Two central banks were particularly active today. Chinese officials appear to be engineering short squeeze that has lifted the yuan 1.2% over the past two sessions. While this does not sound like much, it is a record two-day move, for the still closely managed currency.
In addition to formal and informal capital controls, Chinese officials have reportedly used moral suasion to get state-owned enterprises to sell their foreign exchange, and engineered a liquidity crunch in Hong Kong that lifted the overnight deposit rate to 80%. The cost of holding a short yuan position in Hong Kong become dramatically more expensive, and market participants responded accordingly. The fact that the dollar sold off in the North American session suggests additional yuan strength may be seen before the weekend.
The Mexican central bank intervened, some think repeatedly, during the North American session. Speculation suggested that well over one billion dollar was sold for peso by the central bank. The main driver appears to be a number of tweets from the US President-elect, particularly in the auto industry, that has spooked investors. The weaker peso boosts inflation on top of the increase in energy taxes at the start of the year.
About 10% of the US vehicles bought last year were made in Mexico. Approximately 40% of the auto jobs in North America are in Mexico. Some migrated from Canada when the auto sector lost its preferential treatment. Some were part of the continental organization of the industry that followed NAFTA. Mexico struck an preferential agreement with Europe on auto trade too. Mexico’s integration in the world economy after the mid-1990s crisis has been an important contributor to the modest economic success it has enjoyed.
A real or figurative wall between the US and Mexico, a change in the continental division of labor is a threat to Mexico. This is not because NAFTA was asymmetrical, but rather because it allowed the incorporation of Mexico into supply chains for a wide range of consumer durable goods.
This is a thumbnail sketch of the backdrop for my conversation on CNBC. Click here to see the cool video.
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