An interesting report in La Republica right here, with your author's translation of a couple of the key passages below:
Ministry of Economy Will Help Central Bank to Stop the Fall of the Dollar (in local currency)Using Restrictive Fiscal Policy Measures
Faced with the drastic fall in the greenback last week, Vice-Minister of Economy, Luis Miguel Castilla, announces that the return of dollar purchases will be evaluated.
After last Friday when the dollar registered its biggest drop against the Peruvian Sol (PEN) in 32 months to close at S/2.772 to the dollar, the Ministry of Economy and Finances (MEF) announced that it will help the Peru Central Bank (BCRP) to stop the local downward pressure on the US currency via a clear restrictiv fiscal policy.
Luis Miguel Castilla, Vice Minister of Economy, explained the the best help that the MEF could give the BCR to avoid excessive appreciation in the local currency and in turn the risk of economic overheating is with a countercyclical fiscal policy.
.......
Castilla noted that in 2010 the MEF bought dollars to help the BCR calm volatility in the Nuevo Sol and didn't rule out that these actions would be taken again, for which the MEF has been coordinating with the BCR to work on the best form of intervention.
Bizarrely, I'm now getting crits from readers wondering why I haven't written anything on the Venezuelan devaluation. Well, in fact I have.
1) This time last year I was saying that Venezuela would devalue in the second half of 2009 (here's one example post, plenty of others if you're that bothered to check back). So I missed my prediction by nine days. Bite me.
2) This weekend your scribe put together a note on the deval as part of IKN37 that was published yesterday to subscribers. So ahhhh, what da hell..here it is below. But really, with the world and his wife all throwing in their opinions (from the smart to the stupid to the downright dishonest revisionist theories of the Caracazo), I really don't see why you need this humble corner of cyberspace chipping in, too. But hey...that's just me.
Anyway, here are the mumblings that came as part of IKN37 yesterday.
Venezuela: The fixed currency moves
So, I missed on my forecast of “Venezuela will devalue the VEF in the second half of 2009” by nine days, having said on plenty of occasions that I thought Venezuela would deval in the second half of 2009 ( example (6)).
The surprise here is not the fact that Venezuela has devalued its currency, the Bolivar Fuerte (VEF), as it was obviously overvalued against peers and fighting a parallel rate nearly three times its official face value. After all, I’m writing for an audience that understands gold the metal here...I feel no need to explain how fiat currencies naturally devalue over time as the concept is clear to all and any attempt to artificially prop up a currency value is doomed to failure over time. Neither is the surprise those shills that call it a humiliation for Chávez, as the real humiliation would have been to hold the status quo and watch the country go to the dogs. For sure Chávez has been stubborn about not devaluing the VEF for about a year or so (because he’s really not very good at economics) but he’s finally bitten the bullet. Finally, there’s no surprise about the sudden rise in pseudomath around this subject; as just one example we have Venezuela’s El Universo newspaper (opposition bias) telling its readers that the basket of goods needed for basic needs will exactly double in price as of tomorrow (7). The kind of silly stuff written by people that don’t understand money’s role. Expect plenty more.
The surprise here is the depth of the deval. The new official rate (to be used for certain infrastructure and food related imports) of 2.6/1 is basically for show, as the real new rate is the so-called “oil dollar” rate of 4.3/1, the one used for oil revenues brought in to Venezuela by PDVSA. This revenue is the lifeblood of the economy, and suddenly PDVSA will be adding plenty more VEF into the local economy for every dollar deposited. Many were expecting this deval, but not as drastic a measure as a doubling of the forex. In effect, Venezuela has, in one fell swoop, turned its currency from “expensive” to “reasonably cheap”.
