Mexico: Mexican peso recovers some lost ground following sharp fall in Q1
April 15, 2015
The Mexican peso has recovered some lost ground recently after having experienced sharp drops in the first quarter owing largely to rising concerns that the slide in oil prices had likely affected investments in the energy sector and impacted the government’s finances. At the end of March, the Mexican peso traded at 15.26 MXN per USD, which was 2.1% weaker than at the end of February. In annual terms, the Mexican currency lost 16.9% of its value against the U.S. dollar in March. However, in recent days, the peso has recovered somewhat, although the beginning of Q2 did prove to be volatile.
The recovery of the Mexican currency, although unstable, has occurred as expected in reaction to the Exchange Rate Commission’s measures aimed at providing support to the peso. Mexican monetary authorities began to conduct daily auctions from 11 March to 8 June in which they are selling USD 52 million without a minimum price requirement. These auctions come on top of the currency intervention program that the Commission announced on 8 December through which it is aiming to sell USD 200 million of foreign exchange on trading days on which the peso has weakened by 1.5% over the previous day.
However, further pressure on the peso is expected in the coming months as a result of rising uncertainty regarding the U.S. Federal Reserve’s monetary tightening cycle that is expected later in the year and the Mexican Central Bank’s (Banxico) consequent reaction. Banxico signaled that interest rates are also likely to increase in Mexico this year, and hinted at the possibility of hiking the monetary policy rate either before or after the Fed takes action.
Although Mexico’s international reserves have been falling as a result of the dollar auctions, they continue to provide the Central Bank with enough firepower to intervene in the foreign exchange market. In addition, the country has a USD 70 billion stand-by credit line with the International Monetary Fund (the so-called Flexible Credit Line), which, will allow Mexican monetary authorities to intervene more aggressively if necessary.
Author: Ricardo Aceves, Senior Economist