Mexico's Peso Is Looking Tame After a Very Bumpy Start to 2016

  • Options back up Carstens's comments on intervention strategy
  • One-month implied volatility has tumbled since mid-February

Options traders’ expectations for swings in the Mexican peso fell to a two-month low, signaling the success of policy makers’ move to sell dollars directly to banks at their discretion and end a rules-based intervention program.

The shift by central bank Governor Agustin Carstens in mid-February jolted markets and helped curb one-month implied volatility in the peso, which had jumped to a two-year high. The currency has rebounded 7.5 percent since the government’s announcement, which also included a surprise interest-rate increase along with budget cuts, even after falling Wednesday with major dollar counterparts.

The fall in implied volatility is the second-biggest in emerging markets, trailing only the decline for Russia’s ruble. Mexico’s government had complained that the peso, the most-traded emerging-market currency, was trading apart from its fundamentals given that it is often used by traders to hedge against other risks. Moving away from regularly-scheduled auctions made it harder for traders to take advantage of the auctions as entry points, according to Eduardo Suarez, a strategist for Latin America at Bank of Nova Scotia.

“You added two-way risk to bets versus the peso,” he said in an e-mailed response to questions. “It’s both the intervention strategy, plus a general better tone in emerging-market foreign exchange.”

A gauge of emerging-market currencies reached its highest since November on March 17.

Earlier this month, Carstens said that policy makers’ moves in mid-February were the result of meticulous analysis by the nation’s monetary and fiscal authorities.

“We won’t question using them again if it’s necessary,” he said.

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