Mexico: Mexican peso stabilizes after major hit in August
October 9, 2015
The Mexican peso’s uninterrupted loss in value against the U.S. dollar that began in the second half of 2014 culminated with a sharp plunge on 25 August, when the currency hit a record low of 17.2 MXN per USD. The sharp depreciation was primarily a response to strong volatility in global financial markets that originated in China, as well as lower commodities prices and uncertainty regarding the U.S. Federal Reserve (Fed) hiking the interest rate. Following that period of high turbulence, volatility has decreased drastically, and the Mexican peso has been trading within a corridor of 16.5 MXN per USD and 17.0 M XN per USD since then. On 30 September, the peso traded at 16.9 MXN per USD, which was 1.0% below the value registered at the end of August. Nonetheless, the peso has lost 26.0% of its value against the greenback when compared to the same month last year.
The stabilization of the Mexican peso came after the Fed delayed raising interest rates, as the turbulence in global financial markets that started in China threatened to hurt global economic prospects and, consequently, the U.S. economy. The Fed’s inaction has alleviated some pressure on the Mexican peso for now and also gave the Central Bank of Mexico (Banxico) more time to maintain a loose monetary policy stance. Despite the turbulence, Banxico has left interest rates unchanged—in contrast to other counterparts in the region like the Colombian and Peruvian central banks—and the Bank has preferred to support the currency through regular dollar auctions aimed at avoiding abrupt movements in the exchange rate.
Another factor that alleviated pressure on the peso was Mexico’s second round of bidding (Round 1.2) that offered five development offshore blocks in the Gulf of Mexico. On 30 September, the Mexican government auctioned off three of the five areas to private oil firms as part of its efforts to open up its long-nationalized oil industry to private investment. The auction was considered successful despite the current environment of low oil prices and the disappointing results during the inaugural bidding round in July. The majority of analysts attributed the success of this round to the release of the minimum government take ahead of the bidding, more attractive fiscal terms and more relaxed bidding requirements. In addition, the fields allocated in Round 1.2 are already prepared to be exploited in contrast to the more uncertain exploration phase of the fields auctioned in Round 1.1.
Author: Ricardo Aceves, Senior Economist