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Tags: mexico | peso | foreign exchange | reserves

Mexico Needs New Peso-Saving Tools as Reserves Decline

Mexico Needs New Peso-Saving Tools as Reserves Decline

(Dollar Photo Club)

Tuesday, 10 January 2017 12:30 PM EST

Mexico’s Central Bank wants to lift the peso from its record lows, but is getting backed into a corner after spending $2 billion last week with little effect.

Not only its recent dollar sales are doing little to boost the currency, they come at a time when foreign reserves are faltering. With relatively limited scope for that kind of intervention, policy makers are seen raising interest rates again in February. That’s even after five hikes last year failed to push up the peso’s value and curb inflation expectations. While some analysts say Mexico could alternatively offer dollar swaps or increase its credit line with the International Monetary Fund, they warn against depleting reserves -- which could undermine investors’ confidence and intensify the market selloff.

“It’s very important that they keep a healthy level of reserves because, if the market at any point perceives that reserves are insufficient, that could give them a reason for capital flight,” said Andres Jaime, a currency and rates strategist at Barclays Plc in Bangkok.

Over the past two decades, the government successfully lured global investors as Mexico became an export powerhouse and international reserves surged to a record -- giving the country extra ammunition against market volatility.

Goldman Sachs Group Inc. suggests that if price swings continue to increase in the currency market, the central bank could offer dollar swaps because they don’t directly impact reserves and provide hedging protection.

Negotiating an extension of the IMF credit line would also be a move in the right direction, said Barclays’ Jaime. Mexico has $176.5 billion in foreign reserves or $260 billion in total if the IMF’s flexible credit line is factored in, according to BNP Paribas SA. That gives it a $40 billion buffer to spend on interventions.

While investors would welcome any action by Banxico that could protect the currency without reducing its reserves, investors’ confidence won’t be fully restored until U.S. President-elect Donald Trump provides some clarity on the trade policy, said Mark Dow, the founder of Dow Global Advisors in Laguna Beach.

Before the election, Trump had campaigned on promises to tear up the North American Free Trade Agreement, crack down on illegal immigration, and build a wall along the southern border paid for by Mexico. The U.S. accounts for 80 percent of the Latin American nation’s exports.

“People are afraid of what Trump might do to Mexico and Trump’s negotiating style which, as it’s been confirmed in recent days, is that before you even sit down at the table with him he’s going to punch you in the face a few times," Dow, a former economist at the IMF, said. Investors “are mostly worried about Trump and when the punching will stop, I think that’s what matters most."

 

© Copyright 2022 Bloomberg News. All rights reserved.


Markets
Mexico's Central Bank wants to lift the peso from its record lows, but is getting backed into a corner after spending $2 billion last week with little effect.
mexico, peso, foreign exchange, reserves
456
2017-30-10
Tuesday, 10 January 2017 12:30 PM
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