With all the wild swings in the euro, speculation that the European Central Bank could intervene in one way or another, is running rife.
There are two ways that could be done.
The first is by making verbal statements such as ‘A too weak euro is extremely bad for the eurozone, Schweinhund‘ (minus the Schweinhund bit, probably). The second is by actually intervening in the currency.
And the ECB has only actually intervened in the euro a few times before.
Julian Callow at Barclays Capital has a brief historical overview:
The ECB has intervened on only three occasions, all of them in support of the euro. These interventions were conducted during September and November 2000. The first was on 14 September, 2000, when the ECB announced that it had sold EUR2.5bn of accumulated interest income on FX reserves (the previous day the euro’s Trade-weighted Effective Exchange Rate Index (TWI) was at 83.85, while the euro was at $0.8654. Then on 22 September, the ECB put out another statement saying that there had been joint intervention in the FX markets with the Fed and BoJ (TWI the previous day: 82.7, euro at $0.8524). The ECB put out a further statement on 3 November, 2000, informing that it had undertaken FX intervention (TWI the prior day: 83.56, euro at $0.8646).
Overall, we can conclude from this that the ECB tends to intervene only rarely, and so far only to strengthen the euro when it was at or close to record lows. The intervention has tended to be relatively short-lived, intended as a signal designed to focus market attention on the possibility of a move the other way in a currency, and has been sterilised within the ECB’s monetary operations.
And the procedure of actual currency intervention is a rather political animal:
. . . the development of the Eurogroup, and its chairman, J C Juncker, has suggested that FX intervention would in general need to have at least the implicit support from the Eurogroup – ie, the finance ministers of the euro area. Hence the views of this body are important, and a long-standing issue has tended to be that the countries have tended to have differences of view, suggesting no particularly clear guidance on the euro’s value from the Eurogroup, with Italy often preferring to have a softer currency, and Germany and the Netherlands tending to resist verbal intervention when the euro has strengthened. In this context, it is worth noting that J C Juncker [head of the eurogroup of finance ministers] was quoted [on Thursday] as saying, “I am a little bit concerned by the rapidity of the euro’s slide”….”I don’t think this is a matter of immediate action”.
On the consensus point — 0ne of the last times the ECB intervened in the euro (in September 2000 ) it did so with not just the (presumed) backing of eurozone officials, but also in cooperation with the US Federal Reserve, the Bank of England and the Bank of Canada. The ECB appears to have acted alone in its other interventions, though it frequently called for help from other central banks.
The possibility of global coordination is one brought up by BarCap, so too is the issue of sterilisation:
Euro area officials have often undertaken verbal intervention if the euro has shown especially volatile movements – which is why more elevated verbal intervention is a possibility at the current time, particularly if the euro depreciates sharply further from here). However, the ECB has tended to recognise that since actual intervention is sterilised, the only way in which it can meaningfully impact on the euro’s trend is via the interest rate differential versus other currencies. Moreover, while the euro area has been able to agree on certain issues, such as the need for greater exchange rate flexibility in some parts of the world, and for the US to preserve a strong dollar, the finance ministers who comprise the euro area have often tended to have somewhat differing views on the appropriate value of the euro, which has then undermined the force of verbal intervention.
It is worth noting that the ECB is clearly prepared to undertake different and innovative procedures in order to safeguard the integrity of the euro area, as we saw with its statement on 9 May, so the possibility of outright FX intervention cannot be ignored, if the euro were to depreciate significantly from here. That said, in the minds of many officials, we suspect, is the fact that the euro’s level is not a concern at present – that the level is bringing the euro close to what might be considered its fundamental fair value. As such, the weaker euro delivers an important additional stimulus to euro area activity, at a time when inflation risks are still contained (with core inflation just 0.8% y/y in April, a record low). Hence, while the ECB may be concerned at times about the speed of change in the euro, which is why the verbal intervention may pick up at the current time, in our view the current level is still unlikely to be a worry, which is likely to temper how strongly intervention risks are conveyed.
Both subjects were also mentioned by IFR’s Divyang Shah on Tuesday:
. . . The biggest problem with ECB intervention is that it would go against the monetary grain as the effects of FX intervention would be diluted by liquidity injections. If intervention were to happen then it is more likely to be on a coordinated basis especially given the perception in European policy circles that it would only work if the Fed were involved. In the early days of EUR weakness (just after the EUR’s introduction) the ECB were loathed to intervene without the involvement of the US Fed. Thus the question of intervention rests not on what the Europeans think but what the US thinks. The fact that the US President has been manning the phones to European leaders suggests that they are concerned about new risks entering the market at a time when there is still fragility. Like the rest of the world the US does not want to see its currency strengthen significantly as it looks to exports to support growth . . .
And echoed by Commerzbank on Thursday (translated from the German) :
First of all it is clear that in a case of intervention at the forex markt a coordinated effort would be sensible. First of all issue banks (Federal Reserves) together would be able to move something I the very volatile €-USD market. From a psychological point of view it would be a strong signal for the market. Neither Washington nor Tokyo should have anything against being able to relieve their own weaker currencies of their exporters. But we still have doubts if the rumours about interventions are valid at all. Two points speak against an intervention of the Federal Reserves 1) The rate of €-USD can not be judged wrongly. The fair level should be around 1,15 to 1,20. From the greenback’s view the € is therefore not undervalued 2) An intervention by the Fed would cause speculation and maybe enhance the downwards trend in €-USD . . .
European officials, meanwhile, are due to meet on Friday.
Watch what they say, Schweinhund.
Related links:
Swiss spark talk of euro intervention - FT
Falling euro spurs cautious intervention talk – WSJ
ECB intervention unlikely – Credit Writedowns