Currency Intervention Madness

Currency intervention never works, yet that does not stop countries from trying. And in a strange twist of fate, the Central Bank of Russia has been providing loans to banks to shore up the Ruble, instead they are shorting it.

Bloomberg picks up the story in Russia Fuels Ruble Tumble With Bank Loans.

Russia’s central bank is exacerbating the ruble’s 34 percent plunge since August, even as it struggles to defend the exchange rate, by providing loans to banks that speculate on the currency, say Alfa Bank and UniCredit SpA.

Banks used “almost all” the money to bet against the ruble, said Natalia Orlova, chief economist at Alfa, Russia’s largest non-government bank. The ruble fell 18 percent against the dollar in January.

“A significant amount, if not all, of the speculative attacks on the ruble are funded by the central bank itself,” said Vladimir Osakovsky, Moscow-based economist for UniCredit, Italy’s largest bank.

Central bank Chairman Sergey Ignatiev pledged Jan. 22 to continue using reserves to hold the ruble at 41 against a target basket of dollars and euros, and said he would limit the amount of refinancing offered and adjust interest rates. The ruble slid as much as 0.2 percent to 40.9860 against the basket yesterday, just 0.03 percent from the limit of the trading band.

Using reserves to prop up the Ruble is a disastrous policy. All it does is waste reserves needed for other purposes, thereby exacerbating the problem. If Russia wants to defend the Ruble it will have to hike interest rates.

Mexico Intervenes to Halt Peso Slide

Mexico is in on the currency intervention madness as well as the Mexican Central Bank Intervenes to Halt Peso Slide.

Mexico’s central bank bought pesos in the foreign-exchange market after the currency plunged to a record low today.

A statement from a joint central bank and Finance Ministry committee said Banco de Mexico purchased pesos to “provide liquidity and to ease volatility.” The intervention is an “extraordinary” measure beyond the bank’s normal offer to buy $400 million worth of pesos a day, the press office said earlier.

The central bank stepped into the market after the peso tumbled to a record for a fourth day. Today’s intervention adds to the $16.6 billion of foreign reserves that central bank Governor Guillermo Ortiz has spent to prop up the peso since the global financial crisis sent it tumbling in October.

“They have to be aggressive, they have to do it on a number of occasions and use larger amounts” to support the peso, said Francisco Diez, director of foreign-exchange trading at RBC Capital Markets in Toronto.

“The market learned how to play” the daily auction system, said Maya Hernandez, a currency analyst with HSBC Holdings Plc in New York. “It wasn’t having any impact at all.”

Francisco Diez simply has it wrong. No matter how much Mexico supports the Peso by intervention, as soon as Mexico stops, the Peso would resume its slide. Maya Hernandez has it correct with “The market learned how to play” the daily auction system.

Indonesia Seeks To Defend The Rupia

In an attempt to defend of the rupiah, Indonesia Seeks Larger Japan Currency Swap, New Pacts.

Indonesia’s central bank is seeking to expand its currency swap agreement with Japan from $6 billion and is seeking new pacts to bolster the rupiah, which slumped the most in eight years in 2008.

Indonesia, which has similar agreements with China and South Korea for $3 billion each, may also initiate talks with a fourth nation, central bank Governor Boediono said, without identifying the country. The rupiah, which fell 16 percent last year, closed at 11,673 per dollar yesterday in Jakarta.

“We think the critical period is six months in which the main problem is tight liquidity and investors pulling out money to return home,” Boediono said at a dinner with local newspapers late yesterday. “In the U.S. itself there’s dollar scarcity, which is ironic.”

Kazakhstan Devalues The Tenge

In Kazakhstan a Tenge Devaluation Triggers Sell-Off

Evidence of deteriorating economic conditions in central and eastern Europe fuelled a broad-based return to risk aversion in currency markets on Wednesday after Kazakhstan devalued its currency and Russia’s credit rating was downgraded.

Kazakhstan’s central bank said it had widened the trading band for the tenge, allowing the currency to fall by 18 per cent against the dollar to 150 tenge, in response to weaker oil prices and the impact of the global economic crisis.

