Morgan Stanley Says Mexico Peso in Need of New Intervention Plan

  • Mexican peso volatility has doubled in past three months
  • Mexico should consider discretionary intervention, bank says

Mexican policy makers should consider a new intervention plan to curb volatility in the worst-performing major currency this year, according to Morgan Stanley.

Discretionary dollar sales by the central bank would be more effective at stemming declines than the current program, under which authorities auction dollars when the peso depreciates by certain thresholds, Morgan Stanley analysts led by Dara Blume wrote in a report. Since the program started in November 2014, policy makers have spent 16 percent of the $193 billion in foreign reserves Mexico had at the time, the analysts wrote.

A measure of volatility in the peso has more than doubled in the past three months and the 9.7 percent drop this year for Mexico’s currency makes it the worst performer among its most-traded peers. The peso has been battered by concern the tumble in oil prices will damage the government’s fiscal accounts while a possible slowdown in the U.S. economy saps demand for its exports. As the most-traded emerging-market currency, the peso is also used as a proxy hedge for traders seeking to hedge their riskiest investments.

“The most attractive option would be discretionary intervention," the Morgan Stanley analysts wrote. "Continued price action similar to that of the past few days could be enough to warrant a response, and we think it would likely come in this form."

The analysts also suggested Mexico tap its $70 billion credit line with the International Monetary Fund to provide additional firepower to defend against peso declines.

The peso gained 0.5 percent Friday to 19.0518 per dollar as of 11:27 a.m. in New York, joining a global rally in emerging-market currencies. One-month historical volatility, a measure of price swings, was little changed at climbed to 17.3 percent, more than double the level on Nov. 12. The peso touched a record low 19.4448 per dollar on Thursday.

The central bank could also consider lowering the threshold for declines that trigger $200 million auctions from the current 1 percent and 1.5 percent, or consider increasing the size of the auctions, the analysts said. Another possibility is increasing interest rates, they wrote.

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