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Forex Flash: Prepare to repel boarders - HSBC

FXstreet.com (Barcelona) - HSBC analysts believe that as the liquidity gates flare wide open again, concerns about an influx of capital inflows should rise among local government officials, risking another flare up in the currency wars.

They see that the obvious contender for a policy shift is Chile, where there has been much speculation about the potential for the BCCh to intervene with USD purchases, as it did previously in 2011 and 2008. They add that while the BCCh’s most recent monetary policy report (March) shows only limited concerns with the CLP’s real exchange rate level at present, they maintain that the probability of intervention will rise if the USD/CLP were to fall to: a) 460 or lower (stronger CLP), and b) do so rapidly. Elsewhere. in the Andes, both the Colombian and Peruvian authorities have stepped up their defenses, via higher dollar purchases and new regulations, and they expect this trend to continue, given concerns over de-industrialization and some evidence of success in reducing appreciation pressures in their respective currencies. As mentioned above, they would expect the Brazil’s central bank to return to the market with USD purchases around the 1.95 area, keeping USD/BRL locked within a 1.95-2.03 range.

The market where they do not expect to see any policy shift is Mexico. They write, “Authorities prefer to maintain a hands-off policy in the FX market, and despite the MXN’s recent strength we do not anticipate this changing. Our economists believe there is a chance of additional monetary easing should the MXN’s strength persist, but intervention is off the table as far as we are concerned.” With this in mind, they feel that the MXN probably has the best prospects among the region’s currencies over the medium term. While they could see some short-term consolidation for USD/MXN, especially with FX positions relatively heavy in favor of the MXN, they see room for the carry to continue further in the remainder of the year. They would thus use any short-term weakness as a buying opportunity.

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