Currency Intervention: Risk & Opportunity

FX Strategy Articles > Fundamental articles

In my article “Game Changer” ( I discussed the potential for Government funded currency intervention to play havoc with an FX Strategy. And what a difference a couple of weeks makes!!

There have been 4 interesting developments that I want to bring readers attention to in this article.

  1. The not so neutral Swiss. As markets became increasingly nervous in the past few weeks, there was a flight to safe haven currencies including the Swiss Franc. This flight to safety led to a surge in the Franc or more than 13% against the Euro. At this point the Swiss Government announced they had had enough (their strong currency was hurting exports and reducing growth) and imposed a cap at 1.2 euro-franc FX. This resulted in the Franc plunging 8.7%.

  2. Like the Swiss, the Japanese haven’t welcomed the Yen being bid up as a safe haven currency. The Japanese Government have in recent months been regularly intervening in their currency to help out their exporters. So far they have really just been tinkering at the edges but stay alert for a more determined intervention to occur.

    Currency Interventions such as these are very hard to strategise for. However they can also create the sort of opportunity that make Soros and Rogers sharpen their pencils. One nation trying to defend its currency against the hedge funds of the world is a tough ask! The Swiss seem to have short memories. In June 2010 they last tried to defend their currency and it cost them $21 Billion! Following the big money into FX trades can be a great strategy.

  3. Talking of big money, Bill Ackman, the well know hedge fund investor from Pershing Square Capital (who by the way made a cool $1.6Billion last year) announced during the week that he has taken a large position in the HKD betting that the Hong Kong Government will let the HKD appreciate. Since 1983 the currency has been pegged to the USD between 6.1-7.8 HKD/USD. This is a classic Soros strategy!

  4. Finally, it’s a softer way to intervene in a nation’s currency but FX Strategists must always be aware of a Reserve Bank’s thinking on interest rates. Take for example the AUD which for the most part is viewed as a “risk on” currency. However it’s also very much a yield play. Currency investors may be bullish about Aust/China economies but watch out for the drop in the AUD if the RBA lowers the official interest rate. Markets are currently factoring in 1.25% cuts in the official Australian interest rate over the next 12 months from the current 4.75%.
By Friday Fundamentalist, Published on 23rd of September 2011
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