Silver Flash-Crashes, Peso Tumbles As Mexican Central Bank Intervenes (Again)
By Tyler Durden
If at first you don't succeed, intervene again! For the second time today (at midnight ET), Banxico officials confirmed the central bank entered the market to sell US dollars in an attempt to strengthen the peso. Now we await the next Trump tweet to take the peso back down…
As Bloomberg reports, according to a Banxico official who asked not to be identified, the central bank is looking to strengthen Mexican peso.
For now the move is far less impressive – which is odd given the lack of liquidity and an irrational peso buyer…
We have one other question… Is Banxico dumping its silver to receive dollars to sell to buy pesos?
Around $200mm notional of Silver was dumped in those few minutes.
As we noted at their earlier attempt, we can't really blame Banxico for intervening: with the local population, of which over half lives in poverty, angry and protesting the recent “Gasolinazo”, or 20% increase in the price of gas, the crashing currency is sure to send many other prices, especially of imported goods, through the roof while sending much of the population over the edge. Which is why Goldman's Alberto Ramos agrees that the central bank had to do something:
“In our assessment, some FX market intervention at this juncture is justified since market liquidity conditions became somewhat tighter, the MXN entered overshooting territory (excessively undervalued) and from current levels, significant additional exchange rate weakness, while making exporters even more competitive, can threaten two valuable public goods: price and local financial market stability. A very weak currency can have significant medium-term costs for the broader economy as it is likely to add pressure on inflation and wages (which would over time reduce the cost-competitiveness of the Mexican exporters) and prompt to a tighter monetary stance. Overall, higher inflation/wages and higher rates would be a clear negative shock to the non-tradable sectors of the Mexican economy, for they would not enjoy the exporters (tradable sectors) benefit of a weak currency.
So much for a “brave new world” in which global trade imbalances can be resolved without central bank intervention. If anything, the events from the first 4 days of 2017, in which we first saw a dramatic indirect intervention by the PBOC which sent the overnight CNH deposit rate to the highest ever in a desperate attempt to crush shorts, and then the Mexican direct intervention, have confirmed that 2017 will be very much like 2016 when it comes to central bank intervention, if not more so.
However, as Goldman admits, Banxico made one mistake which explains why virtually the entire post-intervention move has been faded:
In our assessment, if the MXN remains under pressure the authorities should entertain the possibility of using different intervention instruments, such as USD Dollar swaps, for they are not a direct claim on reserves and offer valuable FX hedging protection to the market in a period of significant uncertainty but no large spot market outflows.
There is a problem with using reserves to fight a currency war, one which China …read more
Source: Silver Flash-Crashes, Peso Tumbles As Mexican Central Bank Intervenes (Again)
