Central Bank Intervention Losing Effectiveness

As a new round of competitive devaluation looms, evidence is mounting that currency interventions are losing their potency.

Mexico’s peso fell to a record as Cantor Fitzgerald LP criticized the nation’s efforts to strengthen the exchange rate as “mostly futile.” A study by Brazilian central bankers last week found “no evidence” that their intervention program was affecting currency volatility. And far from driving a sustained decline in the krona, mooted sales by Sweden’s Riksbank may actually be a buying opportunity, according to Citigroup Inc., the world’s biggest foreign-exchange trader.

China’s efforts to depreciate the yuan have raised the stakes as other nations seek to weaken their own currencies to stay competitive or strengthen them as a plunge in commodity prices ravages their citizens’ buying power. Mexican Finance Minister Luis Videgaray said Jan. 7 that the world’s No. 2 economy risks triggering competitive devaluations — known as a currency war– while Sweden put in place measures that will help it step in to curb the krona’s gains and boost inflation.

“There’s a big question mark over the ability of individual central banks — particularly for small, open economies — to really influence exchange rates through intervention in anything other than a short-term perspective,” said Ken Dickson, the Edinburgh-based investment director for currencies at Standard Life Investments Ltd. ,which manages about $360 billion. In Sweden’s case, “it’s very difficult for the central bank to fight the market if it wants to go the other way.”

via Bloomberg

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza