Mexico ended a daily dollar auction designed to shore up the peso, a sign policy makers are no longer concerned about declines in the currency after it posted the biggest rally among major currencies this year.
The peso weakened after the currency commission, which includes officials from the Finance Ministry and central bank, said today that the central bank would no longer offer $400 million of its reserves daily starting tomorrow. The measure was put in place in November 2011 to curb volatility as the peso dropped 11.4 percent that year.
Mexico’s free-floating peso has strengthened as investors search for higher yields amid near-zero interest rates in the U.S. and Japan, and as speculation grows President Enrique Pena Nieto will push through reforms to boost economic expansion. The currency has jumped 15 percent, the most among major emerging-markets tracked by Bloomberg, since the commission said Nov. 29, 2011, it would auction dollars and suspend the sale of dollar options that had been used to curb gains by the peso.
The currency commission is “signaling they are less concerned with depreciation now,” Eduardo Suarez, a Latin America currency strategist at Bank of Nova Scotia in Toronto, wrote in an e-mail. “At some point they will re-introduce the options, but I don’t think the time is now.”
The currency weakened 0.2 percent to 12.1966 per dollar today after dropping as much as 0.3 percent following the announcement. The peso’s 5.4 percent gain against the dollar this year is the best performance among the 16-most traded currencies tracked by Bloomberg.
‘Not Needed Anymore’
While the central bank offered dollars daily since November 2011 at a peso exchange rate at least 2 percent weaker than the previous day’s level, traders only bought dollars on three days, according to central bank data.
“Conditions in the international and national financial markets indicate that exchange-rate volatility has declined,” the currency commission said in today’s statement. “The conditions that motivated the establishment of the daily dollar sales of Banco de Mexico have dissipated.”
Central bank Governor Agustin Carstens said Apr. 5 that the peso’s recent appreciation is a reflection of the nation’s economic strength, while adding it’s still weaker than it had been before the 2008-09 global financial crisis.
Finance Minister Luis Videgaray said March 21 that the government will allow the peso to float freely. Any currency commission intervention would occur “with previously-known rules that have the objective of moderating abrupt variations from one day to the next.”
The yield on Mexico’s peso-denominated bond due in 2024 tumbled eight basis points, or 0.08 percentage point, to a record-low 4.81 percent, according to data compiled by Bloomberg.
The currency commission decision is “a natural step,” Roberto Torres, the head of peso trading at BNP Paribas SA, said by phone from New York. “That auction is not needed anymore.”