US: Many shades of a potential FX intervention by Fed – Standard Chartered

Standard Chartered analysts do not believe an imminent US FX intervention is likely, but suggests that neither is it impossible.

Key Quotes

“If the US Treasury intervened in FX markets to support the USD, the Federal Reserve would have a number of alternatives. We do not expect Fed to stand pat if the Treasury intervenes,  even if this it is a theoretical possibility. Ultimately, we believe the Fed’s decision will be driven by what signal it wants to send to the markets and whether a stronger signal is perceived to carry greater political upside or downside risks relative to a weaker one.”

“The strongest message to the markets would be intervening alongside the Treasury and not sterilising. Nevertheless, for political, monetary policy or institutional reasons, the Fed may prefer a less aggressive stance.”

“For instance, it could coordinate the timing of a policy rate cut with a Treasury intervention even if it did not join in intervention. The Fed could also intervene along with the Treasury close to a policy rate cut and nominally sterilise the intervention. The rate cut would effectively unsterilise Treasury intervention. The Fed could also help finance a larger Treasury intervention by raising the warehousing limit, though we believe a substantial increase in this limit is unlikely, as it would involve considerable political risk.”

“Given limited precedents for these options against the backdrop of a sizeable Fed balance sheet, it is hard to convincingly argue which option the Fed would choose and how market participants would respond. Neither we, the Fed nor market participants have much precedent to lean on. However, in any FX intervention that is unsterilised or is closely followed by a rate cut, the eventual flow of reserves would be expected to put downward pressure on US money-market rates as foreigners either exchange USDs back to local currencies or invest directly in US assets.”