viernes, 6 de septiembre de 2013

While Mexico cuts its interest rate, BRICS agree to combat currency outflows...

The Fed announced in June that at some unspecified point in the future it will begin to taper back its monthly bond purchases. Following that statement of intentions, capital flows to emerging markets slowed to a trickle or, in some cases, even reversed. Consequently, currencies weakened.

The peso fared well in comparison to emerging market currencies. Between April 30 and August 30, the peso depreciated 9.8%. The Turkish lira lost 14.0% of its value in the four-month period. The Brazilian real dropped 19.5%. The Indian rupee lost 22.1% against the dollar. The Russian ruble fared well by those standards, declining just 7.2%.

Banco de Mexico, Mexico's central bank, surprised the markets this morning by cutting the Mexican Reference Rate 25 basis points, to 3.75%. It's the second reduction in six months. That follows a period of nearly four years in which the Reference Rate stayed at 4.50%. The Board of Governors explained their decision on the basis of economic conditions in Mexico and the world. The risks to growth have increased at the same time  inflation is not likely to pose a problem. In Mexico, financial markets, including the currency market, have had an "orderly" adjustment to the anticipated change in Fed policy. The Board concludes that in light of the expected weak demand and the expected "significant advances in strengthening public finances", it was appropriate to cut the Reference Rate.

The Mexican authorities are NOT intervening to to support the peso. By cutting the benchmark short-term interest rate Banco de Mexico sends a signal that monetary policy is not designed to attract carry trade flows. Of course, the increase in longer-term interest rates over the summer has steepened the peso yield curve, which means that portfolio investors can still reap an attractive yield differential in longer-term peso obligations.

The BRICs (Brazil, Russia, India and China) have had a different reaction to the hit to their currencies, judging by a paragraph tucked deep in e New York Times September 6 account of the G-20 meetings in Russia. According to the Times story, the BRICs intend to create a collective fund of US$100 billion to defend their currencies. When the fund will be in place and how it will operate remains to be seen.

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