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• Mathieu Provencher

Peru's grandiose illusion...

Ok guys. Let's talk about the Central Bank of Peru engaging in currency operations in order to influence the value of the PEN compared to the USD. If you remember something from my classes, it may be that I said that the efforts of your central bank were "cute" (I may have said plain useless, but I would not say something like that to my fellow Peruvians would I).

SO, enough rhetoric from me (who thinks that they are wasting our money) or from them (who thinks they are able to influence the value of the USD), let's get down to the REAL thing: numbers!!!!! Take a good look at the data and let's see what we can understand from it!

Note that the blue bars are purchases of USD (by the Peruvian Central Bank) and the red ones are selling of USD (again by the Peruvian Central Bank). The y-axis represents the amount of PEN needed to buy one USD and the numbers above the colored bars are the amount of billions of USD that were exchanged (purchased in blue and sold in red).

First of all, is the effect of currency transactions immediate? It would normally be almost immediate; currency markets tend to act very fast. However, I wrote in the squares that the exchange rates have been taken from the Monday of each week (when possible) while the currency transactions are the addition of all such transactions in that same week.

As such, as you may imagine, there will be a one week lag. We call "lag" the amount of time it takes for a variable to affect another one. In this case, the purchases or selling of USD will have an impact on the following week's exchange rate, if it has any impact at all. This is due to the fact that I measure the transactions of that week (from Monday to Friday) while I measure the new exchange rate only on the following Monday (of the week after that). I hope that helps most of you understand better the relationship these two variables have together.

Remember that when the bars are blue, it means that the Central Bank of Peru bought USD in the international markets, which means that this would, in theory, increase the strength of the USD and, by definition, lower the value of the PEN... which means the bar should go up (because you would now need more PEN to buy one USD). The red bars are supposed to do the opposite

Here's a breakdown a a number of important data points:

(January 2013 2nd week): although the Central Bank purchased close to one billion USD in one week, the following Monday's rate barely increased at all. In fact, the exchange rate increased by a mere 0.5% (which is 0.005).

(January 2013 4th week): the Central Bank did not engage in any exchange of USD during that week but we can clearly see that the following Monday’s exchange rate is significantly higher than before. Note that these only 0.08 billion was exchanged on that Monday (the rest of the 0.7 was bought later in the week).

(February 2013 1st and 2nd weeks): The BCRP bought 0.7 billion and 0.67 billion respectively and had virtually no impact on the exchange rate despite these relatively high amounts being exchanged in two consecutive weeks.

(April 2013 4th week): Despite the BCRP not engaging in any currency transactions, the exchange rate increased by close to 2%. These changes, as everything else you see on the graph, are due to normal market forced of supply and demand. These movements are part of a very big USD market in which Peru is an insignificant part (Peru is so small it is a price taker, which means it cannot influence the price).

(From May 2013 2nd week to July 2013 1st week): the exchange rate increase substantially (by close to 7%) with no intervention from the BCRP. After months of trying to actively decrease the value of the PEN (which we call devaluation in Economics) with no success whatsoever, the market conditions simply changed and the results were a stronger USD (signs of strong Economic recovery in the USA) and thus a weaker PEN.

(July 2013 1st week): The BCRP tried to “stabilize” the decreasing value of the PEN by selling USD in the markets. As you can clearly see here, there was no impact on the exchange rates (remember that the selling should show up in the following period). In fact, we can see that the value of the PEN had already started to stabilize by itself starting in the 4th week of June, without any need of intervention from your central bank.

(From July 5th week to September 1st week): the BCRP’s efforts to bring down the exchange rate (increasing the strength of the PEN) was greatly ineffective during this period of time as well. Even selling very close to 1 billion USD in one week (with the selling of 600 million USD in a single day), did not seem to decrease the exchange rate at all. We can see fairly easily that the exchange rate was not in a clear upward trend anyhow, it had already stabilized by then. The central bank’s argument that they were trying to avoid further depreciation of the PEN is unfounded since it was already very close to its minimum.

(From September 2013 2nd week to November 2013 1st week): variations very similar to the previous period (in which the central bank sold close to 3.13 billion USD) can be seen although the BCRP did not get involved at all in the currency market.

(From November 2013 2nd week to December 2013 1st week): The BCRP sold 1.88 billion USD with no perceivable impact at all on the exchange rate.

(From January 2014 4th week to February 2014 2nd week): The BCRP sold 1.47 billion USD with again no impact or very little impact on the market. We can clearly see that the PEN stabilized by itself at a lower exchange rate (stronger) in the following weeks without any intervention from the central bank.

Here you go guys!!!! The Central Bank of Peru seem to be convinced that they are indeed "helping" the Peruvian Economy by stabilizing the exchange rates with the USD but they are, in my view, having very negligible effects at BEST!

The Central Bank is not supposed to be influenced by political stakes since it is, in theory, independent from the Government. Whoever gets elected should not change anything for them since they are not elected representatives of the population. The Central Bank is in a very nice grey zone where they are officially part of the government BUT they don't report to Anyone, not even the Peruvian people... now, I must admit in complete honesty that I don't know how "independent" your Central Bankers are.

Your Central Bank has made a lot of profits indeed with all these exchanges of currency. They did what we call Arbitrage in Economics, which means they buy at a low price (when the USD is weak) and they sell at a high price (when the USD is strong). If the difference in exchange rates was of 0.3 PEN per USD or so, they would have made close to 1'500'000'000 PEN of profits last year... where is that money now? Well, that's where my job stops (and yours start if you are interested). Let me just say that the Central Bank can probably use their earnings in almost any way they want without having to ask permission to neither the Peruvian people NOR the government (if the Central Bank is indeed "independent")... long live Peru!

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