This is one of those stories that’s so funny you can’t not comment on it and since I’ve got some incremental color to add, I thought I’d weigh in.
It’s no secret that Donald Trump has a penchant for taking direct and indirect jabs at Mexico via his Twitter account. Bloomberg was kind enough to create an annotated graph of the peso documenting notable tweets:
As discussed earlier this week, the peso has been in freefall since the election as traders struggle to determine whether to take Trump literally when he says things like “they’ll pay for the wall, they just don’t know it yet.”
For those who missed it, here’s a chart that compares the trajectory of the peso since the US election to the path of the pound following the Brexit vote:
(Chart: Wells Fargo)
“The Mexican peso was one of the worst performing emerging currencies in 2016, with a 17% decline against the dollar, and has remained on the defensive thus far in 2017,” Wells wrote, recounting the backstory in a note published earlier this week. “Partly in response to ongoing declines in the peso, Mexico’s central bank has accelerated the pace of rate hikes and recently intervened in the foreign exchange market for the first time in nearly a year to lean against peso weakness and limit volatility.”
Mexico hiked rates five times last year in an effort to bolster the flagging currency and keep inflation from spiraling out of control. Earlier this month, the central bank intervened in the FX market for the first time since last February. The $2 billion move “was the second-largest such intervention since October 2008, at the height of the global financial crisis,” Wells Fargo notes.
(Chart: Wells Fargo)
Although the persistent peso weakness has boosted core inflation, central bank governor Agustin Carstens earlier today insisted that the rise in prices isn’t indicative of a sustained trend.
Whatever. Tell that to all of the people who are already irate at a rise in the government-set price of gas. For anyone who hasn’t followed the story, here’s a brief recap via The Guardian:
Officials say the price increase to 15.99 pesos a litre in Mexico City ($0.75) is necessary to cover shortfalls in the federal budget, which traditionally depends on oil revenues. Prices at the pump will vary across the country and be set on a daily basis in the future.
Environment secretary Rafael Pacchiano defended the gasolinazo on Twitter, saying the federal government couldn’t continue to subisidise gasoline, which mostly benefits rich SUV owners. Higher prices, he added, would encourage the use of green energy in Mexico.
“It’s an economic issue,” said Manuel López, a 24-year-old mechanic. “Salaries are not very good. If gasoline goes up, it provokes an inflation in the cost of the items we consume daily.”
Héctor Pérez, a sales manager with an insurance company, rattled off a list of grievances to explain a wave of furious protests. “It’s not because we all have cars. When gasoline prices go up, everything else goes up: tortillas, public transportation, everything.”
The timing of the protests could prove particularly troublesome as Mexico prepares for the impact of US president-elect Donald Trump and his promises to pull out of the North American Free Trade Agreement (Nafta) and build a wall on the northern border – moves economists warn will throw the country into recession.
“We wouldn’t have to worry about Donald Trump if were a stable economy,” said Iván Rosales, a protester and trucking company employee.
Right. And you wouldn’t have to worry about Trump’s tweets if there were no such thing as Twitter which is why, coming full circle to the humor I promised at the outset, some FX traders believe Mexico should just buy the social media company. Here’s Bloomberg again:
Instead of spending its precious reserves to defend the peso, Mexico should just buy Twitter Inc. — at a cost of about $12 billion — and immediately shut it down. The notion made the rounds this week after the central bank revealed it had already blown through $2 billion of reserves in a largely futile effort to shield the peso from a steady stream of anti-Mexico Tweets from Donald Trump.
As laughable as that is, it actually seems like a better idea than continuing to fight an uphill battle against the market – especially considering the impact Trump’s tweets seem to have. As Credit Suisse notes, Mexico does in fact have the money to do the deal:
Banxico/Hacienda’s intervention arsenal is large but not unlimited. Banxico has $166bn in FX reserves; out of this amount, we estimate that the lower bound for an “adequate” level of reserves is approximately $112bn. This implies that the amount of “dry powder” that could be used for intervention purposes is about $54bn (Figure 5).
So watch your ass Jack Dorsey – Mexico is coming.
But really, Banxico is damned if they do and damned if they don’t because after all, an investment in Twitter has proven to be about as effective as “investing” in FX interventions…