Mexican Central Bank Takes FX Warfare Into The 21st Century: Writes $600 Million Worth Of Dollar Options

Tyler Durden's picture

The FX war recently launched by every central bank in the world, just entered its modern warfare stage: we have learned that the Mexican Central Bank has just sold $600 million worth of USD options. That's right - the central bank of our southern neighbor has moved beyond merely pedestrian cash interventions and has entered the derivatives game, in their attempt to raise the US peso and lower its Mexican equivalent. While there is no immediate indication of how the NAFTA treaty reacts to such outright open aggression between member states, it will likely be modestly to quite modestly frowned upon by the central banks of Canada, and most certainly, our own Fed. What we would love to find out, however, is who it was that was on the other side of the transaction, and bought $600 million worth of USD options. It would be supremely ironic if it it is discovered that it was the FRBNY that was taking the other side of the trade, as it would confirm that central banks have now gone AIG on betting on the outcome of currency wars.

Either way, the incremental systemic complexity introduced by this action will make plain vanilla interventions increasingly more unpredictable, and it is a likely validation that many other central banks also engage in this kind of synthetic trading. Also, who is to stop the counterparty on such trades to suddenly ramp up colletaral requests, very much in the fashion that Goldman and JPM destroyed AIG and Lehman, respectively? Should the Fed need to really pounce on the dollar, all it needs is to get the bank that did the deal (or itself) to make a few calls, and increase margin requirements from 5% to 100%+, forcing an immediate unwind of the transaction, and causing who knows how much havoc to both the synthetic and cash scenes.

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Bananamerican's picture

"...causing who knows how much havoc to both the synthetic and cash scenes."

Hyperbole

mrgneiss's picture

For your "Reactions" choices you forgot to include: e) stupid  f) who cares

Threeggg's picture

All right williambanzai7 since you have an excellent talent  I have a request.

A visual :

Benny dressed up like Scotty from star-trek with a lever switch in his hand attached to a super-turbo dollar printing press that is flooding the world with dollars (everyone swimming/drowning in the background in Dollars)

With obama dressed up like captian Kirk behind him kicking him in the azz telling him in a caption to Get "His" economy back on track by printing QE 2 we have an election for crying out loud.

Benny answering back "I am trying captian, I'm giving it everything she's got"

With Giethner and the rest of the clan shown as alien elf's oiling the printing press' bearings with shirts on with name tags that say  "maintenance"

could you do that?

TIA

Spalding_Smailes's picture

Lather, rinse, repeat ... Outsource our mbs, import gold ?

 

 

What happens if the fed had asked for gold as the rest of the cb's dry hump'd our swap lines over the last few years to service their debts that are denominated in dollars.... ? Another reason you always see lust for our dollars ...

 

On February 2, the Swiss National Bank, a well respected central bank, announced that starting in the middle of February, it would issue its own US dollar denominated certificates—T-bills by another other name. These dollar-denominated bills will be sold every two weeks, starting Feb 16 and in tenors of 28, 84 and 168 days. Current counterparties of the Swiss National Bank can participate in the auctions and the bills can be used as collateral in other dealings with the central bank. In days since the SNB's surprising announcement, the Swiss franc has under-performed. It has lost about 0.68% against the dollar, making it the second worst performer after the Japanese yen in recent days.

The dollar reached its best level against the Swiss franc just before the horrible US jobs data, since the middle of December. Why did the SNB decide to issue dollar denominated T-bills? The purpose does not appear to be a signal of monetary policy, though SNB officials seem to have expressed concern about the Swiss franc's strength and reminded the market recently that it could intervene, if needed. The reason the SNB is raising dollars is to help alleviate the financial crisis in Switzerland. In particular, the SNB needs dollars to help finance its Stability Fund, that is to purchase illiquid assets from troubled financial institutions like UBS. A good part of the toxic assets are believed to be denominated in dollars.

Dr. Engali's picture

It's going to be really interesting to watch the whole thing melt down.

hedgeless_horseman's picture

I disagree with your use of future tense. 

I submit that it is really interesting to watch the whole thing melt down.

Clark_Griswold Hedge Mnger's picture

well this is getting interesting; please pass the popcorn.

Scotch anyone?

CashCowEquity's picture

odelay vato holmes

furieus's picture

So, basically, it's USA vs. All?

In other words, everyone is buying dollars?

Porkbellytrader's picture

Everyone racing to the bottom, but since currencies trading against one another, it deosn't work so well.

Buy gold until this stupidity comes to pass.

 

 

 

 

rubearish10's picture

Maybe I'm missing something but if they sold puts for a notional amount of $600mm, they want the USD to rise vs the MXP. I suppose that sets them up to buy more USD or at least participate in that direction. They've been doing this monthly since February.

