New currency swap auctions have been introduced (the central bank effectively buying dollars) to try to curb the rise, but at time of writing this is not proving sufficient. The consequence, apart from high returns for local currency investors benefiting from both high yields and an appreciating currency, is a build up of reserves.
 Although this is to be welcomed, the sterilisation cost is high: as reserves increase, local debt is issued to soak up money supply growth and, with local interest rates at nearly 20 per cent, this is expensive.
 Other regional currencies are less attractive. The Argentine peso is driven by its own dynamic. The Chilean peso is highly correlated to copper. The Venezuelan bolivar’s peg, following talk of devaluation in the closing months of 2004, is stable for now with inflation not as strong as had been expected despite the strong rebound from the economic dip in 2003 caused by state oil company PDVSA’s labour strike.
 However, another major currency opportunity that is perhaps less noticed lies in the Mexican peso. This has adjusted far less to dollar weakness to date and is about the same level as at the start of 2004. Whereas the dollar has fallen about 10 per cent against its standard weighted basket since the peak of the sell-off in the second quarter last year and the Brazilian real has risen about 20 per cent against the dollar, the Mexican peso has risen only 5 per cent to the dollar.
 This seems anomalous. The dynamics of the Mexican economy have become increasingly integrated with those of the US, and interest rates have been going up in line with the US Federal Reserve. Inflationary pressure, however, is now under control and a delinking from US interest rate dynamics is expected shortly. This may be accompanied by a shift to an inflation rather than money supply target. With continued high oil revenues, growth picking up in the fourth quarter, and strong domestic and global liquidity, this may prompt significant currency strength.
Dr Jerome Booth, head of research, emerging markets, Ashmore Investment Management

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