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Australia spends more than 3 billions to boost its currency
- Thread starter tmclimon
- Start date
Well, a well-executed intervention by a CB can work, but I remember the New Zeland CB trying to depress its own currency and failing in 07. However, they can certainly cause rallies of several 100 pips even if they fail to stop a long term trend. But no, even 1 billion gets absorbed into the market fairly easily. Also in the early 90s Britain almost depleted its reserves trying to save it's GBP and that was when volume was much lower (and they failed).
Quote from tmclimon:
Thx. If I get it, it should mean that a CB move could impact some short-terms trade but in the end is not really something any of us should consider a major factor.
It depends. If the intervention fails, then the move will be short term, however, if it can cause a change in sentiment, then it can be the spark that changes the long term trend. The trick is to get enough hedge funds to jump on the new trend. However, any CB's reserves are not sufficient to move the markets alone. This is seen as one of the major benefits of the forex, which is that it is very hard for a single entity to control the market.
There are two types of CB intervention:
a/ Those that try to support their own currencies (e.g. Bank of England in 1990's; Australian bank now)
and
b/ Those that try to weaken their own currencies (e.g. Bank of Japan)
Type a interventions may work, or may not work. An example of great success was coordinated intervention of world central banks around year 2000 to boost the newly introduced Euro. It marked a clear bottom, and we have Euro rising continuously since than. They were supported by fundamentals. The classical failure is that of Bank of England vs Soros.
Type b interventions always work. CB may bring their currency to 0 if they want (althogh they will destroy the country in the process). They "have a technology called the printing press" (to quote Ben "Helicopter" Bernanke) and can employ this state of the art technology in their intervention. The only reason why b/ type may fail, is the CB's own fear to trigger runaway inflation.
a/ Those that try to support their own currencies (e.g. Bank of England in 1990's; Australian bank now)
and
b/ Those that try to weaken their own currencies (e.g. Bank of Japan)
Type a interventions may work, or may not work. An example of great success was coordinated intervention of world central banks around year 2000 to boost the newly introduced Euro. It marked a clear bottom, and we have Euro rising continuously since than. They were supported by fundamentals. The classical failure is that of Bank of England vs Soros.
Type b interventions always work. CB may bring their currency to 0 if they want (althogh they will destroy the country in the process). They "have a technology called the printing press" (to quote Ben "Helicopter" Bernanke) and can employ this state of the art technology in their intervention. The only reason why b/ type may fail, is the CB's own fear to trigger runaway inflation.
Quote from btud:
There are two types of CB intervention:
a/ Those that try to support their own currencies (e.g. Bank of England in 1990's; Australian bank now)
and
b/ Those that try to weaken their own currencies (e.g. Bank of Japan)
Type a interventions may work, or may not work. An example of great success was coordinated intervention of world central banks around year 2000 to boost the newly introduced Euro. It marked a clear bottom, and we have Euro rising continuously since than. They were supported by fundamentals. The classical failure is that of Bank of England vs Soros.
Type b interventions always work. CB may bring their currency to 0 if they want (althogh they will destroy the country in the process). They "have a technology called the printing press" (to quote Ben "Helicopter" Bernanke) and can employ this state of the art technology in their intervention. The only reason why b/ type may fail, is the CB's own fear to trigger runaway inflation.
Incorrect. The RBNZ tried to weaken its own currency in 2007 and failed to do so. CBs can't always successfully debase their currency (especially during a credit crunch).
Quote from short&naked:
Incorrect. The RBNZ tried to weaken its own currency in 2007 and failed to do so. CBs can't always successfully debase their currency (especially during a credit crunch).
As I said, there may be other reasons which may prevent a CB from actually debasing the currency (collateral effects, inflation, triggering a collapse which cannot be stopped, etc.). But again, if a CB "really wants", it can devalue its currency with any amount. Let's say BOE suddenly decides that the pound is worth too much at 1.5. Let's say they decide to devalue GBPUSD down to 1.0. All they need to do is declare that they will offer 1 pound for every 1 dollar received. This is like they enter an offer of 1.0 with unlimited size. Can they do it? You bet they can. They control the supply of GBP. They can offer un unlimited amount of GBP at any price they want. They don't have to borrow anything. They don't even need to print the actual banknotes. All they need to do is state they will pay 1 GBP for every USD received. The reverse is not true. They do not control the supply of USD (the Fed controls USD). They can sell only as much as they can. Of course they can borrow some USD, and sell more then they actually have, but they cannot borrow an unlimited amount of USD. Credit crunch will make an attempt to support GBP much harder because of that. But it will not influence its capacity to devalue GBP.