Kazakhstan’s devaluation triggered a wave of selling of emerging market currencies, with Poland’s zloty plumbing a fresh five-year low against the euro, at 4.7005 zloty, before paring its losses to trade 0.4 per cent lower at 4.6540 zloty by mid-afternoon in New York. The Czech koruna slid 0.5 per cent against the euro to an intraday low of Kcs28.673.

Christian Lawrence, at RBC Capital Markets, said: “Kazakhstan killed risk appetite within currency markets.”

Hungary’s forint hit a record low of Ft304.24 against the euro, before reversing its losses to jump 0.7 per cent to Ft298.05, amid rumours that the central bank had intervened to prop up the currency. The central bank declined to comment.

Kazakhstan Sets New Range For The Tenge

The finger pointing begins: Kazakhstan blames devaluation on rouble.

Kazakhstan devalued the tenge by more than 18 per cent on Wednesday, blaming the sharp depreciation of the Russian rouble and falling oil prices.

The devaluation highlighted the plight of central Asia’s inter-dependent republics and their vulnerability to Russia’s economic woes.

The Kazakh central bank set a new range for the tenge, saying the currency would be allowed to fluctuate by about 3 per cent around a level of 150 against the US dollar. On Wednesday the tenge tumbled to 149 against the dollar from Tuesday’s levels of 122-124 – the far end of the central bank’s previous corridor of 117-123.

Grigory Marchenko, the chairman of the Kazakh central bank, pledged to support the tenge at the new level. “We have reached a new market equilibrium level and we will defend it,” he said. Kazakhstan has used up $6bn of foreign exchange reserves since October defending the tenge, including $2.7bn (€2.1bn, £1.9bn) in January alone.

Silliest Currency Statement Of The Week

This could be premature but I doubt it. I am awarding the silly currency statement of the week to Grigory Marchenko, the chairman of the Kazakh central bank, for “We have reached a new market equilibrium level and we will defend it.”

Excuse me, but if you have reached a new market equilibrium level, there is no need to defend anything.

Spotlight on Japan

Toyoo Gyohten, the former Japanese ministry’s top currency official says Japan Intervention Hinges on Yen Moves, Not Level.

Japan will consider intervening in the currency market based on the pace of the yen’s appreciation as opposed to the level at which it trades, a former Finance Ministry official said.

“Japan’s authorities may focus on the direction and the speed of the movement, rather than the level,” Toyoo Gyohten, the ministry’s top currency official from 1986 to 1989, said in an interview on Feb. 4. He said there was no need for the government to sell the currency, which is trading near a 13-year high against the dollar.

The yen’s 19 percent rise since September has sapped earnings at exporters including Toyota Motor Corp., which is forecasting its first loss in 71 years. Keidanren business lobby Chairman Fujio Mitarai and Honda Motor Co. President Takeo Fukui have called on the government to sell the currency to stem its gains.

Japan hasn’t stepped into the currency market since the central bank, at the request of the Finance Ministry, sold a record 14.8 trillion yen ($166 billion) in the first three months of 2004, when the yen was trading an average 107 per dollar.

The currency strengthened to 87.13 per dollar on Jan. 21, the strongest level since July 1995, as global financial turmoil spurred investors to buy it as a haven.

Gyohten said the G-7 nations will discuss how to combat the global recession, with an emphasis on the progress of President Barack Obama’s efforts to stimulate a U.S. recovery.

The next six months “will be crucial for the U.S. economy and the world economy as a whole” as the effectiveness of Obama’s policies will become evident, he said.

Currency Recap

• Yen at strongest level vs. dollar since 1995
• Russia central banks attacks the ruble
• Ruble in freefall
• Mexican peso at record low
• Indonesia tries to defend the rupia
• Kazakhstan devalues the tenge
• Kazakhstan’s devaluation triggered a wave of selling of emerging market currencies
• Poland’s zloty plummets to a fresh five-year low against the euro
• Hungary’s forint hit a record low against the euro

So much for the idea that it would be the US dollar leading the decline in 2009.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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