Currency Intervention’s Uninterrupted Craze
As currency reversals bled into local bond auctions, with failures in Russia, Korea, Colombia and elsewhere interventionist tendencies were reasserted across a range of stalwarts led by Brazil and Indonesia but encompassed all regions and smaller advocates. Brazil’s regular swaps came to almost $7 billion in the May-June month as it also sold spot dollars, raised the benchmark interest rate to 8 percent, and removed inflow taxes on fixed-income and derivatives. The Treasury also conducted debt buybacks, and indicated remaining corporate short-term borrowing limits could soon end as the stock exchange was down 25 percent after postponement of a big cement form IPO. Indonesia’s overnight rate was likewise hiked, as the central bank bought secondary market bonds continuing to absorb the slack as foreign investors dumped $1.5 billion in early June. Foreign reserves cover over five months’ imports, and the fuel subsidy reduction just ordered to large protest response in the pre-election period is designed to curb both inward energy appetite and the budget deficit. Indian reserves of almost $300 billion have also been deployed to keep the rupee above 60/dollar, as every 10 percent currency fall raises the current account gap and inflation an estimated half a percent. State banks were also directed to sell dollars and the FII debt gap was lifted $5 billion to $30 billion even though the original quota is unused. In Europe Russia and Turkey have been in the market daily for regular $200 million-plus operations, while Poland and Romania involvement has been more modest. In Asia the Philippines and Thailand central banks had agents unload hard currency, while in Latin America Colombia slashed regular dollar purchases and Peru shed USD certificates as the sol hit a 2-year low. Mexico has notably refrained even as the peso dropped with foreign ownership of domestic debt at $135 billion. With the onset of Japan’s record easing retail investors there in the Uridashi and toshin segments had begun to pile into Mexican assets after traditional overweighting in Brazil. Trust holdings had quadrupled to $4 billion in May before the correction, when yen resurgence eliminated previous gains. While the Mexican authorities stay hands-off they have a facility to activate and can also draw on bilateral US Federal Reserve swap and IMF contingent credit lines for balance of payments support.
South Africa’s rand may test the post-Lehman nadir as the worst performer both due to its own weakness and as a liquid proxy for the broader universe. Despite popular calls full-scale intervention has not been mounted although the previous removal of portfolio outflow restrictions on banks and pension funds may be revisited. The stock market is off 20 percent as bond inflows sputter despite recent addition to premier world indices like Citigroup’s. A sovereign downgrade to junk would force disqualification and the short-term debt/reserves ratio is 60 percent with rolling electricity shortages jolting rollover scope.
