Home » Posts tagged 'FX' (Page 2)
Tag Archives: FX
We’ve all done it, haven’t we? Chucked something in the wash and turned it on too high, only to see it pop out at the end of the cycle and it ends up the size of your hamster. Well, Obama has been doing the same. Except this time it’s not your winter woollies that he’s shrinking, it’s the greenback.
The US currency is shrinking as a percentage of world currency today according to the International Monetary Fund. It’s still in pole position for the moment, but business transactions are showing that companies around the world are today ready and willing to make the move to do business in other currencies.
The US Dollar has long been the world’s number one denomination in world currency supply. It represents 62% of total holdings in foreign exchange in central banks around the world. But, it is in for a tough race from up-and-coming strong currencies. The Japanese Yen and the Chinese Yuan are both giving the Americans a good run for their money. The Swiss franc is too (surprisingly). There is $6 trillion in foreign exchange holdings around the world at any given time, on average and the US Dollar represents almost two-thirds of that.
The fact that Brazil and China have also just signed a currency-swap deal worth something to the tune of $30 billion stands as living proof that the dollar may be further on the wane. China will exceed all expectations in the future as the world’s largest economy. The US will be overtaken. The Chinese currency will one day overtake the Dollar too. Has to be!
Although, it’s not quite there for the moment. China is not near being the world’s reserve currency yet. In order to be the world’s reserve currency there would be the need to produce enormous quantities of what the world wants. China has got that one off pat already. Then, countries holding the reserve currency would need to be able to spend that currency elsewhere in other countries or find a place to put it while waiting to do so. World capital markets are currently in dollars (40%), which means that there would be no possibility of using the Chinese currency. But, that’s only a matter of time. Some are predicting this will happen pretty soon.
The Federal Reserve has come in for some strong criticism over the unconventional Quantitative Easing methods that have resulted in 3 trillion spanking new dollars rolling off the printing presses. This has certainly brought about some degree of worry around the world that the dollar is not quite as safe as it might have been thought to be in the past. Is the world worrying that the dollar is not as safe a bet as it used to be in world domination. Are central banks worried that it will shrink in the wash and the colors will run?
Some are predicting that the dollar will shrink rapidly over the next two years and it will lose its top place as the world’s reserve currency by 2015. In the 1950s the dollar was 90% of total foreign currency holdings around the world. The dollar has definitely lost out to other currencies that are stronger. If there is a continued move and the dollar shrinks, then the resulting catastrophe that will ensue will have a spiral effect on the already enormous US budget deficit (over $1 trillion a year on average).
The only reason the Federal Reserve has been in a position to print more money recently is simply because they are in the strong position to be able to do so as the world’s leading reserve currency. If that changes, then the Americans won’t have the possibility of just hitting the button and setting the printing presses rolling. That means the US will be in no other position than to end up having to pay their debt back.
The US economy and the market are starting to show signs of recovery. Signs. It’s not sustained, hope as they might. If the dollar loses its attraction, then it won’t be used as the international reserve currency. Businesses will start using another currency and the dollar will lose out further still.
Some experts are saying that the problems of the dollar are like a time-bomb ready to explode. Ultimately, it will bring about the death of the dollar. As we stand on and watch, huddled around the coffin as it is lowered into the ground, we know it’s all too late. The flowers have been sent and the Stars and Stripes has been played in recognition of loyal service for the nation.
The QE methods are nothing more than aiding and abetting the already problematic situation of the greenback. We might look back in years to come and reminisce over whether it was the right (long-term) solution to use QE, whether printing bucks sent the greenback to an early grave, or whether it just reached the end of its life and croaked peacefully without making too much noise.
But, criticism of and worry over the dollar and its longevity have been hot topics for years now. The US dollar is a fiat currency that can easily lose status, deriving its value from government regulation and law. But, then again, so is the Euro. So, people living in Europe shouldn’t start throwing stones…they live in glass houses too…and that’s before they start.