It smacks of getting all the bad news out of the way in one go. The main bad news will take the form of an immediate dose of high inflation for Venezuela (perhaps ‘even higher’ is a better term, as 2009 CPI came in at 25.1%). This is the bitter pill for ordinary José Q. Citizen to swallow in 2010, but macroeconomic theory says that the inflation bump should be a temporary hurdle. Venezuela has neglected its local economy and has been running on imported goods, thanks to the cheap dollar prices brought about by the 2.15/1 rate. Up to now it’s been between difficult and impossible for local manufacturers to compete on a price basis against imports. Now that the forex rate has doubled, this means imported goods should get expensive compared to locally produced goods and the Venezuelan internal economy should reactivate. True also for exports, and given time Venezuela can start making inroads into the heavy reliance it has on oil as its main export good. The problem is that such a reactivation takes time and the lag in firing up factories means that in the meantime people are obliged to buy the price-bumped goods from abroad. That’s called price inflation.
Next problem: Fiscally, Venezuela runs the risk of overstoking the economy at a governmental level. With more VEFs for every dollar, the temptation to spend its way out of trouble will be high, perhaps even irresistible. This is another aggregate to inflation that has to be watched in the medium term and the prudence (or not) of central government will be key in reining in any extra inflationary impetus.
On a monetary level, the move is positive. With U$7Bn now coming out of CenBank reserves this will leave around U$27.8Bn in the reserves. This still needs to climb compared to M2 levels in Venezuela (currentlyVEF236Bn is in circulation in the country) but the move to cover VEF 4.3 with every dollar brought in will help bring that under control in the medium term.
The bottom line to this quick’n’dirty on the Venezuelan devaluation is that it might be late coming, and Chávez&Co is certainly setting itself up for political flack from the inflation in the immediate pipeline, but the move is the correct one economically speaking. It would have been better perhaps last year, but doing it in 2010 is a mile better than doing it in 2011. However the inflation that Venezuela will suffer in the short term due to higher prices for imported goods may turn into a longer bout due to governmental spending spree of the extra available VEF funds. Time will tell on that score.
As from 2010, Bolivia's central bank is changing the wording on the reverse side of coins minted.
It remains to be seen whether the fascist jerks that claim to represent Santa Cruz are into plurinationalism.
In other Bolivia financial news, International Currency Reserves now stand at U$7.955Bn (which I think is an all-time record, but even if it isn't it's darned close). Also, Fitch said nice things about Evolandia using words like "stable" and "solid" and phrases like "fiscal surplus" and "GDP growth in 2009". But don't let facts get in the way of anyone telling you that Bolivia's economy is in a mess, will you?
This time of the month there's always a swathe of macro econ news from LatAm countries. When it comes to Peru, there are plenty of ingredients to throw in the cake mix.
1. Trade Balance: The March trade balance came in positive, with $1.56Bn in imports and $1.9Bn in exports. The export figure has benefitted directly from the rebound in metals prices. Here's the chart. Looks like things have picked up a touch month-over-month, which is good. However there's still that very large year-over-year gap in activity, which isn't so good.
2. Tax Revenues: Unsurprisingly, taxes levied on external trade traffic are down. However as this WSJ report notes, income tax revenues are also sharply down (21%) for April YoY. This points to a significant slowdown in internal demand. Overall, tax collection was down 17.8% YoY....not funny.
3. The Nuevo Sol (PEN) is now trading at S/2.96 to the dollar, having moved from the 3.10 mark very quickly. This stronger PEN is now affecting export trade competitivity and the Central Bank is moving to stop the melt-up. It bought into the market to the tune of U$7m yesterday , which isn't so very much but should send a signal. With currency reserves back at U$31Bn, Velarde has plenty of ammunition to stop the PEN from strengthening too far.
4. Interest rates: The reason for the stronger currency is likely the interest rates on offer in (what they insist is) an investment grade country attracting overseas money (it can hardly be called 'hot money' these days...maybe lukewarm?). It is a bit pachakuti to think that Peru is considered a safe haven these days, isn't it? So yesterday we saw the CenBank drop rates to 4% and you can bet decent cash that the trend will continue in the months to come.
