How are guardians of the FX galaxy restoring calm?

Here is an overview of some central bank actions to bring stability to their local currency markets
Chief Investment Office03 Apr 2020
Photo credit: AFP Photo

When volatility spiked to a nine-year high from a record low, and investors took a “sell everything” approach, some central banks responded by intervening in the foreign exchange market.

Denmark on Thursday (2 April) said it spent DKK64.7b (USD9.4b) in March defending its currency, which is pegged to the euro in a 2.25% band. That is the most in over a decade. Here is an overview of what they have done to bring some stability to their local currency markets.

Switzerland: In recent weeks, the Swiss National Bank (SNB) appears to have conducted the largest foreign exchange interventions in five years. The SNB said last month that it was stepping up currency market operations to rein in franc gains, which pose a deflationary threat and a risk to the competitiveness of Swiss exports. It seems to be working. The franc recorded the lowest realised volatility among G-10 currencies last month. Looking ahead, its implied volatility is also the lowest in tenors from one week to a year.

Indonesia: Bank Indonesia (BI) is directly intervening to stabilise the rupiah, according to Nanang Hendarsah, executive director for monetary management. While the central bank sees the rupiah at an acceptable level to the dollar, it will continue to take steps to maintain stability, Governor Perry Warjiyo said on Thursday. The currency fell over 12% in March.

The US? A key theme of the crisis has been a global demand-supply mismatch of dollars. There are signs that steps taken by global policymakers – such as swap lines with central banks around the world and quantitative easing – have eased demand for the greenback. Yet, as often occurs during bouts of extreme currency fluctuation, there has been speculation about something akin to the 1985 Plaza Accord that sought to rein in a runaway dollar. – Bloomberg News.

The US Dollar (DXY) index gained 0.51% to 100.180, the euro lost 0.97% to USD1.0858, the pound rose 0.20% to USD1.2396, and the yen weakened 0.69% to 107.91 per dollar.

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