Originally posted: Death of the Dollar
You might also enjoy: You’re Miserable USA! | Emerging Markets: Lock, Stock and Barrel | End of the Financial World 2014 | Kristallnacht on Wall Street? Bull! | China’s Credit Crunch | Working for the Few | USA:The Land of the Not-So-Free
While we are sure it is a very sad coincidence, on the day when Argentina decrees limits on the FX positions banks can hold and the Argentine Central Bank’s reserves accounting is questioned publically, a massive fire – killing 9 people – has destroyed a warehouse archiving banking system documents. As The Washington Post reports, the fire at the Iron Mountain warehouse (which purportedly had multiple protections against fire, including advanced systems that can detect and quench flames without damaging important documents) took hours to control and the sprawling building appeared to be ruined. The cause of the fire wasn’t immediately clear – though we suggest smelling Fernandez’ hands…
While first print is preliminary and subject to revision, the size of recent discrepancies have no precedent. This suggest that the government may be attempting to manage expectations by temporarily fudging the “estimate ” of reserve numbers (first print) while not compromising “actual” final reported numbers. If this is so, it is a dangerous game to play and one likely to back-fire.
During a balance of payments crisis – as Argentina is undergoing – such manipulation of official statistics (and one so critical for market sentiment) is detrimental to the needed confidence building around the transition in the FX regime.
And today the government decrees limits on FX holdings for the banks…
Argentina’s central bank published resolution late yday on website limiting fx position for banks to 30% of assets.
Banks will have to limit fx futures contracts to 10% of assets: resolution
Banks must comply with resolution by April 30
And then this happens…
Nine first-responders were killed, seven others injured and two were missing as they battled a fire of unknown origin that destroyed an archive of bank documents in Argentina’s capital on Wednesday.
The fire at the Iron Mountain warehouse took hours to control…
The destroyed archives included documents stored for Argentina’s banking industry, said Buenos Aires security minister Guillermo Montenegro.
The cause of the fire wasn’t immediately clear.
Boston-based Iron Mountain manages, stores and protects information for more than 156,000 companies and organizations in 36 countries. Its Argentina subsidiary advertises that itsfacilities have multiple protections against fire, including advanced systems that can detect and quench flames without damaging important documents.
“There are cameras in the area, and these videos will be added to the judicial investigation, to clear up the motive of the fire and collapse,” Montenegro told the Diarios y Noticias agency.
The gap between the rich and poor continues to grow. The wealthiest 1 percent held 8 percent of the economic pie in 1975 but now hold over 20 percent. This is a striking change from the 1950s and 1960s when their share of all incomes was slightly over 10 percent. A study by Emmanuel Saez found that between 2009 and 2012 the real incomes of the top 1 percent jumped 31.4 percent. The richest 10 percent now receive 50.5 percent of all incomes, the largest share since data was first recorded in 1917. The wealthiest are becoming disproportionally wealthier at an ever increasing rate.
Most of the literature on income inequalities is written by professors from the sociology departments of universities. They have identified factors such as technology, the reduced role of labor unions, the decline in the real value of the minimum wage, and, everyone’s favorite scapegoat, the growing importance of China.
Those factors may have played a role, but there are really two overriding factors that are the real cause of income differentials. One is desirable and justified while the other is the exact opposite.
In a capitalist economy, prices and profit play a critical role in ensuring resources are allocated where they are most needed and used to produce goods and services that best meets society’s needs. When Apple took the risk of producing the iPad, many commentators expected it to flop. Its success brought profits while at the same time sent a signal to all other producers that society wanted more of this product. The profits were a reward for the risks taken. It is the profit motive that has given us a multitude of new products and an ever-increasing standard of living. Yet, profits and income inequalities go hand in hand. We cannot have one without the other, and if we try to eliminate one, we will eliminate, or significantly reduce, the other. Income inequalities are an integral outcome of the profit-and-loss characteristic of capitalism; they cannot be divorced.
Prime Minister Margaret Thatcher understood this inseparability well. She once said it is better to have large income inequalities and have everyone near the top of the ladder, than have little income differences and have everyone closer to the bottom of the ladder.
Yet, the middle class has been sinking toward poverty: that is not climbing the ladder. Over the period between 1979 and 2007, incomes for the middle 60 percent increased less than 40 percent while inflation was 186 percent. According to the Saez study, the remaining 99 percent saw their real incomes increase a mere .4 percent between 2009 and 2012. However, this does not come close to recovering the loss of 11.6 percent suffered between 2007 and 2009, the largest two-year decline since the Great Depression. When adjusted for inflation, low-wage workers are actually making less now than they did 50 years ago.
