The Strategist

Bank of Mexico tries to pacify local currency market


01/11/2017 - 13:52



In the first week of the year, The Bank of Mexico spent on supporting the national currency about $ 2 billion. According to the regulator’s statement, the country's international reserves fell to $ 174.72 billion on 1 to 6 January.



Joaquín Martínez Rosado
Joaquín Martínez Rosado
"The reserve decreased by $ 1.81 billion, mainly due to sale of US currency", - said the Bank of Mexico on Twitter.

The regulator was forced to start currency intervention after the peso dropped to the lowest level against the dollar on news about cancellation of Ford plant’s construction in the state of San Luis Potosi.

Despite the measures taken by the Bank of Mexico, the peso continues to become cheaper. The bank rate on Tuesday has risen to 21.85 pesos per $ 1, or 0.2 pesos more than on Monday.

Such fluctuations in the currency market may become even more sharp as inauguration of US President Donald Trump is approaching. The politician takes office on January 20.

The Mexican peso’s landslide forced the regulator to actions, as further market devaluation of the peso could lead to disaster. The bank intruded the market with fairly significant interventions, but apparently spent billions of dollars with little or no visible result.
 
Speculators bought the offer quite happily. However, as soon as the influx of money ended, the peso resumed falling. If the bank continues to hold its ground, it may lead to a situation way too familiar to SNB, the Bank of Russia and Chinese foreign exchange regulator. Speculators will simply play against the national currency, increasingly depleting reserves of the Central Bank. At the same time, the Mexican regulator has incomparably less capacity than its larger colleagues, all the more even their attempts ended with back-down.

Actually, the Bank of Mexico is criticized not for obviously wrong decisions about interventions, but for neglect of available set of tools. For example, no one bothered to use a more sophisticated mechanism of currency swaps without pressing on reserves. In addition, it was necessary to borrow at least part of the Chinese experience, although this would be difficult to apply due to much stronger government regulation of China's economy.

Earlier, Ministry of Economy of Mexico on the background of statements by US President-elect Donald Trump has denied any attempts to influence business decisions regarding investment in the country.

US President-elect Donald Trump threatened the world automotive leader Toyota with high taxes on imports of its products if the manufacturer builds its plant in Mexico.

"The Ministry of Economy of Mexico categorically rejects any attempt to influence decisions of companies regarding investment by means of threats or intimidation " - said the regulator in a statement posted on its website.

"Mexico is interested in shaping competitiveness of North America and its transformation into the most attractive for investment geographical area" - the document says.

In early January, Donald Trump recalled his pre-election promises and, simultaneously, the Mexican peso collapsed. Buy American and hire Americans - that's the basic rule, which administration of President-elect would follow. Trump has already lashed out at General Motors because the automaker assembles cars in Mexico, and then duty-free imports them into the United States.

source: ft.com, reuters.com