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Central bank interventions in the foreign exchange market

Data from Turkey and Mexico

The FRED Blog has discussed how central banks and finance ministries buy and sell foreign currencies to influence the value of their own currencies. Those purchases and sales are called interventions and FRED has data for Australia, Germany, Japan, Italy, Mexico, Switzerland, Turkey, and the United States. Today, we discuss the most recently recorded interventions from the Central Bank of Turkey and compare them with interventions from the Central Bank of Mexico.

The FRED graph above shows the amounts of U.S. dollars bought and sold by the Central Bank of Turkey in red and the Central Bank of Mexico in green. Purchases are recorded as positive values (larger than zero), sales are recorded as negative values (smaller than zero), and the sum totals for each month are the data points shown in the graph.

When a central bank sells U.S. dollars in foreign exchange markets, it increases their supply relative to the domestic currency, intending to prop up the value of that domestic currency. For example, in October 2008, the Central Bank of Mexico sold 3 billion U.S. dollars to address the ongoing depreciation of the peso. But that intervention, and several others that followed, did not prevent the depreciation of the peso over the following 12 months.

In the case of Turkey, the timing of the latest reported central bank intervention in relation to the relative value of the Turkish lira is less obvious: The December 2021 sale of 5 billion U.S. dollars took place while the domestic currency continued on its long path of steady depreciation.

These observations highlight how difficult it can be to interpret data. Obviously, the central banks are intervening to prevent something from happening. If it still happens, is it because the intervention was ineffective? Or would conditions have been even worse without the intervention? A simple graph cannot answer those questions.

How this graph was created: Search for and select “Turkish Intervention: Central Bank of Turkey Purchases of USD (Millions of USD).” From the “Edit Graph” panel, use the “Add Line” tab to search for and select “Mexican Intervention: Banco de Mexico Purchases of USD against MXN (Millions of USD).” To change the frequency of the data use the “Edit Line” panel and select “Modify Frequency: Monthly” and “Aggregation method: Sum.”

Suggested by Diego Mendez-Carbajo.

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