Costa Rica’s Central Bank promises to intervene against rising dollar, falling colon

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January 31st, 2014 (InsideCostaRica.com) After the dollar gained significant ground against the colon this week – rising in price by nearly ¢7 during Wednesday’s trading alone – Costa Rica’s Central Bank (BCCR) is promising further intervention in the currency markets should the trend continue, the Bank said in an official statement.

 

The statement reiterated the Bank’s commitment to “protect the economy” before excessive increases in the price of the greenback.

 

On Wednesday, the Central Bank sold some $4.9 million into the Monex wholesale market after the dollar soared to more than ¢520.  The move helped push the dollar down to close at ¢514.24.

 

The Bank notes that it has $7.2 billion in net international reserves to intervene in the exchange market.

 

Today, the Central Bank will unveil its Macroeconomic Program for 2014.

 

 

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    • Bruce Wessels

      So the Costa Rica’s Central Bank (BCCR) is admitting that is manipulating the value of the Colon….

      • McDemon

        Best I can remember they always have and never tried to denied it. From a previous ICR article:

        http://insidecostarica.com/2013/12/04/costa-ricas-central-bank-intervenes-prevent-dollar-bottoming/

        Costa Rica’s exchange rate “band” system sets both a “floor” or lower band and a “ceiling” or upper band for the exchange rate of its national currency against the dollar.

        When the value of the dollar vs. the colon reaches the bottom of the band, the Central Bank intervenes by purchasing dollars in the wholesale market.

        • http://insidecostarica.com/ Timothy Williams

          Correct. Only reversed in this case. Instead of purchasing dollars to prop up the dollar’s price, they are selling dollars to bring its price down (supply and demand).

          BCCR openly intervenes in the currency market and openly lets the public know about – and has never claimed otherwise. Most countries (including of course, the US) do exactly the same but under different names and methods (for instance, the US manipulates the dollar value by tightening or expanding the worldwide supply of dollars, through a number of various terms and acronyms it has invented).

          • http://insidecostarica.com/ Timothy Williams

            One other point. The colon is not an internationally traded currency (such as the Euro, dollar, yuan, etc.) so the ‘manipulation’ really only affects dollar supply/demand (and hence price) within Costa Rica’s own borders, of course. The Central Bank here wants “stability” in the exchange rate, regardless of what that rate is, for a number of reasons I don’t have time to explain.

            Last year the Bank did increase the ‘upper band’ significantly because a ‘cheap’ colon is actually great for exports (makes CR goods cheaper abroad…although it does mean foreign imports for colon-earners become more expensive), though the raising of the band didn’t affect the actual prices the dollar trades at. (Though it was a reflection in many peoples’ minds that the bank would allow the colon to depreciate significantly, which makes it odd that they are intervening right now. My thought would be they want to spread out the devaluation over time and avoid drastic volatility in the exchange rate like we saw on Wednesday).

            What makes this week’s dollar ‘rally’ even more interesting is that typically the dollar loses ground against the colon this time of year, as banks shore up a bunch of dollars from tourists during high season, though there are several explanations for this also, including increased demand for dollars by public institutions like RECOPE and CCSS.

    • Derryl Hermanutz

      Since the Fed began tapering, lots of hedge funds and other big players in international currency markets have been selling local currencies for dollars in the expectation that dollar interest rates will go up because the supply of dollars by the Fed is being reduced. This expectation is based on the same “loanable funds” fallacy that expected QE to cause hyperinflation. But markets are driven by the perceptions of the players, not by any universally established objective measures, so players behave according to their expectations. And right now traders are selling local currencies and buying dollars, which depresses the fx value of local currencies and elevates the value of dollars in the supply/demand currency markets.

      The dollar is on a tear against many currencies, not just the colon. The US$ is up far more against the CDN$, for example, than it is against CR’s colon. Most of CR’s business and financial community expect the colon to lose value against the dollar over the medium to long term, largely based on fears of CR’s government deficits and debt, which are the root of all evil in the neoliberal worldview that thinks God’s invisible hand will save us all if we allow the “free market” to do its good works. Time will tell what actually happens with the fx value of CR’s colon, but in the short term it is the perceptions of traders in the money market that drive changes in the relative values of currencies.

      Meanwhile CR’s central bank is doing what central banks are supposed to do: intervene in fx and interest rate markets as a counterweight to “destabilizing” short term market actions. In January, 2013 the central bank was buying dollars to increase their value against the colon, because some big pools of international money were selling dollars to buy colones to cash in on the high interest rates you could get on colon-denominated investments here. Exporters sell in dollars and pay their costs in colones. When the fx value of the colon increases, exporters only get (for example) 450 colones for each dollar of export earnings that they deposit in their bank and convert to colones to pay their Costa Rican workers, suppliers, taxes, etc; rather than 500 colones per dollar. When the government threatened to increase the tax on repatriated interest income to 38%, the demand for colones evaporated and the “crisis” was overcome.