This brings us to the second undesirable and unjustified source of income inequalities, i.e., the creation of money out of thin air, or legal counterfeiting, by central banks. It should be no surprise the growing gap in income inequalities has coincided with the adoption of fiat currencies worldwide. Every dollar the central bank creates benefits the early recipients of the money—the government and the banking sector — at the expense of the late recipients of the money, the wage earners, and the poor. Since the creation of a fiat currency system in 1971, the dollar has lost 82 percent of its value while the banking sector has gone from 4 percent of GDP to well over 10 percent today.
The central bank does not create anything real; neither resources nor goods and services. When it creates money it causes the price of transactions to increase. The original quantity theory of money clearly related money to the price of anything money can buy, including assets. When the central bank creates money, traders, hedge funds and banks — being first in line — benefit from the increased variability and upward trend in asset prices. Also, future contracts and other derivative products on exchange rates or interest rates were unnecessary prior to 1971, since hedging activity was mostly unnecessary. The central bank is responsible for this added risk, variability, and surge in asset prices unjustified by fundamentals.
The banking sector has been able to significantly increase its profits or claims on goods and services. However, more claims held by one sector, which essentially does not create anything of real value, means less claims on real goods and services for everyone else. This is why counterfeiting is illegal. Hence, the central bank has been playing a central role as a “reverse Robin Hood” by increasing the economic pie going to the rich and by slowly sinking the middle class toward poverty.
Janet Yellen recently said “I am hopeful that … inflation will move back toward our longer-run goal of 2 percent,” demonstrating her commitment to an institutionalized policy of theft and wealth redistribution. The European central bank is no better. Its LTRO strategy was to give longer term loans to banks on dodgy collateral to buy government bonds which they promptly turned around and deposited with the central bank for more cheap loans for more government bonds. This has nothing to do with liquidity and everything to do with boosting bank profits. Yet, every euro the central bank creates is a tax on everyone that uses the euro. It is a tax on cash balances. It is taking from the working man to give to the rich European bankers. This is clearly a back door monetization of the debt with the banking sector acting as a middle man and taking a nice juicy cut. The same logic applies to the redistribution created by paying interest on reserves to U.S. banks.
Concerned with income inequalities, President Obama and democrats have suggested even higher taxes on the rich and boosting the minimum wage. They are wrongly focusing on the results instead of the causes of income inequalities. If they succeed, they will be throwing the baby out with the bathwater. If they are serious about reducing income inequalities, they should focus on its main cause, the central bank.
In 1923, Germany returned to its pre-war currency and the gold standard with essentially no gold. It did it by pledging never to print again. We should do the same.
Note: The views expressed in Daily Articles on Mises.org are not necessarily those of the Mises Institute.
Comment on this article. When commenting, please post a concise, civil, and informative comment.
Frank Hollenbeck teaches finance and economics at the International University of Geneva. He has previously held positions as a Senior Economist at the State Department, Chief Economist at Caterpillar Overseas, and as an Associate Director of a Swiss private bank. See Frank Hollenbeck’s article archives.
You can subscribe to future articles by Frank Hollenbeck via this RSS feed.
“Is the falling exchange rate good news or bad news?”
I was on CBC radio yesterday morning for about 5 minutes, talking about the exchange rate.
From this experience, and from previous similar experiences, this is what reporters want to ask:
“Who gains, and who loses, from the fall in the exchange rate? For Canada as a whole, is the fall in the exchange rate good news or bad news?”
And the answer they expect to hear is:
“Exporters gain; importers lose. On the one hand it reduces unemployment; on the other hand it increases inflation.”
I don’t think reporters are alone in looking at it from that perspective. Most non-economists are probably the same. But economists are uncomfortable answering that question. Let me try to explain why:
The exchange rate didn’t just fall. Something, call it X, caused it to fall. So when we ask “Is the fall in the exchange rate good news or bad news?”, what are we really asking? You can’t give a good answer if you are unclear on the question.
We might be asking:
1. “Is X good news or bad news?”
