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Monday, December 08, 2014 6:55 PM

Mexican Peso Another Casualty of Falling Oil Prices; Mexico Announces Intervention to Halt Decline; Bazooka Theory Revisited

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Currencies of commodity exporter and oil producing countries have been under continual attack. The Mexican peso is the latest to feel the heat.

Mexican Peso vs. US Dollar

Peso at Two-Year Low

The Mexican Peso declined from 9.85-Per-US$ to 15.59-Per-US$ during the great financial crisis (a loss of about 37%) as oil prices plunged. Since then, the peso recovered much of that loss.

Recently, and also in conjunction with declining oil prices, the Mexican Peso declined from 12.02-Per-US$ to 14.39-Per-US$, a decline of roughly 16%.

In response, Mexico Announced Currency Intervention as Peso Weakens to Two-Year Low.

Mexico’s central bank revived an intervention program designed to curb foreign-exchange volatility after the peso fell to a two-year low.

Policy makers will auction $200 million on days when the peso weakens at least 1.5 percent from the previous close, the central bank said today in a statement. A similar measure to support the local currency was put in place in November 2011 and was used just three times before ending in April last year.

The peso, which pared today’s losses after the announcement, is still down 10 percent over the past six months on concern that a drop in oil prices will damp investment in the country’s energy industry. The new program to support the peso surprised investors including Juan Carlos Alderete, a currency strategist at Grupo Financiero Banorte SAB in Mexico City, after Finance Minister Luis Videgaray said last week that he didn’t see a need for intervention.

I don’t think it will be necessary to actually use the measure,” Alderete said in a telephone interview. “It’s more of a preventative one based on high market volatility.”
Bazooka Theory Revisited

Apparently Alderete is a believer in the Paulson's Bazooka Theory:

"If you have a bazooka in your pocket and people know it, you probably won't have to use it" said former U.S. Treasury Secretary Hank Paulson at a July 15, 2008 Senate Banking Committee hearing.

We have seen that theory crumble to dust on numerous occasions in Greece, on Paulson's idea of forcing banks to lend, on Russian currency interventions, etc.

It's only when central banks come out blazing does the market actually take notice. Moreover, results are not guaranteed perpetually even though the Swiss intervention on the Euro has held so far.

Switzerland succeeded at suppressing the Franc vs. the Euro (assuming you really believe that constitutes success) but only because the Swiss National Bank was willing to take on all comers regardless of size. That's not a luxury Mexico has.

Finally, should the Euro collapse, Switzerland will be stuck with a massive pile of useless euro reserves at huge loss. Ironically, that possibility arguably makes the Swiss Franc one of the most overvalued currencies around.

I patiently sit holding gold, knowing full well there is going to be a massive global currency crisis at some not-so distant point. I just cannot say when, or even the country that triggers the mess. I can say the list of potential candidates where such a crisis may start grows every year.

Mike "Mish" Shedlock

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