Guardians of Global FX Are Swooping in to Restore Market Calm

(Bloomberg) -- 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 said it spent 64.7 billion kroner ($9.4 billion) in March defending its currency, which is pegged to the euro in a 2.25% band. That’s the most in over a decade. The central bank surprised investors last month when it raised interest rates at a time when others were slashing theirs, although it may have slowed the pace of currency interventions.

While other central banks haven’t been as forthcoming about how much they’ve spent, here’s an overview of what they’ve done to bring some stability to their local-currency markets.

Switzerland

In recent weeks, the Swiss National Bank appears to have conducted the largest foreign-exchange interventions in five years, as indicated by a jump in the amount of cash that commercial banks hold with the monetary authority.

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 realized volatility among Group-of-10 currencies last month. Looking ahead, its implied volatility is also the lowest in tenors from one week to a year.

Intervention has been a key part of the SNB’s policy toolkit for years. The last time weekly sight deposits rose faster was in early 2015, when the central bank intervened heavily after scrapping a cap on the franc at 1.20 per euro.

Norway

It’s been a tough few months for Norway’s krone.

It was last quarter’s largest decliner among G-10 currencies, reflecting its vulnerability to the plunge in oil prices. The krone’s swings were larger than a range of emerging-market counterparts, including the Mexican peso and the South African rand -- even after both of those nations were hit with a sovereign ratings downgrade in March.

Such was the krone’s collapse that Norway’s central bank sent a warning to markets last month, threatening to intervene for the first time in two decades if the panic selling continued.

That gave some relief to the beleaguered currency, with DNB Bank ASA strategists saying the central bank’s weekly foreign-exchange flow statistics indicate it intervened last month. The central bank also announced it would be buying unprecedented quantities of kroner on behalf of the government to help fund an historic emergency package.

Israel

In Israel, the pandemic has forced a rethink of the central bank’s strategy.

The Bank of Israel began heavily spending on foreign-currency purchases late last year, shelling out billions to weaken the shekel after its appreciation began to choke off inflation. Since the outbreak, however, Israel’s currency has slid sharply amid fears of a global slowdown and an assessment by finance ministry officials that the economy will contract this year.

The worry now is that the meltdown in global markets and the flight to havens are causing domestic dollar liquidity, and the central bank is now loaning out its greenback reserves via currency swaps to local lenders -- boosting the shekel in the process. Meanwhile, the institution has paused its program of purchasing foreign currency to weaken the shekel, Deputy Governor Andrew Abir said last month.

Indonesia

The Bank of Indonesia is directly intervening to stabilize 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.

Bank Indonesia sees the rupiah strengthening to 15,000 per dollar by the end of the year, from a current level of about 16,500.

Brazil

Brazil’s real has seen elevated volatility in 2020 and hit fresh all-time lows throughout March. Wide exchange-rate swings pushed central bank officials to intervene heavily through spot and foreign-exchange swaps, selling around $19 billion since Feb. 27.

“We will intervene for as long as needed,” said Brazil’s central bank’s Monetary Policy Director Bruno Serra at a Bloomberg event in Sao Paulo last month. He pledged to do all that’s necessary to whenever it deems the foreign-exchange market dysfunctional.

The U.S.?

A key theme of the crisis has been a global demand-supply mismatch of dollars.

There are signs that steps taken by global policy makers -- 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’s been speculation about something akin to the 1985 Plaza Accord that sought to rein in a runaway dollar.

There is a “rising probability” that the U.S. Federal Reserve and Treasury will pursue foreign-exchange intervention, Goldman Sachs Group Inc. strategist Zach Pandl wrote in a note to clients last month. Still, it’s seen as a long way off for now by most.

©2020 Bloomberg L.P.