Or, we might be asking:
2. “Given that X happened, should the Bank of Canada take action to prevent the fall in the exchange rate?”
To my mind, that second question is the useful one to ask. Because, even if we think we know what X is, and whether X is good news or bad news, if we can’t do anything about X, that isn’t very useful.
2a. An economist can say something useful about the benefits of two different monetary policies: would it be better for the Bank of Canada to fix the exchange rate, or should it target inflation and let the exchange rate adjust to wherever it needs to keep inflation on target?
2b. Or, an economist can say something useful about whether the Bank of Canada, in this particular case, needs to prevent the exchange rate falling in order to prevent inflation rising above the 2% target.
I decided to answer that second question, in the form 2a. I said it would be better for the Bank of Canada to target 2% inflation than to fix the exchange rate to the US Dollar.
I didn’t really answer 2b. But I think that, in this particular case, the Bank of Canada is right to let the Loonie depreciate, to help bring inflation back up to the 2% target.
My guess is that X is mostly news about Canadian inflation coming in lower than had previously been expected, and the realisation that the Bank of Canada would therefore not be raising interest rates as quickly as had previously been expected. (Note that when Statistics Canada released the December CPI data, on Friday morning, and inflation was just slightly higher than I had expected, the Loonie gained nearly half a cent in the next hour.) And maybe weaker commodity prices are part of X too. And maybe the US recovery, and the prospect of rising US interest rates, is part of X too.
Sometimes, when a reporter asks you a question, it’s best not to answer it, and to answer a different question. Not because you are weaseling out of answering the reporter’s question, but because you think about it differently, and you think the reporter’s question isn’t the right one to ask. (I now have more sympathy for politicians being interviewed, when they appear to duck an apparently straight question!)
Update: by the way, when reporters want to interview an economist, they (or one of the people they work with) will normally want to have a pre-interview discussion first. This is your chance to suggest they re-frame the question in the way you think it should be framed. You can tell them you wouldn’t be able to give a good answer to that question, but you could give a good answer to a different but related question. Because very few reporters have any economics background, they don’t really know what questions to ask. And, from my experience, they seem to be willing to listen to your suggestions, because they are trying to prepare for the interview, as well as help you prepare.
It would be interesting to hear any reporter’s thoughts on interviewing economists. (It must be tough!)
Posted by Nick Rowe on January 28, 2014
Some perspective on the two “alternative currencies” – bullion and bitcoin -from the man who has run a hedge fund for 37 years and currently manages $23.3 billion, Elliott’s Paul Singer.
After 37 years in the investment-management business, we are not easily shocked. However, two things about bitcoin have shocked us recently. One is that bitcoin and some of its fellow alternative currencies are finding such favor among investors while gold (the only real alternative currency) is languishing. The second is that the most heated investment-related conversation we have had in many years was with a young person who, when told of our mild dubiousness toward bitcoin, basically lost it and started yelling in its defense. Bitcoin comes with passion and belief – at least at the moment.
There is no more reason to believe that bitcoin, a computer-generated, algorithm-driven currency of supposed limited supply, will stand the test of time than that governments will protect the value of government-created fiat money. One difference: Bitcoin is newer and we always look at babies with hope.
If you are looking for an alternative currency, look into gold. It has stood the test of thousands of years as a medium of exchange and a store of value. Better yet, it is not just a computer entry out in the ether somewhere, and it was last seen available at a good price.
Bitcoin and its relatives speak to understandable impulses (against big government, in favor of freedom and modernity), but we do not see this particular experiment lasting. At least you have to work really hard to dig gold out of the ground.
It would appear the fears of a global bank run are spreading. From HSBC’s limiting large cash withdrawals (for your own good) to Lloyds ATMs going down, Bloomberg reports that ‘My Bank’ – one of Russia’s top 200 lenders by assets – has introduced a complete ban on cash withdrawals until next week. While the Ruble has been losing ground rapidly recently, we suspect few have been expecting bank runs in Russia. Russia sovereign CDS had recently weakned to 4-month wides at 192bps.
Lender has introduced complete ban on cash withdrawals until end of week, news agency reports, citing unidentified person in call center.
