From July 1973 to January 1975 alone, the total amount of intervention by Western countries reached 58 billion US dollars; in the second half of the 1970s, this kind of intervention became more obvious. This is mainly because under the floating exchange rate system, the exchange rate often undergoes large-scale fluctuations, and it is difficult to suppress such fluctuations only by the spontaneous strength of the foreign exchange market. In this case, official direct intervention in the foreign exchange market is more convenient, flexible and effective than other exchange rate management methods.
In order to prevent excessive exchange rate fluctuations from affecting the smooth development of the economies of various countries and the international economy, and at the same time, in order to prevent governments from improperly controlling exchange rates in order to safeguard their own interests, the International Monetary Fund and others have formulated a series of regulations on government intervention under the floating exchange rate system. : ①The intervention of member countries cannot hinder the effective adjustment of the balance of payments, and cannot obtain unfair competitive benefits for other member countries; ②When there are short-term and destructive fluctuations in the exchange rate of their currencies, member countries must To deal with the chaotic state; ③ member states should consider the interests of other member states when implementing intervention policies.
After the 1980s, there was a noticeable change in government intervention, that is, after more than 10 years of floating exchange rate system, countries finally realized the importance of jointly intervening in the foreign exchange market and stabilizing exchange rates. At the seven-nation Versailles summit economic conference in 1982, the "Statement of Guarantee on International Currency" was adopted, and an institution headed by officials from the French Ministry of Finance was established to study the seven-nation joint action plan for foreign exchange market intervention and related issues . On April 28, 1983, the agency published a research report on intervening in foreign exchange rates, reiterating that "coordinated intervention by two or more countries will be more effective than intervention by a single country." In the ensuing 1984 London G7 Summit Economic Conference and the 1986 Tokyo Summit Economic Conference, the issue of joint and coordinated intervention in the foreign exchange market was again emphasized. Historically, the most typical joint intervention was the US dollar exchange rate intervention in 1985. In September 1985, at the meeting of the five finance ministers held at the "Plaza Hotel" in New York, all countries agreed that the exchange rate of the US dollar was overvalued, decided to intervene in the foreign exchange market jointly, and negotiated a very specific joint intervention goal: ① lower the exchange rate of the US dollar by 10% ～12%; ②The intervention time is 6 weeks, the total intervention scale is 18 billion US dollars, and the maximum intervention scale in one day is 300-400 million US dollars; ③Intervention funds are shared by various countries: 30% for the United States and Japan, 25% for the Federal Republic of Germany, and 25% for the Federal Republic of Germany. 10% in France and 5% in the UK. Since then, the five countries have sold nearly $4 billion in international markets; the Bank of Japan sold $1.5 billion in one day. This combined action slashed the dollar by 8% in a matter of days.
Summarizing the foreign exchange intervention models of various countries, the following conclusions can be drawn: First, there is no unified foreign exchange intervention model in the world. There seems to be no clear pattern as to which intervention model countries adopt. Among the 10 countries and regions in the United States, Japan, South Korea, Singapore, the United Kingdom, Australia, Russia, Canada, Hong Kong, and the Eurozone, 2 countries or regions have finance-led interventions, and 3 countries or regions have fiscal-central bank joint interventions There are 5 countries or regions where the central bank takes the lead in intervention. For major countries, the UK and Japan are similar in that the fiscal sector takes the lead in intervention in the foreign exchange market, and the central bank plays the role of consulting support and implementation. In the United States, although the Federal Reserve is not responsible for foreign exchange policy and does not manage foreign exchange reserves, the intervention of the Ministry of Finance in the foreign exchange market needs to be implemented by the Federal Reserve after consultation with it, and the Federal Reserve also bears half of the foreign exchange intervention funds. Among the larger economies, central banks in Canada and Australia are independently responsible for foreign exchange market intervention. Among emerging economies, Russia's central bank is also the main institution responsible for foreign exchange market intervention decisions. The second is that the central bank at least assumes the role of the operator, and the differences between countries are reflected in the role of the financial sector. The central banks of all countries assume the role of executors of foreign exchange market intervention and play an irreplaceable role. Even in countries where the central bank does not manage foreign exchange reserves, the central bank is the executor of foreign exchange market intervention. The differences in foreign exchange intervention models are reflected in the roles and functions assumed by the financial departments of various countries. In some countries, the financial departments hardly intervene, while in other countries they dominate most of the foreign exchange market intervention. Third, there are differences in the frequency and transparency of foreign exchange market intervention, which are related to the foreign exchange system to a certain extent. Countries that implement an independent floating exchange rate system generally have less frequent foreign exchange intervention and higher transparency; countries that implement managed floating exchange rate generally have more frequent foreign exchange intervention frequency and lower transparency.
However, this kind of action by the central bank does not always achieve the desired effect – sometimes the market is stronger and has more say than the central bank. Even if the central bank has huge capital reserves, some super speculators can still take advantage of the situation to confront the central bank head-on and win a big victory. George Soros' blockade of the Bank of England in 1992 is one example.
The process of European monetary integration in the 1990s was impressive. At the beginning of 1992, 12 member states of the European Union signed the "Maastricht Treaty" representing the new framework of the European exchange rate system. A currency is allowed to float within a certain exchange rate range. Once the exchange rate exceeds the specified floating range, the central banks of each member state have the responsibility to intervene in the market by buying and selling their own currencies to stabilize the currency exchange rate of the country within the specified range; Within the specified floating range of exchange rates, the currencies of the member states are based on the Deutsche mark, and can float relative to the currencies of other member states.
Joining the European exchange rate system and promoting its own political status and power in the new economic union was almost the only decision-making plan of the British government at that time. Sign on. However, Soros determined that Britain, which was in recession, could not maintain the exchange rate of 1 pound to 2.95 marks, so he used 10 billion U.S. dollars to place a bet to short the pound to buy the mark. At the same time, he bought 500 million U.S. dollars worth of British stocks and sold a huge amount German stocks. His move attracted more long-term arbitrage mutual funds and multinational corporations. They were like a pack of hungry wolves, ready to wait for their prey to "come in".
In mid-September 1992, the crisis finally broke out. When the British government finally could not bear the pressure of the economic downturn and asked the German Bundesbank to lower the interest rate, the German Bundesbank resolutely rejected the British request. In desperation, the Bank of England raised the interest rate twice a day, bringing the interest rate to 15%, but still had little effect, and the exchange rate of the pound still failed to stand on the minimum limit of 2.778. In this currency war to defend the pound, the British government mobilized up to 26.9 billion US dollars of foreign exchange reserves, but ultimately failed miserably, and the British government had to announce its withdrawal from the European exchange rate system. And Soros became the biggest winner in this battle of the pound. It is reported that in this contest, Soros spent 10 billion U.S. dollars alone, and made a huge profit of 1 billion U.S. dollars from the British pound short transaction on September 15. The Economist magazine called Soros "defeated". People from the Bank of England".
A sufficiently large pool of funds enables the foreign exchange market to form a complete ecosystem. The ups and downs of the exchange rate carry the flow of funds in the pool, implying the coming and going of the circle. The capital pool is large enough, no matter how deep the industry is, it is just a bubble; when the water is clear, there will be no fish, but it still follows the law of economic development;
Add
