Key points
Central banks often find it necessary to intervene in the foreign exchange market to protect the value of their domestic currency. Central banks can do this by buying or selling foreign exchange reserves or simply by saying that a particular currency is undervalued or overvalued, allowing foreign exchange market participants to adjust. This article looks at the different types of central bank intervention and the important facts to keep in mind before trading.

What is foreign exchange market intervention?
Foreign exchange market intervention is the process by which a central bank buys or sells foreign currency with the aim of stabilizing the exchange rate or correcting a distortion in the foreign exchange market. This is often accompanied by a subsequent adjustment, by the central bank, to the money supply to offset any unwanted negative effects in the local economy. The mechanism mentioned above, is known as “disinflationary intervention” and will be discussed later, along with other methods of currency intervention.
How Forex Traders Can Trade During Central Bank Intervention?
Traders must keep in mind that when central banks intervene in the forex market, the volatility can be extremely high. Therefore, it is essential to establish an appropriate reward/risk ratio and use careful risk management. Central banks intervene in the forex market when the current trend is contrary to the direction the central bank wants the exchange rate to go. Therefore, trading around central bank intervention is very similar to reverse trading.
Additionally, the forex market tends to anticipate central bank intervention, which means it is not uncommon to see movements contrary to the long-term trend in the moments immediately preceding a central bank intervention. As there is no guarantee that traders can look for emerging trends before placing trades.
What is foreign exchange market intervention?
Foreign exchange market intervention is the process by which a central bank buys or sells foreign currency with the aim of stabilizing the exchange rate or correcting imbalances in the foreign exchange market. This is often accompanied by subsequent adjustments by the central bank to the money supply to offset any undesirable side effects on the local economy. The mechanism referred to above, known as “sterilized intervention”, will be discussed later, along with other monetary intervention methods.
How can forex traders trade around central bank interventions?
Traders need to remember that when central banks intervene in the forex market, the resulting volatility can be extremely large. It is therefore essential to establish appropriate risk/reward ratios and use prudent risk management. Central banks intervene in the forex market when the current trend is opposed to the exchange rate direction they desire. As such, trading around central bank interventions is very similar to trading reversals.
Furthermore, the forex market tends to anticipate central bank interventions, meaning it is not unusual to see short-term moves counter to the long-term trend in the moments just before the central bank steps in. There is no guarantee that traders can identify the new emerging trend before placing their trades.
Why do central banks intervene in the foreign exchange market?
Central banks generally agree that intervention is necessary to stimulate the economy or maintain a desired exchange rate. Central banks will typically buy foreign currency and sell domestic currency if the domestic currency has appreciated to the point where domestic exports become too expensive for foreign countries. Central banks thus deliberately alter exchange rates to benefit the local economy. Below is an example of a successful central bank intervention to counter the strength of the Japanese Yen against the US Dollar. The Bank of Japan felt the exchange rate was unfavorable and quickly intervened to weaken the Yen, leading to a rise in the USD/JPY pair. The intervention occurred within the period described by the blue circle, with the effect being felt shortly after.

Mặc dù hầu hết các can thiệp của ngân hàng trung ương đều thành công, nhưng cũng có những trường hợp không phải như vậy. Biểu đồ dưới đây mô tả một ví dụ về can thiệp tiền tệ trong cặp tiền tệ USD/BRL (Real Brazil). Biểu đồ nêu bật cả hai trường hợp mà ngân hàng trung ương đã can thiệp để ngăn chặn sự suy giảm của đồng Real Brazil. Rõ ràng là cả hai trường hợp đều không thể củng cố ngay lập tức đồng Real so với đồng đô la Mỹ khi đồng đô la tiếp tục tăng cao hơn và cao hơn.

How does currency intervention work?
Central banks can choose from different types of intervention. They can be direct or indirect. Direct intervention, as the name suggests, has an immediate impact on the foreign exchange market, while indirect intervention achieves the central bank’s goals through less invasive measures. Here are examples of direct and indirect intervention:
TYPES OF INTERVENTION | DIRECT OR INDIRECT |
---|---|
Jawboning | Indirect |
Operational Intervention | Direct |
Concerted Intervention | Direct and indirect |
Sterilized Intervention | Direct |
Operational intervention: This is often what people mean when they refer to central bank intervention. It involves the central bank buying and selling both foreign and domestic currencies to bring the exchange rate back to a target level. It is the sheer size of these transactions that moves the market.
Jawboning: This is an example of indirect foreign exchange intervention, where the central bank mentions that it may intervene in the market if the domestic currency reaches a certain undesirable level. This method, as the name suggests, is more about talk than actual intervention. With the central bank ready to intervene, traders take it upon themselves to bring the currency back to a more acceptable level.
Coordinated intervention: This is a combination of jawboning and operational intervention and is most effective when multiple central banks voice similar concerns about the exchange rate. If several central banks step up their jawboning efforts, it is more likely that one of them will actually engage in operational intervention to move the exchange rate in the desired direction.
Curtailment: Curtailment involves two actions by the central bank to influence the exchange rate while not changing the monetary base. This involves two steps: The sale or purchase of foreign currency and an open market operation (sale or purchase of government securities) of the same size as the first transaction.