Bank spokeswoman declined to comment by phone
My Bank is top 200 lender by assets: Prime
NOTE: Central bank has revoked about 30 banking licenses since July 1 when Elvira Nabiullina succeeded Sergei Ignatiev as governor, compared with three in the firt half of the year
Interestingly, Russia’s biggest lender Sberbank has seen a 8.7% rise in deposits in December… it seems the Russian’s are realizing that bank deposits are nothing more than risky loans to highly levered entities…
It seems the “dollar is a reserve currency for ever and ever” propaganda has not reached Africa, also known as Southern China as explained here two years ago, where moments ago the Central Bank of Nigeria issued the following surprise announcement:
- CENTRAL BANK OF NIGERIA TO SELL DOLLARS TO DIVERSIFY RESERVES
- NIGERIA CENTRAL BANK TO RAISE SHARE OF YUAN TO 7% FROM 2%
- NIGERIA CENTRAL BANK TO DIVERSIFY RESERVES INTO YUAN
- NIGERIA CENTRAL BANK CONSIDERING DIM SUM BOND: MOGHALU
But why would anyone buy Yuan when there are so many ever-more diluted dollars available? And now, let’s open it up for the most creative Nigerian email scam involving Chinese Yuan…
Citi Warns The Greatest Monetary Experiment In The History Of The World Is Being Wound Down | Zero Hedge
As Citi’s Tom Fitzpatrick, a number of local market currencies are increasingly coming under pressure and look likely to fall even further. Whether this will turn into a dynamic as severe as 1997-1998 in unclear; however, at minimum Citi believes the “change in course” by the Fed in December (guided since May) has become a “game changer” for the EM World. The greatest monetary experiment in the history of the World is being wound down. In a globally interlinked economy it would be “naïve” to believe that the big beneficiaries of this “monetary excess” in recent years would be immune to the “punch bowl” no longer being refilled constantly.
Via Citi FX Technicals,
A look at some Subemerging currencies of interest.
There are a number of local market currencies that are increasingly coming under pressure and look likely to fall even further:
- In Latam we look at BRL,MXN,CLP and COP as well as the LACI (Latin America currency index)
- In Asia we look at PHP,KRW,SGD,IDR, TWD and MYR as well as the ADXY (Asia Dollar index)
- In CEEMA we look at TRY, ZAR and RUB
USDBRL long term chart continues to look ominous. (BRL is 33% of the LACI)
The uptrend in USDBRL that began off the double bottom formed in 2011(As the 2008 low held) has continued to develop steadily with a series of higher highs and higher lows.
Each new high (including the last one at 2.4550) has tended to result in a retracement back to test and hold the prior high.
If this trend is to continue (which we think it will) we would expect to see a successful break above that August 2013 high at 2.45 (possibly even within the next month) en route to a test of the major 2.62 resistance level. This is the major high from December 2008 and a decisive break above would complete the long term double bottom.
The target on such a development would be for a move towards 3.70 in the medium term
USDMXN starting to break out (MXN is 33% of the LACI)
USDMXN has clearly broken out of the triangle consolidation in place for most of the 2nd half of 2013.It did so while completing a bullish outside week last week after seeing strong support hold in recent months at the converged 55 and 200 week moving averages.(12.75-12.78)
It seems only a matter of time before pivotal resistance at 13.46-13.47 is likely to be tested.
A successful breach of this range should open up the way for further gains with little resistance of note evident before the downward sloping trend line at 14.09.
USDCLP now moving towards major resistance (CLP is 12% of the LACI)
Having broken through the 2011 highs at 535.75 USDCLP now looks set to rally further and test a whole range of resistance levels in the 551-556 range.
A decisive close above this range would suggest continued gains with next good resistance met around 622 (Downward sloping trend line from 2003 and 2008 peaks.
USDCOP attempting to complete a major double bottom (COP is 7% of the LACI)
A weekly close above the 1988 area would complete this formation and target a move as high as 2,200-2,225
Overall these 4 currencies make up 85% of the LACI (PEN is 5% and ARS 10%) suggesting further losses in this index are likely.
LACI (Latin America currency index) has really only 1 support level left
Having only been created in 2004 we now find that the only support level of note left in this index is the 2009 low at 89.39.(Around 3.4% below here)
We fully expect this level to be tested in the medium term and given the magnitude of moves possible in USDBRL, USDMXN, USDCLP and USDCOP new lifetime lows in this index are a distinct possibility.