As for the conclusion to all this, I'll be writing up my views in The IKN Weekly. It's called "another pitch", but it's also about preferring the paying subcribers. Life's like that.
Here's the chart of the Argentine Peso (ARS) over the past three months (basically 2009):
We can see the near 10% devaluation versus the greenback in this period. This is good for exports, of course......errrr...except that nobody is buying anything. This makes imports more expensive, but that's not a real problem because....errrrr...nobody is buying anything. Hopefully both those situations will change, as LatAm as a block is a net exporter and therefore a net gainer from a recharged world.
But for dollar demoninated goods (eg world traded commodities) it means that locals will have to pay more for more inelastic demand goods things like wheat, porkbellies and fuel, even if they're produced at home base. As our topical example, Critica today reports that fuel prices in Argentina have risen by up to 5.5% due to the softening of the local currency against the greenback.
The problem is not limited to just fuel and just Argentina, of course. With most of the regional currencies having suffered recently versus Uncle Buck, the phenomena of monetary inflation is starting to arrive on the shores of the continent. This is not something to ignore in the months ahead because the last thing a collection of emerging markets needs is a nasty dose of stagflation.
What's that one that Buffett likes about naked swimmers at low tide? Yeah, you know it too. Well here's another example to show off the Omaha dudes set of smarts. First let's examine the accepted financial world wisdom of three South American countries:
Peru: New star, biz-friendly, now stable, financially prudent, investment grade, stable outlook
Argentina: Irresponsible, anti-free trade, unstable, will default at any moment, crazy to invest there, junk bond graded, negative outlook.
But where the rubber hits the road, what do we see?
Red = Peru Sol vs USDollar, Blue = Arg Peso vs USDollar, Green = Chile Peso vs USDollar
Nuff said. The sooner the world wakes up the arriviste BS propagated about Peru, the better things will be. I still find it amazing that any investor trusts convential wisdom of the idiots in suits about anything economic after the evidence of the last few months.
Following on from yesterday's post that noted the recent rebound in the Chilean Peso (CLP) compared to all other Americas currencies (including the US dollar), here's a way of playing Chile's currency strength without all that mucking about in the forex market and with leverage to boot.
ECH is the iShares Chile ETF, with a basket of local stocks from the Santiago bourse. But really and truly it's less a play on companies and more a play on the CLP, as this one year chart shows.
But if we now focus in on the three month chart, the leverage to the CLP is shown. The Peso has outperformed other currencies ever since the Bachelet government took the gloves off and started getting countercyclical on the recession that's affecting Chile and the world, tapping the reserves it had squirreled away in the previous boom years.
So with copper looking like it will be used as a "Obama stimulus will save us all" vehicle to the upside, playing the CLP via this ETF is a simple alternative that may offer decent leverage in the next couple of weeks. Today ECH stands at $33. I'd envisage this as a short-term play and would provisionally target $40 or so, I suppose, without getting too slide-rule accurate or deep into my own calculations. That target could adjust at any moment. Here's the price chart for ECH that shows how it's come back from the doldrums but has plenty of room before it regains its mid 2008 position. DYODD, dude.
Every now and again, even a dyed-in-the-wool, professional politician will say something that's actually the truth. I was struck by this line spoken by Argentina's Eduardo Duhalde yesterday (as reported in this post).
"This crisis was born in the USA, it hurts all of us and they have the chance to print money and save their own people. We don't have that opportunity."
It makes sense on plenty of levels, not least of which the context of Duhalde's argument yesterday, that of "sauve qu'il peut". A couple of mental connections later, and here are two charts that show the evolution of local currencies against the greenback. This one has a 12 month timescale......
.......and we see the Argentine Peso and the Peruvian Sol as having held up the best...so far. But looking at the shorter-term movements.....
.....it's the Chilean Peso that has kicked back strongest in the three month period chosen by default, care of Yahoo Charts. That would be the moment when Bachelet&Co stopped the free-floating rot and due to direct, Keynesian government intervention policies and self-protection, dontcha know....
