The intervention in the foreign exchange market is an action by the Central Bank of a country on a currency to control its exchange rate with respect to other currencies in order to avoid excessive devaluation of that currency and, therefore, generate a climate of general distrust about the situation of the economy of that country or economic zone.
There are other arguments to control the exchange rate such as inflation control , interest rates and financing costs as well as favoring export activity and the trade balance .
All these interventions are part of the monetary policy of a country or economic zone and have the main purpose of guaranteeing confidence in the investor given that the markets move by expectations.
For example, in Europe it is the Central Bank is the ECB , who has the power to intervene in the foreign exchange market to control reserves in other currencies and, in particular, the exchange rate of the euro against others. While it is true, that the most controlled parity is the EurUsd or EurChf exchange rate.
Two examples of intervention in the currency market
- One of the biggest interventions in recent years has been carried out by Switzerland in the EurChfparity at the threshold of its optimal exchange rate at 1.20 through the intervention of its Central Bank since 2011.
It has been carried out through the balance between supply and demand by buying and selling Swiss francs and maintaining the exchange rate in a range located at the level of 1.19-1.20 in order to control its macroeconomic aggregates. The Central Bank knew the maximum historical amount of supply and demand of its exchange rate against the euro and could play with this variable to operate in the market, maintaining the balance between supply and demand since it knew the total volume of supply that there were in the market, since filters were made of the positions of investors and they were covered in case they were very large so that there was no significant imbalance in the exchange rate, for this, the Swiss Central Bank had large Money reserves in your currency exchange in these two currencies. So,
- Another example can be found in Argentina since 2011, caused as a result of the difference in the official exchange rate and the exchange rate of the street or also called the blue exchange ratethat caused a significant devaluation of the Argentine peso ( see the author’s recommendation about the exchange rate).
There are, therefore, different models of intervention in the foreign exchange market and all have the purpose of protecting the national currency since they can reduce its value and favor its downward speculation.