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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