There’s a joke going around the floors of currency operators. It goes: “The Mexican central bank should stop investing in the Mexican peso. Instead, they should come up with about 12 billion dollars, buy Twitter and immediately close it down.” Some people smirk at this statement, and then go back to wonder about what the future of monetary policy looks like under Trump.
Normally, central banks adapt their monetary policy to changes in the macroeconomic environment. Now, under President-elect Trump's establishment, a single tweet can send exchange rates flying all over the place.
Case in point: Last week the Mexican peso plummet to an all-time low after Trump criticized automakers that had plans to build factories in Mexico. The 2.9% fall in the first week of January made the Mexican Central Bank auction off about 2 billion USD from its reserves to try to protect the peso’s depreciation. Then, after another series of anti-Mexican statements, the peso kept its downwards spiral.
When conventional monetary policy fails, what is left for central banks to do to protect their currencies' acquisition value? Traditionally, they target certain goals, such as an inflation, unemployment or economic growth, and control the supply of money and set interests rates to achieve their goals. In special situations, they might take unconventional actions to secure their targets; such as currency or treasury bond buy-back programs that influence their goals more directly (e.g. Google “Quantitative Easing Program”).
These unconventional programs are supposed to work in the medium to long term and to target extraordinary macroeconomic situations, such as the 2009 financial crash or an unexpected surge in inflation during a year. In order to be able to execute on these programs, central banks hoard foreign currency reserves to signal to the market that they’re able and willing to protect their currency from external shocks. Some countries, such as some Latin American countries, control upwards of 15% of their GDP in foreign currency reserves or credit availability.
But all of these premises are changing. Now, if the President-elect has some great Indian food and tweets about it, we should buy some rupees and short the sterling. Instead of following macroeconomic trends, maybe we should follow the future First Lady’s fashion choices or his family’s Spotify account to gauge our investment strategies.
Basically, maybe buying Twitter stock is the best risk-controlling strategy today.
Jesus is a Mexican first year student on a daily fight against FOMO.