Yuan Plunge Could Spur Devaluation Race, Mexico Minister Says

  • Mexico's stocks have been swept up in selloff spurred by China
  • Peso slumped on Thursday to weakest since 1993 re-denomination

The decline in China’s yuan is generating turbulence in financial markets across the world, including Mexico, and threatens to spark a cycle of competitive devaluations of currencies, Finance Minister Luis Videgaray said.

Videgaray said that while the decline in China’s currency has been relatively small so far, it’s been enough to concern global investors and affect Mexico’s stock market and currency. Mexico’s peso touched a record low Thursday and the benchmark IPC stock index declined for a ninth straight session.

China’s stock selloff continued Thursday, sparking a decline in global equities and emerging-market currencies, as the People’s Bank of China reduced the yuan’s reference rate -- the mid-point of the band in which the currency is permitted to trade -- to the weakest since March 2011. China’s tolerance for a weaker currency is viewed as evidence policy makers are struggling to revive the economy of the world’s largest developing nation.

The yuan’s decline "implies a risk of starting a cycle of competitive devaluations," Videgaray said in a speech at the Foreign Ministry in Mexico City. "It’s frankly a perverse process, because at the end of the day if all countries engage in a competitive devaluation, no one becomes more competitive, and you generate financial dislocations."

Mexico is better positioned to face global economic and market volatility after the government reduced the nation’s dependence on oil revenue and hedged its crude exports for this year, Videgaray said. Latin America’s second-biggest economy last year hedged 2016 oil exports at an average $49 a barrel, according to the Finance Ministry. The nation’s oil export mix fell to $24.75 a barrel on Wednesday, the least since 2004 and down 38 percent in the past year.

While Mexico’s currency intervention is working well, it’s too early to say whether the dollar auctions will be extended beyond their scheduled expiration at the end of this month, said Videgaray, who heads the commission that determines peso policy. He added that he sees no need for 2016 budget cuts beyond what the government had announced last year.

The central bank sold $400 million in dollars Thursday under its program to support the peso as the currency fell for a fifth straight day. The peso lost 1.4 percent to 17.7880 per dollar at 2:01 p.m. in Mexico City, after earlier touching a record low.

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