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4 Central Banks Swinging into Action

4 Central Banks Swinging into Action

Kathy Lien, Technical Strategist

A wave of new policy measures by some of the world’s central banks have helped stem recent FX volatility, and while the respite may be short-lived, hard-hit currencies are enjoying much-needed corrections.

With no major US data on the economic calendar today, currency traders are licking their wounds. All of the major currencies that have fallen steeply in recent days are trading higher, led by the gains in the AUDUSD and NZDUSD.

The EURUSD, which has enjoyed a nice rally since May, is also trading lower despite the rise in Eurozone industrial production. Although today's retracement is modest in relation to the broader swings experienced by these currencies over the past month, there's more to these moves than a technical recovery.

See also: 2 Important FX Corrections in the Making

While G10 central banks are sitting on the sidelines and watching the volatility in the currency, equity, and bond markets, central banks in emerging economies have sprung into action. Indonesia raised interest rates by 25 basis points (bps) to boost the Indonesian rupiah (IDR), which dropped almost 5% in the past 12 months.

Poland decided to intervene directly in the currency market to drive the Polish zloty (PLN) lower against the euro (EUR) for the first time in two years, and the Turkish central bank introduced a series of liquidity tightening measures to calm the volatility. Five $50 million forex-selling auctions were held, and the bank also threatened to intervene directly in the foreign exchange market.

These central banks finally realized that they can't just sit around and wait for the larger players to take action. Instead, they have to take their respective fates into their own hands and control volatility in their local markets.

See related: A Local Decision with Global FX Implications

For the time being, these defensive policy measures have halted the deleveraging in the FX and equity markets, but more aggressive action or comments from G10 central banks are needed in order for these currencies to bottom.

For the EURUSD, this means today's move could prove to be a temporary pullback, and for USDJPY and AUDUSD, it’s likely just a short-lived recovery.

A Critical Day for New Zealand Dollar (NZD)

The best-performing currency this morning was the New Zealand dollar (NZD), which was up 1.4% against the USD. The Reserve Bank of New Zealand (RBNZ) will meet tonight, and any comments about currency intervention should determine whether the NZD gives up its gains or extends its recovery.

While the NZDUSD has been in a relentless downtrend, the central bank's focus is on their currency's value against the AUD, and they haven't been happy with the move. According to data released in late May, the RBNZ conducted its largest intervention since May 2008 this April while trying to weaken the NZD. RBNZ Governor Graeme Wheeler even took the unusual step of confirming the intervention.

Unfortunately, there's been very little relief in the exchange rate since we last heard from the central bank, and if the RBNZ hardens the warning about currency intervention, the NZD could resume its slide. If the Bank doesn't discuss intervention, however, NZDUSD could find itself trading firmly above 80 cents.

By Kathy Lien of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.