Mexico: Mexican peso weakens in 2014 and exchange rate pressures turn authorities more cautious
January 19, 2015
The Mexican peso experienced a rapid depreciation in the last months of 2014 due to a combination of external and internal factors. The strengthening of the U.S. dollar and the persistent fall in oil prices that began in July 2014 were among the external factors. Internally, economic growth is slowing and social unrest and political scandals are contributing to negative sentiment. On 31 December, the peso traded at 14.75 MXN per USD, which was 5.4% weaker compared to the same day of the previous month. At the end of the year, the Mexican currency had lost 13.1% of its value against the greenback in annual terms and hit the lowest level since February 2009.
Mexican monetary authorities reacted to the peso’s underperformance and the Exchange Rate Commission—made up by three members of the Central Bank and three members of the Ministry of Finance—announced the reintroduction of a currency intervention program on 8 December. The program is aimed at selling USD 200 million of foreign exchange on trading days on which the peso weakens by 1.5% over the previous day. A similar program was put in place to support the currency between December 2011 and April 2013. The announcement came as a surprise to investors and market analysts since, just a few days before the announcement, Finance Minister Luis Videgaray had stated that the government did not see a need to intervene in the foreign exchange market.
In the 5 December monetary policy meeting minutes, Mexican monetary authorities underlined that the risks the economy is going to face in the coming months are likely to add further pressure to the exchange rate. Risks include the growth differential between the Mexican and U.S. economies, lower oil prices and the expected increase in interest rates in the U.S.
Mexico’s international reserves totaled USD 193.2 billion in 2014 and the country also has a stand-by credit line with the IMF (the so-called Flexible Credit Line), which is worth USD 70 billion. Therefore the Exchange Rate Commission has enough room to intervene more aggressively if necessary.
Author: Ricardo Aceves, Senior Economist