Given the volatile capital flows experienced by Asian economies in the years following the global financial crisis, foreign exchange market developments and the corresponding interventions by Asian central banks have quickly become pertinent issues.
While strong capital flows into Asian economies are nothing new, what is different this time are the stronger external drivers, particularly the prolonged low interest rates in the U.S. resulting from quantitative easing combined with substantially weaker growth outlooks. These factors have amplified short-term portfolio flows seeking higher returns and have led to an influx of capital flows into Asian economies. The resulting impact on exchange rates has raised macroeconomic and financial stability concerns, as well as the question about what central banks in Asian economies can do about it. This paper therefore seeks to address the impact of interventions by Asian central banks on their exchange rates during the period of reserves accumulation and the global financial crisis.
Using a novel approach that relies on the use of Reuters’ news reports as a proxy for Asian central bank interventions, we demonstrate the near-term relationship between Asian central bank intervention and their exchange rates. The results show that leaning-against-the-wind intervention strategies are effective in Indonesia, Malaysia, Philippines, Singapore, Taiwan, and Thailand during January 2005 to April 2011. This implies that interventions by Asian central banks provide a value only as a forecast that recent dollar movements would dampen. In addition, we find that coordinated interventions significantly improve the odds of effective intervention. The first day of a string of interventions is also associated with higher odds of effective interventions.
We have shown that interventions by Asian central banks in the near-term appear successful in altering or moderating exchange rate movements. In the absence of such interventions, we could have observed a more rapid appreciation of Asian currencies
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against the USD during the period of quantitative easing, which could have potentially hurt their export sectors. Moreover, we have identified that in dealing with capital flows’
volatility, a collective plan is the key to increasing the likelihood of success. In contrast to the usual standalone actions based on each country’s individual needs, we find that unilateral actions may not be sufficient to achieve the desired outcome of influencing the level and direction of exchange rate movements. Given that the first day of a string of days of interventions has a significant impact on influencing market expectations about the exchange rate level and increases the odds of successful intervention, it may be in the interest of central banks to intervene with greater intensity (in terms of intervention volume) on that first day.
Although foreign exchange intervention by central banks may impede the direction and levels of exchange rate movements during the crisis period, it provides only a short-term solution to the root cause of the problem of volatile capital flows (Humpage, 2013). Fixing the source of the problem, however, is not straightforward, because doing so requires a collaborative effort globally with a strong willingness and commitment to implement restructuring changes from both the supplier and recipient of capital flows.
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Appendix
Table A1 Sample News Reports
We classify news reports into four categories: firm, suspected, support, and neutral. The firm news category refers to news that clearly indicate that the central bank intervened in currency markets. The suspected news category is for news that cast doubt on official foreign exchange intervention. The supported news category is for news that indicate that central bank or government officials provided a statement of support for intervention in the foreign exchange market. The neutral news category is for news that indicates central bankers or government officials provided a neutral opinion on foreign exchange intervention activities. The column heading of ‘Actions’ represents buying or selling of US dollars, or no clear intervention strategy. The examples of news content are obtained from Indonesia’
s reports.
Category Action Examples
Firm
Buy
or
Sell
The central bank was spotted buying dollars, initially from 8,600 up to 8,610, but pulled back its intervention lines.
It is stuck because the central bank keeps intervening to support USD/IDR, so it doesn't break the 8,705 level.
The central bank was spotted selling dollars to check the rupiah’s
Traders said they suspected authorities were intervening to buy dollars on Thursday at levels around 9,288 to 9,290 to smooth currency volatility.
Traders suspect Bank Indonesia intervened again to curb rupiah strength.
The Indonesian rupiah hovered near 9,870-9,880 per dollar as the central bank was suspectedly selling dollars in the market to prop up the
Supported No
“We have already studied it very carefully, knowing which are the aggressive players. We know the players,” Nasution said, adding “BI is in the market to prevent excessive volatility in the market.”--Bank Indonesia’s (BI) senior deputy governor, Darmin Nasution.
Central bank governor Boediono said the bank will remain in the market to support the rupiah.
Indonesia’s central bank will not let the rupiah hit “irrational” levels, Bank Indonesia’s governor said on Tuesday, following a further depreciation of the currency.
Neutral No
Budi Mulya, a deputy governor of Bank Indonesia (BI), told Reuters that the central bank would not curb strengthening in the rupiah as it reflects investor optimism on the country’ s economic fundamentals.
The rupiah rebounded to 10,800 per dollar to be virtually unchanged from Monday’s close after President Susilo Bambang Yudhoyono said authorities may announce a new policy response to the currency’s fall.
He didn’ t provide any details.
The rupiah was “still within fundamental range” despite its recent gains, said acting central bank Governor Darmin Nasution.
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亞洲央行干預外匯市場有效性的再驗證