Forex Investment and Currency Trading

The widening of basis in Brazil and Mexico in October to 6-month highs was a testament to the dollar
pinch, The lack of USD in spot came from a bad mix of a pullback in cross boarder lending by foreign banks, large stock of external private sector debt, significant FX derivatives exposure in the corporate sector, and outright hoarding of dollars. Aggressive intervention by their respective central banks offset some of the pressure. The additional USD30bn in Fed swap lines will reinforce this cushion provided by official intervention even if in Brazil’s case, the swap lines are used to neutralize the widening short USD position that the BCB has incurred with aggressive use of USD swaps. In the nearterm the Fed lines will smooth out volatility in the dollar funding market and solidify credibility in the central banks’ intervention strategies. Both BRL and MXN will gain from this. But broader problems remain including the stock short-term private sector foreign currency debt in both countries and further adjustment in capital & financial account flows as markets price in much less rosy growth outlook. These will prevent any significant recovery.