ATG's picture

Bingo

Big4 long dollars

knukles's picture

No no no no no.....

An options execution unless offset in the cash marketplace does not effect the supply of or demand for cash dollars.

This is not intervention; t'is more speculation!

rubearish10's picture

Agreed and they're spekin' for USD upside vs MXP so they could play wargames!

Pladizow's picture

Gold Says, "We dont need no steen-kin dollars."

scratch_and_sniff's picture

Mexican savagery at it's worst.

Catullus's picture

This is getting a little too real.

Conrad Murray's picture

They're just still sour over the whole Texas thing.

Prof Quagmire's picture

 

  Preparing to launch financial weapons of mass destruction in the currency wars of the 21st century.  No one was killed, but all fiat currencies died.

cougar_w's picture

modestly to quite modestly 

One of the Tylers (at least one) is a writer. And a thumping good one.

In homage to greatness I will definitely use that phrase in my next story. You watch for it. I'm saying it and I will.

Yorick7's picture

This article is silly.  600 bucks in $mxn is not that big.  What strike did they sell?  And there is no way the counterparties will raise "collateral" requirements on the CB of mexico.  Honestly who writes this crap?  A moonlighting CNBC writer trying to stir up angst.

papaswamp's picture

Is this really that new? Apparently they do this every month. Feb they sold the same amount. Just asking...

web bot's picture

Just when you think you've seen all there is... you then get something like this to come along.

I know I'm just a simple sock puppet, but is this starting to look like a house of cards?

Superdrol's picture

Ok, so they sold what kind of options short against the long dollar ?

pamriallc's picture

much ago about nothing.  keep in mind that with billions of repurchases weekly in treasuries by the FED the idea that we're seeing some border-partners manage upcoming trade events at the end of Q3 with some forward calls which only serve to counteract Northern trade settlement is not anything new.

 

when I decide to sell my collection of 100 Ferrari's to the guy running Ecclectica, I'll sell some Euro-forwards as well, in order to limit volatility on final payment for delivery.  because the USD has been in a downward trajectory, it's entirely reasonable to assume that Mexico saw this as *VERY CHEAP* insurance on managing its current trade account with the USA in the forward months.  when Mexico stops running a surplus with the USA they'll stop selling currency forwards.  frankly--- a ramping up of currency forwards would suggest that we're buying a LOT of stuff from Merxico.

 

Shawn A. Mesaros, Pamria, LLC

vs-trader's picture

as per this http://online.wsj.com/article/BT-CO-20100927-712684.html Mexican Central Bank does this strategy every month 

"The Bank of Mexico sells $600 million in options each month, which can be exercised when the peso is stronger than its 20-day average. Most have already been exercised as the peso has appreciated from above MXN13.20 to the dollar at the start of the month, which was its weakest level of the year."

outamyeffinway's picture

Some of you are missing the point. It's the action itself that is the story. They are joining the choir in a sea of disharmony.....

Yorick7's picture

umm, no, you are missing the point.  this is nothing out of the ordinary, sorry to shatter the end of the world story.

cougar_w's picture

Okay fine. Then you come up with an end-of-the-world story for us. Since FX is your thing, we expect something 007-ish. Currency crisis to end the world, narrowly averted and still time for drinks. Or not, go ahead and end the world outright we might find it amusing. There should be a gorgeous chick named Kitty or something, and a devious villain with perfect hair. These might even be the same person. And at some point a helicopter blows up.

[waits expectantly]

pamriallc's picture

remember to listen to the crazies.  the main thrist of this blog is to make us all thing hard.  some ideas are created here, many worthwhile.

pamriallc's picture

remember to listen to the crazies.  the main thrust of this blog is to make us all think hard.  some good ideas are created here, many worthwhile.

longjohnshorts's picture

Sorry, it won't be 21st century warfare until El Banco lobs Fux$net across the border.

Then, it'll be there worm against our Worm.

 

StychoKiller's picture

Worms fighting in a Cyber-cage match!  Now that is just too weird!

goldmiddelfinger's picture

Not enough info to understand what the trade is, or even attempts to acheive.

Thunder Dome's picture

You think it's bad in the U.S.  The peso is worth 1/2 of what it was vs. the dollar back in '94 when I was in Cancun getting obliterated on spring break.

gwar5's picture

Well, they know something about currency crashes since their's went down 80% 15 years ago. When Corona with a lime speaks, people listen.

digalert's picture

Ooh that evil USA...

Meanwhile, Mexican officals tell US to stop sending Mexican criminals back to their homes in Mexico. It's causing them problems.

http://www.judicialwatch.org/blog/2010/sep/mexico-asks-u-s-stop-deportin...

The Alarmist's picture

If our government had any sense, we'd be giving Mexico a 2-fer by sending along one of our dangerous criminals for each of their own repatriates.