Mexico May Expand Dollar Auctions, Protecting Economy From Capital Outflow

Mexican Finance Minister Ernesto Cordero said policy makers may increase the amount of dollar options they auction monthly, a move that would help soften the impact on the peso of any sudden outflow of capital.

Mexico won’t follow other emerging market countries in adopting currency controls or intervening directly in the peso market no matter how much the currency advances, Cordero said in an interview at Bloomberg’s headquarters in New York.

An increase in the size of dollar option auctions would quicken the pace at which Mexico accumulates foreign reserves, providing a buffer against a sharp fall in the peso should investors quickly withdraw money from Mexican debt and equities markets, said Gabriel Casillas, chief economist at JPMorgan Chase & Co. in Mexico City. Investors pulled $4.6 billion from exchange traded funds that track developing-nation stocks in the week ended Feb. 2, Bank of America Merrill Lynch said Feb. 4, citing data from research firm EPFR Global.

“It’s important to have more reserves in case of any reversal in capital inflows,” Casillas said. “If you have more reserves, the depreciation would be slower.”

Mexico auctions $600 million in dollar options per month, a system that bolsters foreign reserves as it takes dollars out of the market and eases appreciation pressure on the peso.

Photographer: Jin Lee/Bloomberg

Mexican Finance Minister Ernesto Cordero. Close

Mexican Finance Minister Ernesto Cordero.

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Photographer: Jin Lee/Bloomberg

Mexican Finance Minister Ernesto Cordero.

“It’s one of the possibilities we’re exploring right now,” Cordero said, referring to the monthly auctions.

The peso, which has strengthened 7.3 percent over the past year, rose 0.1 percent to 12.0595 at 10:45 a.m. New York time.

‘Firepower’

Having more reserves gives policy makers greater “firepower” to stop a rapid fall in the peso by giving them more capacity to buy the local currency, Casillas said.

The currency last month gained beyond 12 per dollar for the first time in more than two years, and on Jan. 18 touched 11.9435, its strongest level since Oct. 14, 2008.

“We don’t have a threshold,” Cordero said when asked if there was a level for the peso at which officials would consider intervening. “The capital controls policies of some of the other countries in Latin America don’t have any effect at all.”

Cordero said he doesn’t expect a sudden reversal in capital inflows to Mexico, saying they may retreat gradually over time.

Capital flows to emerging markets soared last year as near- zero interest rates in the U.S. and Europe prompted investors to seek higher returns in faster-growing emerging markets.

Brazil tripled to 6 percent in October a tax on foreign purchases of fixed-income securities in a bid to contain gains in its currency. The real has advanced 39 percent against the dollar since the end of 2008, the second-best performance among 16 major currencies tracked by Bloomberg, trailing the Australian dollar.

Chilean Intervention

Chile triggered the biggest fall in its peso in 20 years on Jan. 4 when the central bank said it would buy $12 billion in the spot currency market.

Foreign investment in short-term Mexican notes known as Cetes had risen more than eightfold as of Jan. 31 from a year earlier. Inflows increased to 147.6 billion pesos ($12.2 billion) last month from 100.6 billion pesos in December, according to the central bank’s website.

A stronger currency can hurt exporters by making their products more expensive in dollar terms. About 80 percent of Mexican goods sent abroad go to the U.S.

Withdrawals from ETFs, which are listed on an exchange and change hands throughout the day like stocks, signal hedge funds are paring bets on the fastest-growing nations, Morgan Stanley wrote in a Feb. 1 report. The MSCI Emerging Markets Index has dropped 5.4 percent this year as countries from Brazil to Hungary and Indonesia raised interest rates to combat inflation.

Balanced Flows

Capital inflows became more balanced between developed and emerging markets at the start of this year after an inflow into developing markets last year, Barclays Capital strategists George Christou and Avanti Save said in a Jan. 31 report.

The increase in peso bond yields over the past months won’t deter the government from issuing debt this year, Cordero said.

“Even with the increase in the rates, they’re still very reasonable,” Cordero said. “We still feel there are some opportunities in the debt market.”

The yield on Mexico’s benchmark 10 percent bond due 2024 has increased 152 basis points to 7.78 percent since hitting a low of 6.26 percent on Oct. 12.

The government forecasts the economy will expand about 4 percent this year, more than the 3.7 percent median estimate of 13 analysts surveyed by Bloomberg. Cordero said yesterday that the economy probably grew 5.3 percent to 5.6 percent last year.

To contact the reporter on this story: Jens Erik Gould in New York at jgould9@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net; David Papadopoulos at papadopoulos@bloomberg.net

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