Bloomberg News

Mexico Taps Post-Lehman Crisis Measure to Bolster Sagging Peso

December 06, 2011

Nov. 30 (Bloomberg) -- Mexican policy makers are reverting to a measure they used during the 2008 financial crisis to stem losses in Latin America’s most-battered currency.

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 19 months ago to shore up the exchange rate following the collapse of Lehman Brothers Holdings Inc., is a “preventative” measure designed to provide liquidity to the market during times of volatility, the commission said in a statement.

The bank is “recognizing that there’s too much volatility in the currency and doing something about it,” said Alejandro Urbina, who oversees $800 million of assets at Silva Capital Management in Chicago. “It makes the peso more attractive.”

The peso has lost 16 percent in the past six months, making it the worst performing major Latin American currency. It surged the most in three weeks yesterday after the bank published the statement, climbing 1.5 percent to 13.8230 per U.S. dollar at the close in Mexico City.

Investors will probably only participate in the auctions when the peso weakens 2 percent or more in intraday trading, the exchange commission said.

Auctions will take place daily from 9 a.m. 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 in a separate statement on its website.

‘Less Volatility’

Gerardo Rodriguez, the country’s deputy finance minister, said in an interview yesterday that the peso market should have “less volatility going forward.” Participation in the program is likely to be limited, he said.

The peso has weakened 2 percent or more during just four sessions in the past month.

“It’s like a circuit breaker,” said Win Thin, chief emerging market strategist at Brown Brothers Harriman & Co. 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.”

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.

Reserves

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.

When Agustin Carstens took the position of Mexico’s central bank governor in Jan. 2010, he said his mandate was to promote a “stable currency.” With less than a month on the job, he announced a program to boost international reserves, which have risen 54 percent since then.

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 yesterday’s move will help stabilize the foreign exchange market, “this doesn’t mean that the peso depreciation will end,” said 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 yesterday, 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 yesterday to 128.35 centavos per peso.

Silva Capital’s Urbina predicted the peso would extend yesterday’s gains on optimism about the auction policy.

“There are people who are just getting woken up to this,” Urbina said. “Once people get finished digesting what’s going on, it should be good for more of a rally.”

--With assistance from Jose Enrique Arrioja, Nacha Cattan and Ben Bain in Mexico City. Editors: Joshua Goodman, Jonathan Roeder

To contact the reporters on this story: Jonathan J. Levin at jlevin20@bloomberg.net; Ben Bain in New York at bbain2@bloomberg.net

To contact the editors responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net; Joshua Goodman at jgoodman19@bloomberg.net


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