USDKRW- Forming a base? (KRW is 13% of the ADXY)
For the 3rd time since 2011 USDKRW has held good support around 1,048. It now looks to be forming a double bottom with a neckline at 1,163. A break above here would target as high as 1,275.
Such a move, if seen, would complete an even bigger basing formation on a break of 1,208 that would suggest as high as 1,365-1,370
USDSGD testing good resistance (SGD is 10.27% of the ADXY)
Now testing good trend line and 200 week moving average resistance in the 1.27-1.28 area
A break through here would suggest extended gains towards horizontal resistance in the 1.3200-50 range.
A break above this latter range would open up the way for extended USD gains.
USDTWD: Breaking good resistance (TWD is 5.11% of the ADXY)
Has broken decisively above the 200 week moving average for the first time since Sept. 2009 and also completed a very clear inverted head and shoulders and horizontal trend line break (see insert).
The target for this move is at least 31.50
USDMYR: Re-testing the 2013 highs (MYR is 4.6% of the ADXY)
Having broken above good resistance around 3.21 (Double bottom neckline) USDMYR retraced back below and tested the 200 week moving average before rallying again.
It regained the 3.21 level and is now re-testing the 2013 high at 3.3377.
A break above here would put the double bottom well “back on track” and suggest a move to at least 3.48-3.50 again.
USDIDR: End of a 15 year consolidation? (IDR is 2.69% of the ADXY)
USDIDR looks simply to have been treading water for the past 15 years with signs growing that it may be in danger of break out.
A move above 13,000 would further support this view and suggest that the 1998 peak close to 17,000 could ultimately be tested again.
USDPHP breaking out (PHP is 1.64% of the ADXY)
Having broken out of the 8 year downtrend in May 2013 USDPHP has now completed a well-defined inverted head and shoulders that suggests a move towards 49.
In addition good resistance is met at 50.17 (2008 peak). A break through this latter level, if seen, would suggest continued gains to new all-time highs close to 60.
The ADXY has started to move lower again in recent weeks
So far it remains comfortably above pivotal support in the 113.60-114.00 area.
Only a break below this range would raise concerns about the potential for more extended losses in these Asian currencies.
While the currencies above only make up about 38% of this index the HKD and CNY together make up 49%. Therefore it is likely that moves in the charts above would be instrumental in determining the direction of the ADXY.
USDZAR looks like a long term breakout
We believe that USDZAR has now decisively broken out of a 12 year consolidation at the end of 2013.
We would expect a quick move up to test the 11.87 highs seen in 2008 and thereafter the 13.84 highs seen in 2001.
Ultimately we would not be surprised to see new all-time highs in the coming years.
USDTRY: The sky is the limit
Like USDZAR, we believe we have broken up out of a 12+ year consolidation. However looking at the pace of USDTRY prior to that we have no idea how far this can go, but it looks to be a long way.
As an initial level to watch, the inverted head and shoulders (see insert) targets the 2.60 area
USDRUB testing a breakout point
USDRUB is testing the 2012 high at 34.14 and a break above there suggests a move towards 36.50, the converging 2009 high and channel top
So overall in an environment of relative calm in the US Bond market in recent months the currencies above have continued to weaken albeit to different degrees. If this is as good as they can do with US Bond yields stable/drifting lower what does that suggest if and when bond yields start to push up again?
We have focused previously on how the FX markets have traded in a similar path to that seen in the late 1980’s/late 1990’s…
1989-1991: Savings and loan and housing crisis- USD index hits its low in 1992
1992-1994: Exchange rate mechanism crisis hits Europe and existing financial architecture comes apart. USD weakens in 1994 as bond yields turn off their lows.
1995: USD-Index starts to rise again as the USD and fixed income both look cheap
1997-1998: Structurally low rates in US and then Europe led to carry trades and money flowing into local markets in search for yield. During this time European currencies performed well on the back of the “convergence trade”. Peripheral European bond yields and spreads collapsed versus Germany into late 1998. Emerging markets (Asia and Russia in particular) got hit hard as money flowed out again.
