by Win Thin
Chile peso is the worst performer today vs. the dollar, down 5% after the central bank announced plans to buy $12 bln in order to weaken the currency. The bank plans to buy $50 mln a day from January 5 to February 9, with subsequent activity to be announced at a later time. It added that it will sell peso bonds to sterilize this intervention. The last intervention plan was in April 2008, when the central bank announced an $8 bln program. However, in the wake of that autumn’s collapse of Lehman and the resulting plunge in EM currencies, the bank only ended up buying $5.75 bln and shelved the program.
We are not surprised by the action, as the peso had strengthened to the 460-470 range that we have long highlighted as the threshold for likely official action. Still, central bank Governor De Gregorio acknowledged that the effects of the intervention are likely to be transitory, and that it won’t change the country’s long-term competitiveness or the long-term real exchange rate. We agree. As long as investment flows are going into EM due to strong underlying fundamentals, there’s not much EM policy-makers can do except lean against the wind. Even in Brazil, where the IOF tax has been adjusted numerous times this past year, the real remains near the cycle highs as investment inflows continue.
Indeed, we note that other currencies including BRL are also bumping up against what we view as threshold levels for official action. We believe that’s why the 2011 EM rally, if it continues as expected, won’t be as big as it was in 2010. Too much official interference is likely to be seen, but again, such actions are only likely to slow the moves, not reverse them. USD/BRL made a new marginal low yesterday around 1.6435. While there has been chatter that Brazil policy-makers may be more willing to accept BRL strength, jawboning was heard from Trade Minister Pimentel. If the authorities do not act on a break below 1.64 towards 1.60, then that would confirm that chatter. Until that happens, though, we believe there is heightened risk of further IOF adjustments by Brazil. USD/ZAR just made a new cycle low this past week around 6.5577 and we also highlight South Africa as a likely culprit to take action to weaken its currency. Interestingly, ZAR is the second worst performer today, down over 1% vs. USD and perhaps reflecting a change in perceived intervention risks. Third worst is BRL, down almost 1% on the day.