FX markets and FX interventions

Insights from a Markets Committee Workshop chaired by Jwahong Min (Bank of Korea)

Against the backdrop of the unprecedented monetary tightening and large terms of trade shocks of 2022, the Markets Committee held a workshop to discuss foreign exchange (FX) markets and lessons for FX interventions.

Among the issues highlighted was the continued migration of liquidity from primary venues to other venues. These other venues have become vital for price discovery in FX markets but there was a divergence of central bank views on their resilience during periods of volatility.  The workshop confirmed and elaborated the nuances of other well-known structural changes in FX markets, including increased electronification, the growth of dark pools, and the emergence of new trading platforms.

In addition, the workshop explored operational aspects and the effectiveness of recent FX interventions.  It also highlighted that the motivations and objectives of FX interventions remained similar to those of the Covid crisis, despite the very different market backdrop and a decrease in intervention volumes and frequency in 2022. Emerging trends such as adapting FX operations to structural market changes, exploring new venues for interventions, and evolving market monitoring techniques were highlighted as critical for the future resilience and effectiveness in FX market interventions.