Weaker dollar means central banks more likely to enter forex markets

WATCHING for central bank intervention has once again become a critical part of following the currency markets. The Swiss National Bank has been the most active and open in its interventions, decidedly entering the forex markets whenever the Swiss franc approaches the SFr1.5 level against the euro. <br /><br />Equally, countries such as Singapore and Taiwan are suspected to have felt it necessary over recent weeks to get involved in the markets as their currencies strengthen against the US dollar. <br /><br />But while these countries are thought to have been physically intervening in the market, plenty of other central banks have been vocally influencing the markets, whether they mean to or not. <br /><br />Recent comments from the Bank of England have seen the pound fluctuate sharply. Comments from governor Mervyn King recently saw sterling slump to six-month lows against the euro, for example. But the Bank&rsquo;s head of markets, Paul Fisher, said he thought that the quantitative easing policy was working, comments which saw sterling gain against both the euro and the US dollar.<br /><br />And in Japan, where the Bank of Japan was previously very happy to consider intervention in the yen, there has been a complete turnaround and the incoming finance minister has said that the central bank is ready to see the yen strengthen gradually. This has encouraged traders&rsquo; bullish attitude towards the Japanese currency as they no longer fear the central bank wading in should the yen appreciate too far. <br /><br />But it is in Canada and New Zealand that there is potential for central banks to talk down their currencies. Yesterday, the Bank of Canada (BoC) noted the better global economic conditions but said: &ldquo;The current strength in the (Canadian) dollar is expected, over time, to more than fully offset the favourable developments since July.&rdquo; <br /><br />The Canadian dollar is now nearing parity with the US dollar after having risen more than 17 per cent since the start of the year. But the Bank of Canada&rsquo;s comments saw the Loonie &ndash; as the Canadian dollar is known &ndash; drop to Ca$1.0361 from Ca$1.0315 before the announcement.<br /><br />ING analyst Tom Levinson says: &ldquo;To us, this suggests that the BoC is more concerned about Canadian dollar strength than perhaps the market presumed.&rdquo;<br /><br />But while the Canadian central bank has not entered the markets, Mark O&rsquo;Sullivan, director at foreign exchange provider Currencies Direct, thinks that 2010 will be a real test for central banks and we could see actual intervention in currencies. &ldquo;Both the Canadian and New Zealand central banks are already trying to talk down their currencies and they could be forced to turn vocal intervention into physical intervention,&rdquo; he says. <br /><br />Traders should also bear in mind that intervention in the euro has also been touted. A strong euro is harming exports and hindering recovery. John Hardy, FX consultant at SaxoBank, says: &ldquo;Trichet was out yesterday trying to talk up the greenback once again with the usual comments about his interest in the US&rsquo;s purported strong dollar policy. Other European officials were far more stark in their comments today, with one French official calling the strong Euro a disaster.&rdquo; But while not impossible, European Central Bank intervention appears unlikely.<br /><br />Central banks with a credible and well-publicised currency policy are difficult to take on and individual traders would be foolish to try. But where precise levels have been specified &ndash; as in the case of the Swiss National Bank &ndash; there is plenty of opportunity for forex traders to anticipate potential interventions in the markets. <br />