Mexico Will Keep Buying Dollars as Weak Yuan Pressures Peso, Carstens Says

Mexican central bank Governor Agustin Carstens said the country’s policy makers will keep buying dollars in the market as China’s refusal to let the yuan strengthen limits their ability to allow the peso to move more freely.

Policy makers have no plans to make any changes to their monthly auctions of $600 million in options, Carstens said in an April 16 interview in Washington. The peso has strengthened 5 percent this year, the second-best performance among major Latin American currencies, and last week reached its strongest level since October 2008.

“Certainly if the yuan were more appreciated, we would feel more comfortable allowing the peso to go wherever it needs to go,” Carstens, 52, said while attending a meeting of the International Monetary Fund, where he served as deputy managing director from 2003 to 2006. “Even though we have a pretty flexible exchange rate regime, we still have been intervening in the markets. So needless to say, it’s an issue we need to take into account.”

Carstens’ comments signal that by continuing to buy dollars in the market, Mexico may be anticipating that continued capital inflows could further pressure the peso and damp economic growth, said Gabriel Casillas, chief economist for JPMorgan Chase & Co. in Mexico City.

U.S. Treasury Secretary Timothy F. Geithner on April 16 said that the world’s major economies need greater flexibility in exchange rates to avoid putting pressure on countries with market-driven exchange rates.

‘Flexibility’

Geithner’s comments, while not identifying China, are part of the U.S.’s efforts to get the country to allow the yuan to rise further.

“It certainly would be very important to have more flexibility, especially in some Asian currencies,” Carstens said.

Mexico auctions $600 million in dollar options per month, a system that aims to bolster foreign reserves. The policy, along with a $73 billion flexible credit line from the IMF, aims to protect Mexico in case of rapid capital outflows. It can also act to stem a strengthening peso by taking dollars out of the market.

Any decision to change the amount of options that Mexico auctions would be months away, Carstens said. Mexico’s “currency commission,” a body comprised of Central Bank and Finance Ministry officials, oversees the options program.

Trade Competition

Carstens’s “comments are directed at the trade competition that has existed between Mexico and China over the last several years,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “If China appreciates their currency, Mexico would obviously gain some new producers from the U.S. seeking a cheaper cost base for their factory output.”

China’s capital controls, weak currency and high inflation are limiting global economic growth, which encourages lax monetary policy in developed nations, Casillas said. That is fueling rapid capital inflows and strengthening currencies in emerging markets, he said.

“Carstens is saying that maybe in the future we could have more problems, more volatility,” Casillas said. “China’s exchange rate policy is causing difficult monetary policy management around the world, and Mexico isn’t an exception.”

The peso fell 0.8 percent to 11.7514 per U.S. dollar. Among Latin America’s seven major currencies, only the Colombian peso -- which is up 6 percent against the dollar in 2011 -- has outgained Mexico’s peso this year.

Commodities Prices

Carstens also said rising global commodities prices have caused uncertainty for the inflation outlook in Mexico and have complicated the bank’s monetary policy process.

“What I think has introduced some noise to the process is the fact that commodity prices have been very volatile,” Carstens said. “There is always some more uncertainty about what the final outcome on inflation will be.”

Among the major Latin American countries that target inflation, only Mexico has yet to raise interest rates in the past year as consumer prices increase at the third-slowest pace in the region after Chile and Peru.

The central bank’s board on April 15 extended its longest- ever pause and kept the benchmark rate at 4.5 percent for an 18th straight meeting.

Inflation in Mexico slowed to 3.04 percent in the 12 months through March, the lowest level since May 2006. The rate is half the 6.3 percent recorded in Brazil, the region’s largest economy. Consumer prices in the U.S., which bought the bulk of a record $298 billion in exports last year, rose 2.1 percent in February from a year earlier.

Mexico’s central bank won’t change borrowing costs until January 2012, according to the median forecast in a survey of economists by Citigroup Inc.’s Banamex unit. JPMorgan Chase & Co., UBS AG and Banamex are among banks that forecast an increase in October.

To contact the reporters on this story: Jens Erik Gould in Mexico City at jgould9@bloomberg.net; Rebecca Christie in Washington at rchristie4@bloomberg.net

To contact the editors responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net; Chris Wellisz at cwellisz@bloomberg.net

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