Talking Points:
- Mexico's FX Commission announced a $20 billion program aimed at deflating the volatility of the Peso
- The starting point action and reactions between the US and Mexico is debatable, the intensification isn't
- With the world's largest economies taking steps to respond to perceived inequities, a vicious cycle takes hold
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The Mexican Peso surged Tuesday afternoon on news that the country's FX Commission had escalated its effort to stabilize its currency the face of volatility fueled by US policy. A $20 billion 'hedge' program was announced that represented a necessary expansion of the Mexican effort to stem the overwhelming tide of the Dollar's influence. Neither progressive rate hikes from the Bank of Mexico nor direct purchases of the local currency over the previous year have rendered a lasting result for USD/MXN. Given the balance of influence, there is certainly reason to doubt that the most recent effort will produce a different result.
There is a distinct imbalance of influence between the US and Mexican policy - monetary and trade - powers at play. In this important economic relationship, the United States' economy is magnitudes larger than its southern neighbor. That means in the relationship between the two, the US can overpower even concerted efforts by Mexican authorities to influence the exchange rate and flow of capital. Amid the free market deviation and frustration for traders looking for a traditionally fundamental motivation, the question of which side started this escalating blows reasonable comes up. Direct intervention from Mexico was preceded by US trade policy threats which was preceded by the perception of unfair trade advantage and so on. There is reasonable debate as to the source of this cycle, but the intensity and depth of this vicious escalation is not in question. What's more, this is far from the only trade threat the world is facing.
We have seen an escalation of competitive monetary policy for some months - arguably years. The pace and depth of rate cuts has turned into competing quantitative easing (QE) programs. Whether specifically economic focused or an effort to confer specific trade advantage is open to interpretation. Now the effort is shifting towards trade policy - though the evidence of this effort is not exactly new. The influence of the Eurozone on Switzerland, the US over emerging markets and RBA and RBNZ attempts to divert their currencies is well known. In all cases, effectiveness is a balance between the intensity of the effort and the scale of the players involved. A 'winner' always arises, and 'losers' facing economic and financial struggle are prompted to action. This pressure is leading to a global rise of competitive policies that will leverage volatility to targeted pairs but also to the financial system as a whole. We discuss this prominent event and what it signals for the broader system in today's Strategy Video.
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