Mexican peso rockets 1.3 percent

Central bank vows $8.6B to slow currency’s plunge

Peso traders gave Mexican policymakers a vote of approval late last week, sending the currency to its biggest gain since March after policymakers acted to stop a rout.

The peso jumped 1.3 percent to 16.06 per dollar in New York on Friday, bolstered by the central bank’s pledge to buy at least $8.6 billion of pesos in the next two months to provide support. The currency extended gains as central bank Governor Agustin Carstens said Mexico could bolster its interest rate sooner than expected to stem peso volatility.

“The central bank brought confidence back to the markets,” said Javier Benavides, the head of currency trading at Banco Base in Monterrey, Mexico.

The Bank of Mexico’s announcement that it was stepping up support for the currency came after the peso tumbled to record lows amid a broader emerging-markets sell-off. It was the best option for policymakers seeking to keep interest rates at a record low until the Federal Reserve embarks on its first increase since 2006, according to Alberto Ramos, the chief Latin America economist for Goldman Sachs Group Inc. in New York.

“When you do an overall analysis of what’s going on, this seems like an appropriate response,” Ramos said. “This kind of intervention may not work, but it won’t make things worse.”

Raising rates could have restrained economic growth, which has fallen short of analysts’ estimates in eight of the past 12 quarters.

Investors had been wagering that the opening of the country’s oil industry to foreign producers would spark a surge in capital inflows. Indeed, the peso, the most-traded currency in emerging markets, was forecast by analysts at the start of the year to strengthen the most in the world.

Instead, it has tumbled 8.2 percent, for reasons that include a growing aversion to riskier assets and the tumble in oil prices that have damped the outlook for energy investment.

Since December, the central bank has sold about $6 billion to support the currency, through daily dollar sales and extraordinary auctions designed to damp volatility.

In a move that began Friday, it will almost quadruple daily dollar sales to $200 million. The extraordinary auctions, also for $200 million, will be triggered whenever the peso weakens more than 1 percent in a given trading session; previously, the threshold was 1.5 percent.

The peso gained as much as 1.6 percent Friday, the biggest intraday increase since March 20.

Mexico has kept its benchmark rate at a record low 3 percent since June 2014. Even with the plunge in the peso, there has been little pressure on inflation, which tracked at a 47-year low of 2.87 percent in June.

Carstens, speaking in an Enfoque radio interview last week, said that if peso volatility continues, Mexico could raise interest rates independent of what the Fed does.

In the announcement about stepped-up intervention last week, officials highlighted international reserves that have more than doubled since the aftermath of the 2009 financial crisis; in January they reached a record $196 billion. The country also has a $70 billion flexible credit line from the International Monetary Fund.

While the intervention means dipping into the reserves, the current level is considered “enormous,” equivalent to about 15 percent of gross domestic product, said Kathryn Rooney, macroeconomic strategist at Bulltick Capital Markets.

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