Citigroup Joins Morgan Stanley in Seeing Mexico's Peso at Risk

  • Analysts say currency more vulnerable after auction decision
  • Policy makers nix $200 million daily sales at no price minimum

Mexico’s central bank decision to scale back measures to prop up the peso is putting the currency at risk, according to Citigroup Inc. and Morgan Stanley.

The decision to cut $200 million in unconditional daily peso support on Thursday came after dollar auctions to bolster the currency reduced the central bank’s international reserves for 15 straight weeks. In days when the peso declines sharply, the central bank may still sell two tranches of dollars of as much as $200 million each at prices that are 1 percent and 1.5 percent weaker than the previous day’s fix exchange rate.

“This is a change that makes a lot of sense from a reserve management
perspective,” Citigroup analysts led by Kenneth Lam wrote in a note to clients on Friday. However, the risk that the peso will weaken against the dollar “remains high,” they wrote.

Before Thursday’s announcement Mexican policy makers had been stepping up support to bolster the currency amid an emerging-market currency rout fueled by concern the Federal Reserve will raise interest rates. The changes to Mexico’s intervention program will let policy makers limit the peso volatility on days when the currency falls significantly, while not interfering during stable trading sessions.

The peso rose 0.6 percent to 16.5187 per dollar at 11:52 a.m. in Mexico City, paring its decline over the past 12 months to 17 percent.

The currency commission, which is comprised of officials from the central bank and the Finance Ministry, said in a statement Thursday 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 Citigroup comments followed a note from Morgan Stanley economist Luis Arcentales and strategist Dara Blume on Thursday in which they called the changes “a slight step back from the more aggressive strategy.” If emerging market currencies have a large selloff after the Fed raises rates, the peso will become “more vulnerable,” they wrote.