(Glossary: COP = Colombia Peso, MXN = Mexico Peso, ARS = Argentina Peso, PEN = Peru Nuevo Sol, BRL = Brazil Real, CLP = Chile Peso)
As just one example of the consequences here, the relatively strong dollar helps LatAm exports, of course. However you would expect a strong dollar in a time of strong US economy, not right now in the biggest financial and economic crisis to have hit the industrialized nations (led by the US) in modern times. What's the use of a strong dollar and its ensuing export market advantage when there's no market, except of course to make breathing space and prepare the way for the next round of helicopter flights from Bennyboy?
I could go on and on and on with this particular post, as the angles and tangents are manifold. I could talk about that post way back when I said that the US was keeping its dollar as strong as possible to make sure it doesn't lose its place at the head of the world table. I could talk about inflation risk of weak currencies. There's the whole issue of how soft pegged currencies like the Nuevo Sol and the Argentine Peso have performed much better than the more freely floated regional currencies such as the Mexican Peso or Brazil's Real. The case of the Chilean Peso and its dependence on copper is a particularly fascinating one for a wonk like me.
All those and more. But no, let's stop here. What I really want to say is that Duhalde made a great point yesterday, whether or not he was looking at it in a wider context. The bottom line is that if the USA has decided to protect itself at all costs and let others like us guys down here drown in the muck of its making, then why the **** should we keep playing ball with you guys?
Seriously. What have you guys done for us lately? Your economic policies suck and you still try and tell us how to runs things. You screw up the whole financial world and now you're getting the innocent victims to carry the can.
It's taken me a while but I'm beginning to see that Rafael Correa is absolutely right, basically because I'm not as smart as he is. Take your sovereign bonds, gringos, and stuff them where the sun doesn't shine. We have an abundance of water, farmland, power supply, region-wide democratic governments and importantly a population of caring, kind, willing and hard-working people, from Tijuana to Tierra del Fuego who are evermore pissed at the way the USA and the wider world community has been treating them all this time.
Over at Caracas Chronicles, Quico has today continued his diatribe against the Venezuelan economic policies concerning international currency reserves (IKN picked up on his politically charged but generally excellent post of a couple days ago right here). But today Quico has obviously decided to "forget" some pretty basic economics in his rush to condemn the Vzla gov't and its economics, basically because he's the kind of partisan analyst that hates Chávez so much he could never say anything remotely in favour of the guy. As I said the other day so be it, I'm not my brother's keeper etc, but he does himself a disservice by his error of omission.
"...Most irksomely, the press release parrots the meaningless concept of an "optimal level of foreign currency reserves", which immediately flags it as a work of rank hackistry. For the Nth time, calling any absolute level of reserves "optimal" is simply meaningless. It's a bit like confidently declaring that 2 kg. is the "Optimal Level of Harina Pan reserves.".."
That, unfortunately for Quico, is simply untrue. In serious economics circles there is a clearly defined concept of optimum foreign currency reserves. I'm not going to get all wonky on you here (those so inclined to dust dry economics can run the names "Garcia and Soto" though Google with keywords like 'currency', 'GDP', 'reserves' etc and have a nice afternoon) but to hit it in simplified bullet points:
It actually costs a country money to hold currency reserves. This cost is usually defined as local interest rates minus world benchmark interest rates (usually LIBOR). Even in these rocky times that equation is not to be ignored. This cost is more akin to an opportunity cost than real "gotta pay a bill" cost....but a cost is a cost. Period.
There is always debate about these things, but a consensus among economists revolves around having 10% of a country's GDP available in the reserves to avoid sudden stop shocks etc.
In the case of Venezuela, the current U$42Bn really is too much according to these accepted parameters. In fact the U$30Bn that will be left once Chávez extracts his $12Bn soon is as close to optimum as possible.
