Big week for currency intervention measures
Policymakers across Latin America are announcing measures to stem currency appreciation against the $US. Since March 2009, the $US depreciated 25% against the Colombian peso, 28% against the Brazilian real, 14% against the Mexican peso, 12% against the Peruvian nuevo sol, and 11% against the Chilean peso.
Much of the $US’s lost value is due to a renewed risk appetite as the “flight to (US) quality” unwinds somewhat. Even so, emerging market policymakers are worried; and governments across the region are stepping up to halt the appreciation either directly (Peru) or with quasi-capital controls (Brazil).
The Brazilian government announced a 2% tax on foreign capital flows into the domestic fixed income and equity markets. And to Brazil’s northwest, the Colombian central bank on Friday announced plans for direct intervention in the foreign exchange market to the tune of 3 trillion pesos (only after lesser and indirect measures announced the previous week proved only transiently effective). And Peru’s central bank has been purchasing $US on a regular basis since September 2009.
As the chart above illustrates, the Banco Central de Reserva del Perú has been very successful in stemming the appreciation. Colombia’s initial efforts (like halting the repatriation of foreign dollar holdings) were successful but only to a point – the peso fell almost 4% against the $US; but since then, the peso has settled to around 1917 Peso/$US. Brazil’s efforts, however, did little to break the trend of the real: the $US appreciated roughly 2% in the wake of the capital tax announcement, but the BRL (the real) gained back every bit of value that it lost in about 2.5 days. As one of my colleagues said, “you can’t submerge a beach ball”.
I suspect that Colombia’s direct intervention announced on Friday will successfully drive down the value of the peso, as the foreign capital inflows are primarily from $US-denominated government bond issues (little equity flows). It’s kind of interesting that the government is concerned about the appreciation of the peso but issuing debt denominated in $US…….
Brazil’s capital markets are too big and too enticing to foreigners right now (see charts below) – more direct measures are needed to stop the BRL’s appreciation. We will see if the Banco Central do Brasil goes there – Asia’s certainly doing it!
Text added: The charts illustrate the EXTERNAL bond and equity issuance by country as a share of total issuance in Latin America from the IMF Global Financial Stability Report.