Whether they’re intervening verbally or actively buying and selling in the market, central banks will only succeed in buttressing their currencies for the long-term with interest rate hikes, Commerzbank AG warns.
(Bloomberg) — Whether they’re intervening verbally or actively buying and selling in the market, central banks will only succeed in buttressing their currencies for the long-term with interest rate hikes, Commerzbank AG warns.
Switzerland, Sweden and Japan are among the countries where policymakers favor interventions, rather than matching the aggressive monetary tightening of other central banks, Commerzbank AG strategists led by Ulrich Leuchtmann wrote in a note. Those nations are breaking with decades of accepted practice and exposing themselves to significant risks, they said.
Sweden is the prime example, and Commerzbank says only aggressive interest-rate hikes will salvage the krona. Not only are the Riksbank’s threats of intervention unproductive, but the central bank doesn’t appear to have the firepower to step in anyway, they say.
“One can only recommend to the Riksbank to pursue a more attractive monetary policy from the FX market’s point of view if it wants to see a stronger krona,” Leuchtmann wrote in a note. “Everything else is ridiculous, because it illustrates that Riksbank is not willing to accept the logical and predictable consequences of its own actions.”
In Japan, officials are also trying to prop up the yen with verbal interventions as the central bank sticks to its ultra-loose monetary policy. The Commerzbank strategists said this shows a lack of consistency — a weak yen would actually help to prevent inflation from falling below target.
There’s the danger this policy could “have the opposite effect one day: that it will turn into high inflation levels that are difficult to control, into a crisis of national finances and in explicit yen weakness of an extent that will make the current yen exchange rates seem like a walk in the park,” Leuchtmann wrote.
The strategy in Switzerland, meanwhile, is to intervene directly in the market to create franc strength. This risks depleting the central bank’s foreign currency reserves and increases the chances that it will be branded a currency manipulator by the US government. Commerzbank strategists say the tactic may only work if inflationary pressures continue to ease on their own over the coming months, which is “far from certain.”
“Whereas over the past decades there had largely been agreement that determining the exchange rates should be left to the FX market there are always exceptions,” he wrote. “I get the impression that the central banks and Ministers of Finance were affected by a kind of rare disease at present: interventionitis.”
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