Every dramatic currency move soon turns into a whodunnit, even when it is hard to pinpoint the perpetrator in a $5tn-a-day market. Algorithmic programmes are often blamed, along with fat-fingered traders. But the current mystery has a more official suspect with talk about whether or not the People’s Bank of China intervened last week to give the renminbi its biggest gain on record. But the better question to ask when the PBoC is involved is, what counts as intervention?
Old-school action, perhaps best typified by the Bank of Japan in the 1990s and 2000s, involved spending billions in mere minutes to reverse a market move. Call it the King Canute approach. See also the Bank of England in 1992. In the past decade, intervention has become more subtle with central banks trading to reduce the scale of unwelcome developments rather than to hold back the tide entirely. Asian central banks are experts in this, notably in Indonesia, South Korea and Malaysia, all of whom have been in the market in the past two months.
China, however, is less predictable. The near $1tn fall in its currency reserves since July 2014 implies heavy action, but exactly how much, and whether on or offshore is unclear. PBoC officials rarely comment on anything, but they never confirm intervention, however likely it looks. This leaves traders to guess whether the flows they see are the PBoC spending its own dollars, Chinese banks trading for their own book or perhaps the PBoC asking those banks to make a splash with their dealing — which can affect the market mood, but is not technically intervention.