Mexico unlikely to intervene to tame peso

REUTERS

PANAMA CITY

MEXICO is committed to maintaining its freely floating exchange rate and is not currently contemplating any new mechanism to slow strong gains in the peso, deputy finance minister Fernando Aportela said on Saturday.

The peso hit a 18-month high against the dollar last week, boosted by growing confidence in a reform drive by the new government and potential credit-rating upgrades, sparking speculation that authorities could take measures to slow the currency’s advance.

Aportela said Mexico’s currency commission, made up of members of the central bank and the finance ministry, had not discussed any new measures to try and slow the peso’s advance.

“Mexico has learned that the sound macroeconomic policy of having a welladministered flexible exchange rate pays off in the end,” Aportela told Reuters at an Inter-American Development Bank meeting in Panama City.

Mexico has eschewed the direct intervention and capital controls that other emerging- market countries have deployed in recent years to tame local currency gains resulting from a flood of liquidity from developed markets seeking higher returns.

Investors are watching to see if Mexico will reinstate a more market-friendly mechanism of auctioning dollar “put” options, which could indicate authorities are growing uncomfortable with the pace of peso gains.

The options, which the central bank used to accumulate reserves and slow peso gains in 2010 and 2011, give investors the right to sell dollars to the central bank at a better rate than the spot rate when the cost of dollars in pesos falls below its 20-day moving average.

Aportela said policymakers had not discussed reinstating the auctions and they were not looking at any other tools either. “The set of instruments we have are what they are,” he said.

Mexico’s peso, one of the world’s most liquid emergingmarket currencies, has oscillated wildly since the financial crisis, tracking the ups and downs of riskier global assets.

The currency has yet to recover to the levels seen before late 2008, which has helped boost the competitiveness of Mexican exports amid sluggish global growth.

“The exchange rate has shown itself to be effective in absorbing this type of external volatility,” Aportela said.

Market players read a 50 basis point cut to Mexico’s benchmark rate to a record low of 4 percent on March 8 as a bid by the central bank to try and curb the appeal of local-currency fixed-income assets to speculators.

The Banco de Mexico warned that heavy inflows could lead to an ‘unnecessary’ tightening in monetary conditions.

A stronger peso could create drag on growth by crimping exporters’ profits.