Mexico Cuts Unconditional Peso Support After Reserves Decline

  • Policy makers nix $200 million daily sales at no price minimum
  • Central bank to boost dollar auctions on days of sharp drops

Mexico is scrapping a part of its peso intervention program after daily dollar auctions this year shrank the central bank’s international reserves by $22.9 billion.

Starting Monday, policy makers will no longer hold dollar auctions with no minimum price, the nation’s currency commission said in a statement. Rather, the central bank will step up the maximum amount it can sell in auctions that are triggered by sharp declines in the peso. Reserves at the central bank, known as Banxico, fell to $173.2 billion last week, declining for a 15th straight week, after touching a record high of $196 billion in January.

Mexico’s peso has been swept up in an emerging-market currency rout that was fueled by concern the Federal Reserve would raise interest rates, thereby reducing the appeal of riskier assets. The changes to Mexico’s intervention program will let policy makers limit peso volatility on days when the currency falls significantly, while not interfering during stable trading sessions.

“They were selling $200 million even on days when it wasn’t necessary, but they’re not happy with the decline in reserves,” Carlos Serrano, chief economist of Banco Bilbao Vizcaya Argentaria SA’s Mexico unit, said from Mexico City. “This change gives them more flexibility.”

The central bank will continue offering $200 million daily in auctions triggered when the peso weakens by 1 percent from the previous day’s fixed rate. It will also offer an additional $200 million in daily sales that will occur when the currency declines by at least 1.5 percent. The measures will extend through Jan. 29, policy makers said.

The currency commission, which is comprised of officials from the central bank and Finance Ministry, said that while volatility was possible in coming months, it was ending the no-price minimum auctions due to “the recent relatively more stable performance of financial markets.”

The changes signal “that Banxico is willing to tolerate moderate but additional peso weakness,” Barclays Plc strategist Andres Jaime said in research note. The currency has lost 18 percent in the past year against the dollar.

The currency trimmed gains after the statement was posted on the central bank’s website and rose 0.7 percent to 16.6210 per U.S. dollar Thursday. It had strengthened as much as 1.1 percent.

“This is a slight step back from the more aggressive strategy implemented in July,” Morgan Stanley & Co. LLC economist Luis Arcentales and strategist Dara Blume said in a note to clients. If emerging market currencies have large selloff after a Fed raises rates, the peso is now “more vulnerable,” they wrote.

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