In an age of economic policy activism, including widespread quantitative easing and associated purchases of bonds and other assets, Amphora's John Butler reminds us that it is perhaps easy to forget that foreign exchange intervention has always been and remains an important economic policy tool. Recently, for example, Japan, Switzerland and New Zealand have openly intervened to weaken their currencies and several other countries have expressed a desire for some degree of currency weakness. In this report, Butler summarizes the goals and methods of foreign exchange intervention and places today’s policies in their historical context; but moreover he discusses the evidence of where covert intervention - quite common historically - might possibly be taking place: perhaps where you would least expect it... And if the currency wars continue to escalate as they have of late, it seems reasonable to expect that covert interventions will grow in size, scope and frequency.
Via John Butler's The Amphora Report:
Back in 2001, some prominent economists wrote a paper, published in the American Economic Association’s prestigious Journal of Economic Literature, titled “Official Intervention in the Foreign Exchange Market.” In this paper, the authors discuss the efficacy of foreign exchange intervention and, perhaps surprisingly, they include a brief section on covert intervention specifically, of which the following is an excerpt:
Most actual intervention operations in the foreign exchange market have been—and still are—largely secret, not publicly announced by monetary authorities…
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A further explanation may be that although monetary authorities intervene in order to target the value of a foreign currency, since the fundamentals of the foreign currency are not necessarily equal to this objective, the monetary authorities do not have an incentive to reveal their intervention operations as no announcement on their activities will be credible … [S]ecrecy of intervention may be an attempt to affect the exchange rate … without triggering a self-fulfilling attack on the currency.
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Looking around various FX rates, there is some evidence that covert intervention has been taking place in Asia. Occasional, sharp overnight moves on unusually high volume have taken place in the Korean won, Taiwan dollar, Indonesian rupiah, Malaysian ringitt and Vietnamese dong. This is of course only circumstantial evidence but it would be odd were profit-maximising economic agents to behave in this way. Given that the authorities in question have the means and quite possibly the motive, and the price action is suggestive, it is entirely reasonable to surmise that some covert intervention has been taking place in the region.
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If the currency wars continue to escalate as they have of late, it seems reasonable to expect that covert interventions will grow in size, scope and frequency.
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Desperate policymakers sometimes do desperate things. And history is sometimes stranger than fiction.
Full report below:
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