MexECON Blog

Central Bank Intervenes to Support the Peso

Banco de México has intervened in the foreign exchange markets to support the peso, according to a statement posted on its website.  On Monday, the central bank put $400 million of its reserves on auction, selling $281 million at a price of 13.56 pesos per dollar.  The intervention is part of a Banco de México program that aims to reduce any sharp weakening in the peso by auctioning up to $400 million whenever the currency drops by more than 2.0% against the dollar from one day to the next.  The program was first launched during the global financial crisis in 2008, but it was eventually suspended.  It was resumed in November 2011.

Comment:  Monday's intervention came as renewed worries about the European debt crisis again sent global investors scrambling to exit higher-risk positions.  As an emerging-market currency, the Mexican peso has suffered repeatedly from such panics over the last several months.  Indeed, as I noted in my Peso Review for June, the currency is now effectively held hostage by events in Europe.  Fundamentals for the peso are actually strong.  The Mexican economy is growing much faster than average, Mexican interest rates are relatively high, and the government budget deficit is quite modest compared to most other major countries.  Nevertheless, as long as the European crisis and slowing U.S. economic growth remain a concern, the peso is vulnerable to steep declines, and more interventions by Banco de México may be in store.

Patrick Fearon, CFA
Vice President, Fund Management

Special - 120725 Cenbank Forex Intervention

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