Peso Undervalued by Up to 10% on U.S. Concern, Carstens Says

Updated on
  • Currency should be stronger even amid U.S.-Mexico turmoil
  • Inflation progressing as it should given shocks Mexico faces

Bank of Mexico Governor Agustin Carstens explains why he believes the Mexican peso may be undervalued up to no more that 10 percent, even with the uncertainty surrounding relations between Mexico and the U.S. He speaks with Bloomberg's Erik Schatzker. (Source: Bloomberg)

Mexico’s peso is undervalued by as much as 10 percent even if the “unknown” of bilateral relations with the U.S. is taken into account, central bank Governor Agustin Carstens said.

The currency is closer to where it should be, but is still undervalued by "no more than 10 percent," Carstens said Thursday in an interview with Bloomberg TV’s Erik Schatzker on the sidelines of a banking conference in Acapulco. Carstens added that while the central bank is watching inflation to ensure it doesn’t get out of hand, for now it is progressing as it should given the price shocks Mexico is facing, such as a surge in gasoline prices.

Mexico felt the initial brunt of Donald Trump’s presidency after the peso crumbled amid threats he’d rework or scrap the North American Free Trade Agreement and build a border wall that Mexico would pay for. The currency has since made a comeback as one of the best performers this year after White House officials said they’re confident a trade deal can be reached to benefit both countries, although it has yet to return to pre-election levels.

"There’s still an important unknown there, which is that we don’t know how exactly the bilateral relationship between Mexico and the U.S. will shape up," Carstens said. "But even taking that into account, and given the other fundamentals of the Mexican economy, I think the peso is still undervalued."

Mexico’s peso briefly extended its gain after Carstens’s comments and rose 0.4 percent to 18.9576 per dollar in afternoon trading in Mexico City. The currency has strengthened 9.3 percent so far this year, the top performer among major currencies after the South African Rand.

See more: Videgaray: Mexico-U.S. Relations Go Beyond Trade (Video)

The recent peso appreciation hasn’t been fully incorporated into inflation expectations, Carstens said in a separate interview with El Financiero Bloomberg in Acapulco. The stronger peso "without a doubt will affect the process of price determination in the economy and this should speed up the convergence" of inflation toward the 3 percent target, he said.

The central bank has raised interest rates for four consecutive meetings to 6.25 percent, and economists expect another quarter-point hike at its March 30 decision as inflation expectations soar well above target. Annual consumer price increases will reach 5.48 percent by year-end and 3.66 percent in 2018, according to the most recent Citibanamex analyst survey.

Consumer prices rose by an annual rate of 5.29 percent in early March, the highest since 2009, when the nation was hit by a recession. The inflation rate surged by the most in 21 years in January after Mexico rolled back subsidies on gasoline it could no longer afford and the peso dipped to record lows due to uncertainty over Nafta negotiations.

The central bank and the Finance Ministry are working to preserve the value of the peso, Carstens told El Financiero Bloomberg. He was responding to U.S. Commerce Secretary Wilbur Ross’s comments earlier this month that mechanisms for making the peso-dollar exchange rate more stable should be considered as part of Nafta talks.

It’s important that the U.S. be assured that there’s no need for concern that Mexico might be intervening to weaken its currency, when what it has done, on the contrary, is take actions to prevent an accelerated depreciation, Carstens said.

— With assistance by Eric Martin

(Updates with El Financiero TV interview starting in sixth paragraph.)
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