Central banks have been intervening in currency markets around the world. First, the Swiss National Bank pegged the Swiss franc to the Euro, and now Asian central banks are selling dollars to defend their currencies.
Not all emerging market central bank interventions can however be expected to be equally successful. Societe Generale analyst Anne Benoit offers three questions that could help you predict the likelihood of a successful intervention:
- Does the central bank have a solid track record of intervening in the past and could it influence market perception?
- Does it have a clear policy on defending its currency?
- Does it have the foreign reserves necessary to act consistently? Depleting Forex reserves would hurt its ability to repay external debt, though Russia’s intervention in 2008, despite its massive Forex reserves proved rather unsuccessful. The central bank’s foreign reserves fell from $600 billion in August, to $450 billion at the end of the year with little success and it eventually had to let the ruble trade against a wider range of currencies to allow for orderly depreciation.
Now here is a chart of countries by foreign reserves:
Photo: Societe Generale
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