We have no idea if this will turn into a dynamic as severe as 1997-1998 (This caused the Fed to back off its tightening bias in 1998 as EM markets got hit hard and LTCM went bankrupt as its convergence trades “blew up”. The US Equity market (S&P) fell over 20% in July-October 1998.)
However, at minimum we believe the “change in course” by the Fed in December (guided since May) has become a “game changer” for the EM World.
The greatest monetary experiment in the history of the World is being wound down.
In a globally interlinked economy it would be “naïve” to believe that the big beneficiaries of this “monetary excess” in recent years would be immune to the “punch bowl” no longer being refilled constantly.
Here is how Reuters summarized the soaring price expectations in the country under its first day with “relaxed” controls:
Argentina’s sudden relaxation of currency controls, long touted by the government as essential to the country’s financial health, has left investors wondering what’s next for Latin America’s crisis-prone No. 3 economy. Shopkeepers around the country hurriedly placed new price tags over the weekend on imported items from Cuban cigars to Asia-made televisions, reflecting a more than 20 percent drop in the official peso rate over recent days.
The consumer price surge came after the government said on Friday it would lift a two-year-old ban on Argentines buying foreign currency, allowing savers access to coveted U.S. dollars while the peso was left to plummet. Friday’s relaxation of controls came as central bank reserves fell beneath $30 billion, a level suggesting its interventions in support of the anemic peso had become unsustainable.
But allowing average wage-earners to access U.S. dollars was sure to pressure reserves as well, because the central bank is the main source of foreign exchange. The announcement on Friday ended a two-year ban on saving in the greenback.
So far inflation has been in check, mostly thanks to a price freeze imposed this month on staple foods which has kept a lid on basic supermarket items. Reuters says that “no one knows how long those prices can hold while labor unions prepare wage demands based on one of the world’s highest inflation rates.” For now, they are holding. They won’t for long, and if Argentina reports 30 percent inflation this year, as private analysts expect, it would mark the fastest rate since the 2002 crisis, when inflation reached 41 percent.
However, one thing is certain: dollar demand by the general population is sure to flood the central banks, and force reserve depletion, which have been declining at a pace of over $100MM per day and were last at $29.1 billion, at the central bank to really pick up pace. To wit:
Conditioned by previous crises to save in dollars, Argentines are obsessed with the greenback. The currency control regime ending on Monday forced people to go to the black market for dollars needed to protect them from the weak peso and fast-rising consumer prices.
Luckily for the central bank, as Bloomberg calculates, at most 20% of the population will actually be able to take advantage of the “relaxed” capital controls, because only Argentines who earn at least 7,200 pesos ($901) per month will be allowed to buy dollars, Cabinet Chief Jorge Capitanich told reporters today. And since only 20% of Argentines earned 7,000 pesos or more as of 3Q 2013,according to the National Statistics and Census Institute, it means that 80% of the population will get all the “benefits” of inflation with zero benefits from dollar purchase price protection.
And it’s not like even the rich will be able to truly benefit: he limit for FX purchases will be $2,000/month and will be taxed at 20% unless deposited with bank for at least a year.
So in other words, Argentina’s capital control “fix” was largely a sham, designed to hide the real motive behind last week’s announcement – push inflation far higher, perhaps under some persistent external influence, which in turn would lead to even more social instability. This could be a problem.
Consumer prices are a big worry on the street, but the issue has not sparked mass protests lately. Tensions could rise over the weeks ahead as labor demands pay increases in line with private economists’ 2014 inflation estimates. Fernandez has mentioned neither consumer prices nor the peso’s plight in recent speeches, leaving her cabinet to announce policy changes. The next presidential election is next year, with Fernandez unable to seek a third term.
Possible candidates from the main parties offer policies that lean in a more pro-investment direction that Fernandez’s, as the outgoing leader tucks into her last two years in power.
“If the government fails to prevent inflation from accelerating it will probably hurt the chances of presidential aspirants who are aligned with the administration,” said Ignacio Labaqui, an analyst with Medley Global Advisors.
“A deeper economic crisis could provide a window of opportunity for candidates who are more business friendly.”
Such as technocrats from… Goldman Sachs?