LONDON — Sometimes you can defy the market, at least for a while.
Even mentioning government or central bank intervention in financial markets to many professionals will provoke a tirade about such futility against forces out of control.
And once again, 2022 proved that that is far from the truth.
Times are, of course, extraordinary. The disorderly, inflationary global economic reset of a once-in-a-century pandemic was compounded this year by the war in Ukraine, an energy shock and harsh sanctions. Multiple subsidies and price cap attempts of one kind or another have followed.
Historically, wartime almost always sees a change in priorities. And free-running markets tend to rank low on that list when faced with general security imperatives involving blood and treasure, especially if the former frustrates the latter.
While the 2020/21 pandemic and 2022 geopolitical clashes were thankfully not “hot wars” for most Western powers, their economies were effectively on a war footing.
Against that, this year was marked by three very different examples of direct financial market intervention that seem to have succeeded at least in their narrow and specific goals, despite much doubt as to whether they would or even could work.
Crude oil, the Japanese yen and British gilts had extremely turbulent years, even beyond the standards of a terrible 2022 for most world markets, and required direct action to calm the horses.
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Although the latest US Strategic Petroleum Reserve (SPR) release to cool oil prices began late last year, it extended to the largest direct intervention by SPR in history after the invasion of Ukraine in february.
As the SPR launch now nears the end of its projected sales, the nearly 40% drop in the global crude oil benchmark from post-invasion peaks in March to levels seen a year ago can be seen reasonably as a cause for relief, if not celebration.
Early post-invasion forecasts of crude prices anywhere between $150 and $200 a barrel have certainly turned out to be far off the mark so far, even after oil-exporting nations cut production again. And it was due, at least in part, to SPR’s intervention, even if that was helped by central bank tightening and slowing global demand.
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A dramatic consequence of this energy shock was the quicksand of inflation, the different responses of central banks and the sharp fluctuations of the currency against a rising dollar this year.
With the Federal Reserve tightly tightening credit, the Bank of Japan’s determination not to go any further, as well as Japan’s widening oil-fuelled trade deficit, caused the yen to lose almost a quarter of its value at one point, which forced the dollar/yen exchange rate to rise more than 30% to 32-year highs near 150.
But after weeks of verbal warnings of excessive movements that could simply exaggerate Japan’s more subdued inflation pulse, the Bank of Japan stepped in for the first time this century in September and October with several rounds of intervention to buy tens of thousands of yen worth. millions of dollars.
Somewhat predictably, the initial response was that the BoJ would fail, especially with the global forex market daily trading topping $7.5 trillion for the first time this year.
And yet, by accident, design, good timing, or even sheer persistence, the BOJ’s actions left a marker and calmed the move. The dollar/yen is now 7% below last month’s peaks and its dollar selling appears to have coincided with at least a peak in the overall dollar rise this year.
With the dollar widely seen as overvalued, the BOJ’s open move proved it had both the firepower and the stamina to at least stamp out speculation, not unlike an equally successful exercise by the European Central Bank to boost the new euro in 2000. . .
The third celebrated intervention of the year followed yet another bout of self-inflicted volatility in Britain’s government bond market after September’s disastrously failed budget.
After a blinding rise in long-term government bond yields nearly blew up the country’s pension market and risked a resulting spiral, the Bank of England was forced to step in to buy so-called gilts for two weeks in a row, with some considerable doubt about what would happen next.
Helped by a U-turn in government budget policy since then, the BoE not only held the line, but dragged interest rates down and squeezed excessive risk premiums out of the market, so much so that it was able to resume active selling of gilts from your balance this month.
All three examples of market intervention had their own dynamics and drivers. Although all had the public objective of reducing excess markets and speculation, all had to affect prices, although not one specific one.
Free markets are fine, but only up to a point.
For those skeptical of such a move, long-term fundamentals will still win out. Intervention can only serve as temporary smoothing if pricing is erratic: underlying policy configurations would be needed to change direction.
But if you believe that extraordinary circumstances warrant extraordinary action, if only to buy time during a tense period of low visibility, then market intervention can work and traders discard it at their peril.
The opinions expressed here are those of the author, a Reuters columnist.
(Reporting by Mike Dolan; Editing by Jonathan Oatis)