Mexico’s currency exchange commission announced today that the central bank will start auctioning $400 million daily of its reserves at a peso exchange rate at least 2 percent weaker than the previous day’s level, providing support for the currency. Investors would likely only participate in the auctions when the peso weakens 2 percent or more in intraday trading, the exchange commission said.
Mexico’s market “has been evolving with relative order and good liquidity given what’s happening in the world,” Rodriguez said in a telephone interview today from Mexico City. “We believe that with this measure we’ll contribute to preserving these conditions and for now we don’t have additional measures.”
Mexico’s peso was the worst performing major Latin American currency over the past six months, losing 16 percent against the U.S. dollar. The currency’s decline has helped fuel a 12 percent decline in dollar terms for Mexican government peso debt over the same period, according to data from Bank of America Corp.
The yield on benchmark government peso bonds due in 2024 has risen 40 basis points, or 0.40 percentage point, to 6.76 percent, over the last three weeks.
The auction mechanism, which was last used to shore up the peso following the 2008 collapse of Lehman Brothers Holdings Inc., is a “preventative” measure designed to provide liquidity to the foreign exchange market during times of volatility, the commission said in a statement earlier today.
The peso should have “less volatility going forward,” Rodriguez said.
The central bank will use the so-called fix rate, the official daily exchange rate published by the bank, as the reference to conduct the following day’s auction, Rodriguez said.
The government expects limited demand for the dollar auctions because the peso has only infrequently declined more than 2 percent in daily trading, Rodriguez said.
Mexico doesn’t plan to request any changes to its flexible credit line of $72 billion with the International Monetary Fund, he said.
“The line is valid until 2013 and at this time we don’t contemplate any changes,” he said.
Mexico’s peso surged the most in three weeks after the auction mechanism was announced today. The currency climbed 1.5 percent to 13.8230 per U.S. dollar at the close in Mexico City from 14.0258 yesterday. It was the biggest increase since Nov. 3 for the currency, which has lost 10.7 percent this year.
Auctions will take place daily from 9 am to 9:05 a.m., 12 to 12:05 p.m. and 3 p.m. to 3:05 p.m. in Mexico City, the central bank said on its website.
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