Or put another way, the cost to Venezuela of holding that extra U$12Bn in reserves would be around U$1Bn annually. That's a significant amount of moolah, folks.
In other words, yer man Quico over there at Caracas Chronicles is telling half-truths and preaching just what the converted want to hear instead of being intellectually rigorous and telling the whole truth. The problem in Venezuela is NOT, repeat NOT the size or non-size of its international currency reserves. The problem in Venezuela (in this case at least) in the amount of money being printed by the Central Bank aka M2. If Quico stuck to that he'd have a decent argument, but until then he's just another anti-Chávez ranter and can be ignored. A pity, really.
.....is Brazilian Real over the last three months.
Now that the Fed is pumping U$30Bn in their direction things might (repeat might) settle down a little, but after the recent switchback ride in the Real I wouldn't bank on it.
The funniest reaction to the Fed bailout (ok ok "credit swaps lines") of Mexico, S. Korea, Singapore and Brazil has been in Argentina. The Argentines have been all "Why not us? Aren't we important enough? Hey, that's not fair!" over it all. Absolutely ridiculous, and kind of ironic that the $30Bn offered up to Brazil by the Fed almost exactly matched the $29Bn that Klishtina gets her hands on by decimating her country's pensions sector, isn't it? Argentinano es un pais serio..........
When it comes to currency exchange rates, especially concerning the dollar, LatAm locals are a very sharp collective crew.
On Thursday I ran a kind of informal poll by contacting friends and acquaitances up and down the region, and I made it a point not to talk with people in the financial sphere. So in Colombia, Ecuador, Uruguay, Peru, Venezuela, Argentina, Chile and Brazil, a dozen or so people got phone calls or mails (or both) asking them what local feeling was about the exchange rates.
Without exception, the answers came back with variations on "people are selling dollars and buying local currency", which pleased me no end because not only did it agree with my current take on the overbought dollar (see chart here for example, plenty more though) but it confirmed once again the wisdom of the masses down here. I've seen this phenomenon many a time; when the dollar gets past a certain point against local currency, saved greenbacks suddenly appear from under mattresses, behind clocks and between hardback books. Queues form at exchange houses. Foreigners who get paid in USD go around with big smiles on their faces because it's like getting a 10% payrise (myself included on that one).
Here we see a range of three month charts for local currencies against the dollar (all on these quick'n'easy yahoo charts that I like), and look how they all peaked at the same time:
The Argentine Peso
The Brazilian Real
The Colombian Peso
The Chilean Peso
The Peruvian Nuevo Sol
The effect of a weaker currency is good news for exporters. This means that the net exporting countries of the region will be happy with this drop. However, weaker currencies also mean higher imported inflation, and countries such as Peru that have expanded rapidly and have seen their trade balance dip into the negative recently (despite record metals exports) will be a little concerned about this move.
In fact, the Peru Sol (PEN) is a good example of a currency to buy right now and I expect it to be encouraged back up by local monetary policy in the next few weeks, with my personal chalkboard target currently set at S/2.80 (from today's S/2.97).
Another currency likely to improve rapidly is the Chilean Peso (CLP) as copper prices rebound and the country gets back toward a 5% growth rate. Most economists in Chile have forecast an exchange rate of around 500 to the dollar at year's end, and that seems perfectly logical to me. A good vehicle to play this bounce would be ECH, the Chilean ETF available on the NYSE. It's a very misunderstood ETF (from nearly all literature I've seen written on it in English), because contrary to most people's perception it's much more a play on Chile's currency than on its stock market. I fully expect ECH to gain around 20% from here and end the year in the U$48 to U$50 range.
Anyway, I digress. The point of this post was to show that locals are pretty astute at the currency exchange game down here. All last week the foreign tide of dollars went into ebb mode and money was sucked away from the region (mainly Brazil). Locals saw their chance and cashed in on the strong dollar exchange rate. I'd now expect the smart ones among them to buy back those dollars in ten percent's time.
