Mexico Planning Intervention as Peso Weakens to Two-Year Low

Mexico’s central bank revived an intervention program designed to curb foreign-exchange volatility after the peso fell to a two-year low.

Policy makers will auction $200 million on days when the peso weakens at least 1.5 percent from the previous close, the central bank said today in a statement. A similar measure to support the local currency was put in place in November 2011 and deployed just three times before ending in April last year.

The peso, which pared losses after the announcement, is still down 10 percent over the past six months on concern that a drop in oil prices will damp investment in the country’s energy industry. The new program to support the peso surprised investors including Juan Carlos Alderete, a currency strategist at Grupo Financiero Banorte SAB in Mexico City, after Finance Minister Luis Videgaray said last week that he didn’t see a need for intervention.

“I don’t think it will be necessary to actually use the measure,” Alderete said in a telephone interview. “It’s more of a preventative one based on high market volatility.”

In a statement on Dec. 5, the central bank had signaled concern that the slump in the currency might spur inflation.

The peso weakened 0.2 percent to 14.3820 per dollar at 4 p.m. in New York after earlier dropping as much as 0.7 percent to the lowest intraday price in two years. Speculators as of Dec. 2 had taken out a record number of short futures contracts, or those designed to profit from a weakening of the currency, according to data from the Commodity Futures Trading Commission and Bloomberg.

Successful Instrument

“This instrument has been successfully used before during other episodes of transitory volatility,” the bank said today in its statement. “Its main goal is to provide liquidity in foreign exchange markets if necessary.”

Salvador Orozco, deputy director for fixed income at Grupo Financiero Santander Mexico, said the bank should have made this announcement last week to calm the markets.

“I was expecting them to announce it last Friday,” he said. “Since it has worked in the past, to help contain volatility, this should give the markets more confidence.”

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