Bloomberg News

Peso Surges as Mexico Taps Reserves to Stem Currency Plunge

November 29, 2011

(Adds closing prices in fourth and final paragraphs.)

Nov. 29 (Bloomberg) -- Mexico’s peso surged the most in three weeks after policy makers said they’ll tap $140 billion in reserves to cap declines by Latin America’s most-battered currency over the past six months.

Mexico’s currency exchange commission said the central bank will auction $400 million daily of its reserves at a peso exchange rate at least 2 percent weaker than the previous day’s level, providing support for the currency. The mechanism, which was last used to shore up the peso following the 2008 collapse of Lehman Brothers Holdings Inc., is a “preventative” measure designed to provide liquidity to the foreign exchange market during times of volatility, the commission said in a statement.

The announcement “gives some certainty to the peso and all Mexican assets,” Ramon Cordova, a currency trader at Base Internacional Casa de Bolsa in Monterrey, Mexico, said by phone.

The peso climbed 1.5 percent to 13.8230 per U.S. dollar at the close in Mexico City, from 14.0258 yesterday. It was the biggest increase since Nov. 3 for the currency which has lost 11 percent this year.

“It’s like a circuit breaker,” said Win Thin, chief emerging market strategist at Brown Brothers Harriman in New York, said in a phone interview. “The signal is that they’re worried about a weaker currency, they’re worried about disorderly movements.”

Auctions will take place daily from 9 am to 9:05 a.m., 12 to 12:05 p.m. and 3 p.m. to 3:05 p.m. in Mexico City, the central bank said on its website.

Suspending Auctions

Mexico’s currency commission, which is made up of representatives of the central bank and Finance Ministry, also said it was suspending until further notice the sale of dollar options. The bank had been buying as much as $600 million through the options every month since March 2010 to bolster reserves while assuring against capital outflows and curbing gains by the peso.

Mexico’s foreign currency reserves have climbed $26 billion since the start of the year to $140 billion in the week ending Nov. 25, central bank data shows.

Rafael Camarena, an economist at Banco Santander SA in Mexico City, said policy makers may have planned the announcement to head off additional volatility as euro-area finance chiefs meet in Brussels. The central bank’s interest rate decision on Dec. 2 may also contain signals of increased concern over spillover from Europe’s debt crisis, he said.

While today’s move will help stabilize the foreign exchange market “this doesn’t mean that the peso depreciation will end,” Sergio Martin, a Mexico City-based economist at HSBC Holdings Plc.

‘Orderly Fluctuation’

“What we are going to see is a more orderly fluctuation”, Martin said in a telephone interview.

The peso’s decline over the past six months is the second- worst performance against the dollar among 16 major currencies tracked by Bloomberg after South Africa’s rand.

Mexico sold all of the 6.5 billion pesos of 28-day Cetes it offered at auction today, the central bank said on its website. The government sold all of the 7.5 billion pesos of 91-day bills and all of the 8 billion pesos of 182-day Cetes, the bank said

The yield on Mexico’s benchmark peso-denominated bond due in 2024 declined 14 basis points, or 0.14 percentage point, to 6.73 percent. The price for the security rose 1.37 centavo today to 128.35 centavos per peso.

--With assistance from Jose Enrique Arrioja, Benjamin Bain, and Jonathan Roeder in Mexico City. Editors: Joshua Goodman, David Papadopoulos

To contact the reporters on this story: Jonathan J. Levin at; Nacha Cattan in Mexico City at

To contact the editors responsible for this story: David Papadopoulos at; Joshua Goodman at

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