INTERVENTION: Currency interventions are back in fashion from Japan to China and Switzerland. They are a part of the policy toolkit, but the chance of success varies widely. All three are looking to bolster their currencies and starting from a position of strength, with the world’s largest foreign exchange reserves. The Swiss and Chinese have highly controlled ‘crawling peg’ currencies whilst the Japanese Yen is freely floating (see chart) and among the world’s cheapest. Direct intervention is not without costs, from moral hazard and encouragement of risk taking, to potential inconsistency with loose monetary policy. And unless backed by broader policy support, like higher interest rates, its impact can often be only fleeting.
JAPAN: The JPY is world’ cheapest major currency and sitting at the 145 level vs the US dollar that saw authorities intervene to support last September, for the first time in 24 years. We are seeing ‘verbal intervention’ as the Finance Ministry warns against more weakness. The cheaper Yen has been key in revitalizing the economy and corporate profitability but has also raised imported prices. We believe authorities are more focused on the speed of depreciation, down 9% this year, than targeting a specific level. China is also taking measures to stabilize the CNY, down 5% this year, subject to capital controls and with world’s highest $3.2 trillion FX reserves.
SWITZERLAND: The national bank (SNB) has a crawling peg exchange rate, since scrapping its minimum rate in 2015. It has been selling foreign currencies to strengthen the CHF in a new policy to dampen inflation pressure to keep price rises within its 0-2% target. This is a shift from its historic selling reserves to weaken the ‘safer-haven’ franc and maintain the competitiveness of its export driven economy. Switzerland has the world’s 3rd highest FX reserves, at $900 billion, equal to 100% of GDP, and also one of the proportionally largest financial sectors.
All data, figures & charts are valid as of 03/07/2023.