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Mexico's Peso resumes rally after Central bank intervenes

Petroleumworld.com 01 09 2017

Mexico's peso rebounded in Asian trading hours as Banxico sold dollars directly to banks to support the currency.

On Thursday, the currency climbed as much as 1.5 percent after Banxico confirmed that it was selling dollars to bolster the exchange rate from a record low. The rally reversed after U.S. presidential-elect Donald Trump threatened Toyota Motor Corp. with a border tax for planning to build a factory in Mexico.

Mexico's central bank sold dollars for the first time this week since February after the peso tumbled to the lowest level since its re-denomination in 1993 amid concern over U.S. trade policy. The peso had weakened 3.5 percent in two days as Ford Motor Co. said it was canceling a $1.6 billion plant in Mexico, spurring Trump to thank the automaker.

“Two interventions in two days suggest the central bank has become even more nervous,” said Masashi Murata, a Tokyo-based currency strategist at Brown Brothers Harriman & Co. “Some investors may have concerns over Trump, of course. But Mexico's problem is a weak economy due to tightened fiscal and monetary policy. The market has priced in a weaker peso to offset a bad economy.”

The central bank confirmed it sold dollars again to strengthen the peso. This was the first time Mexico sold dollars during Asian trading hours, an official said.

Peso Trend

The last time Banxico intervened was on Feb. 17, when it sold $2 billion directly to banks to shore up the currency hit by a global rout fueled by a plunge in oil prices. That same day the central bank, led by Agustin Carstens, also raised the key interest rate by 50 basis points while the Finance Ministry announced budget cuts.

Banxico's actions will not set a level or change the peso trend, but will result in greater market caution amid periods of extreme overshooting, BBVA analysts wrote in a note. Mexican authorities should consider using U.S. dollar swaps as a different intervention tool because these are “not a direct claim on reserves” and offer currency hedging protection, Goldman Sachs Group Inc. Chief Latin America Economist Alberto Ramos said in a note.

The monetary authority has a $40 billion “buffer” to intervene in the currency market, BNP Paribas SA analysts led by Gabriel Gersztein said in a note. In order for the bank to be successful, it should be discretionary and “more aggressive” than in 2015, they said. Mexico has $176.5 billion in international reserves or $260 billion in total if the International Monetary Fund's flexible credit line is factored in.

Story by Isabella Cota and Carlos M Rodriguez from Bloomberg News.

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