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ot the idea for this article after recently sitting through several bouts of forex intervention by the Swiss National Bank [link widoczny dla zalogowanych], which has used different tactics to discourage appreciation of the Swiss Franc. Central bank intervention may be a new event for those who have recently entered the forex market. An understanding of the different forms intervention can take and the effectiveness of each is useful for those trading in the currency market.
I got the idea for this article after recently sitting through several bouts of forex intervention by the Swiss National Bank, which has used different tactics to discourage appreciation of the Swiss Franc. Central bank intervention in the forex market may be new for those forex traders who have recently entered the forex market. An understanding of the different forms intervention can take and the effectiveness of each is useful for those trading in the currency market.
Forex intervention has been going on for as long as I can remember although there is not one set of rules that central banks follow. Rather [link widoczny dla zalogowanych], forex intervention can be employed in a variety of methods, each having a different level of effectiveness. The recent forex interventions by the Swiss National bank to prevent the CHF from appreciating sparked the idea to write an articleon this subject.
Types of Intervention 1) Intervention can take the form of being unilateral (i.e. one central acting alone) or coordinated (i.e. various central banks acting in concert).
2) The results of the intervention (i.e. buying or selling a currency) can be sterilized or left un-sterilized. When currency intervention is sterilized, the central bank neutralizes the impact by adding or draining reserves from its domestic money market. When intervention is left un-sterilized, the central bank allows the full impact of such actions to either increase or reduce the supply of liquidity.
3) The central bank may look for the shock effect by being visible in its forex intervention. This may see the central bank surprise the market and come in via an electronic platform, which gets flashed across wore services. This often sees a sharp reaction in the market but the more times employed [link widoczny dla zalogowanych], the less impact it tends to have.
Some central banks may disguise their actions by using surrogates to buy or sell its currency. In this way it can disguise its actions and keep the market guessing. Some call this stealth intervention. There is speculation that the Japans MOF (Ministry of Finance) and Bank of Japan employ this tactic but only insiders know whether this is true and if so, to what extent it is used.
5) Those countries with managed currency regimes have become a factor in intervention. In these cases, the central bank uses the proceeds from forex intervention to adjust its currency reserve basket to maintain the ratio of dollars and other currencies. Central banks often use this tactic to keep its currency from appreciating although it can work on both sides.
What types of forex intervention tend to be more effective? As a rule, it is easier for a central bank to intervene to slow the appreciation of its currency than to support a falling currency. Intervention tends to be more effective when accompanied by other measures, such as an increase/decrease in interest rates to make a currency more/less attractive.
Coordinated forex intervention is generally more effective than unilateral intervention in the currency market. The most notable example is the 1986 Plaza Accord, where the G-7 countries agreed to work together to drive down an overvalued USD. It is more difficult for a country, acting alone, to intervene effectively.
Un-sterilized intervention is more effective than sterilized intervention. Traders look to see if central banks sterilize intervention and allow interventions to increase or decrease (as the case may be) the supply of its currency. Most interventions tend to be sterilized as central banks take offsett

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