Column: A 2022 tale of three market interventions

LONDON, Nov 23 (Reuters) – You can sometimes change the market – at least for a time.

Even mention the intervention of the government or central bank in the financial markets of many professionals and you challenge such futility against forces that cannot be controlled.

And once again, 2022 proves that is far from the truth.

Times are of course strange. The chaotic, inflationary global economic reboot from a once-in-a-century pandemic has been compounded this year by the war in Ukraine, a shockwave and renewed sanctions. More subsidies and tentative price caps of one kind or another followed.

Wartime in history almost always sees priorities shift. And free-flowing markets tend to be low on that list when faced with massive security requirements involving blood and treasure – especially when the former fails the latter.

While the pandemic 2020/21 and geopolitical standoffs in 2022 are thankfully not ‘hot wars’ for most Western powers, their economies are for all intents and purposes a war.

Against that, this year was marked by three very different examples of direct intervention in the financial market that seem to have succeeded in their narrow and targeted objectives at least – despite many doubts whether they could or can even.

Crude oil, the Japanese yen and British gilts have all had extremely turbulent years – even ahead of the benchmarks of a terrible 2022 for most all global markets – and require direct action to calm the horses.

PLEASE LEAVE ME

SPR Release and Oil Prices

Although the latest release of the US strategic petroleum reserve (SPR) to cool oil prices began late last year, it escalated into the largest direct intervention of the SPR in history after the February invasion of Ukraine.

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While the release of the SPR is nearing the end of its planned sale, the nearly 40% drop in global crude oil prices from post-invasion peaks in March to levels seen a year ago could be ‘g should be seen as a cause for relief if not celebration.

Early post-invasion forecasts of crude oil prices anywhere between $150 and $200 per barrel have certainly proved wide of the mark so far – even as oil-exporting countries have once again cut production . And this is at least in part due to SPR intervention, albeit aided by central bank tightening and slowing global demand.

YEN FOR ACTION

BOJ Intervenes to Buy Yen as it Nears 150/$

A dramatic branch of this strong shock is the shifting sands of inflation, different central bank responses and wild currency swings against a rising dollar this year.

With the Federal Reserve tightening credit sharply, the Bank of Japan’s determination not to comply as well as Japan’s ballooning oil-driven trade deficit has seen the yen lose nearly a quarter of its value. at one point – pushing the dollar/yen exchange rate up more than 30% to a 32-year high near 150.

But after weeks of verbal warnings of excessive moves that only risked exaggerating Japan’s more muted pulse of inflation, the Bank of Japan began for the first time this century in September and October with several rounds of intervention to buy yen for tens of billions of dollars.

Somewhat predictably, the initial response was that the BoJ would fail – at least with daily global currency market trading exceeding $7.5 trillion for the first time this year.

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And yet – by accident, design, good timing or even sheer persistence – the BOJ’s actions set a mark and calmed the movement. Dollar/yen is now about 7% below last month’s peaks and its bearish dollar selloff now appears to at least coincide with a full dollar rally this year.

With the dollar widely viewed as overvalued, the open-ended BOJ move shows it has both the firepower and the resilience to deflate bubble speculation at least – unlike a similar successful exercise of the European Central Bank to promote the new euro back in 2000 .

GILT TRIP

The BoE intervened to buy gilts

The third celebrated intervention of the year followed a more self-imposed bout of volatility in the government’s government bond market after September’s disastrous botched budget.

After a blinding spike in long-term government bond yields nearly blew up the country’s pension market and threatened the resulting spiral, the Bank of England was forced to step in to buy so-called gilts for two weeks next- next – with some doubts about what will happen afterwards.

Aided by a U-turn in the government’s budget policy since, the BoE has not only held the line, it has dragged borrowing rates back and forced the excess risk premium out of the market – so it was able to maintain the actively selling gilts from it. balance sheet this month.

All three examples of market intervention have their own dynamics and drivers. Although all are aimed at reducing market excess and speculation – all of them must affect prices, although not a specific one.

Free markets are good, but only up to a point.

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For those skeptical of such action, the long-term fundamentals still win. Intervention can only be a temporary smoothing if price-making is not correct – the underlying policy settings are needed to change direction.

But if you believe that extraordinary circumstances call for extraordinary action – even if it’s just buying time during a busy period with little visibility – then market intervention can be a treat. and traders reject it at their peril.

The opinions expressed here are those of the author, a Reuters columnist.

Reporting by Mike Dolan; editing by Jonathan Oatis

Our Standards: The Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

Mike Dolan

Thomson Reuters

Mike Dolan is Reuters Editor-at-Large for Finance & Markets and has worked as an editor, correspondent and columnist for Reuters for the past 26 years – specializing in the global economy, policy-making and financial markets across the G7 and new economies. Mike is currently based in London, but has also worked in Washington DC and Sarajevo and covered news events from many cities around the world. An economics and politics graduate from Trinity College Dublin, Mike previously worked with Bloomberg and Euromoney and received Reuters awards for his work during the 2007/2008 financial crisis and the 2010 frontier markets. He was a regular columnist for Reuters in the International New York Times between 2010 and 2015 and currently writes twice weekly columns for Reuters on macro markets and investments.

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