Over the past few years we have seen numerous attempts from many central banks to control and manipulate the price of their national currencies by buying it to boost the price or selling to keep it from getting too high.
Chart 1 provides an example of this and shows the market action on the Japanese Yen futures contract over the past year. (ProfitSource software code: JY-Spotv). I have highlighted the sharp falls in the value of the Yen from March, July and October:
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These falls were all brought about by the Bank of Japan intervening in the currency markets in an attempt to weaken the Yen.
In March,2011 the Yen rose steeply following the Japanese earthquake and tsunami before the central bank intervened and sent the currency from 1.30 to 1.17 in a matter of weeks. This intervention, however, did not create a permanent solution. As you can see, the Yen made a low in April and has been rallying since.
Two more attempts at intervention (aka manipulation) have occurred since then - in July and October. Both had very short-term effects and the market continued doing what it was already doing.
Another interesting currency intervention was attempted by the Swiss National Bank on September 6, 2011. Throughout most of 2011, the Swiss Franc had risen steadily against most major currencies and at one point almost reached parity (one for one) with the Euro. I remember waking up on September 7 to hear that the Swiss Franc had been ‘pegged’ to the value of the Euro. The exact words of the Swiss National Bank were that they “would no longer tolerate” a Euro/Swiss Franc cross-rate of less than 1.20.
This is illustrated in Chart 2 below:
click to enlarge
Upon this announcement the Euro jumped in value against the Swiss Franc and crossed the 1.20 level. Whether this was because of the huge sum of Euros bought by the Swiss National Bank or simply because traders did the SNB’s job for them by rushing in to sell Swiss Francs, no one knows. Whatever the reason, the Euro has been hovering around the magic 1.20 level ever since.
If the Euro begins to dip below the 1.20 Swiss Franc level again, the Swiss National Bank will presumably intervene to stop the Swiss Franc from strengthening too far. The big questions though are how far are they prepared to go and how deep are their pockets?
Has the Swiss National Bank ‘saved’ the Swiss Franc or have they simply pushed the value of the Euro just high enough to provide a juicy short setup for hungry bears watching from the sidelines?
I’m reminded of a classic line from Governor Tarkin in the original Star Wars movie: “I’m taking an awful risk, Vader. This had better work.”