Bank of Mexico Caught Between Stronger Peso, Rising Inflation

Fox Business, 4/24/13

Economists say Mexican policy makers have limited options to address those issues at the moment, especially following their decision in March to slash the country’s benchmark lending rate by half a percentage point to 4%, the country’s first rate move since 2009. That’s left the central bank with less room to maneuver at its Thursday meeting.

On the one hand, concern about a slowdown in growth coupled with a 6.7% surge in the peso against the U.S. dollar since the start of the year might suggest that another rate cut is warranted. Such a move might help spur consumer spending and relieve pressure on the exchange rate from foreign investors searching for higher yields.

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Analysis: Mexico peso rise tests central bank’s hands-off stance

Chicago Tribune, 3/14/2013

Mexico’s peso is scaling new highs amid confidence in the country’s reform push, a likely credit ratings upgrade and profit taking after last week’s interest rate cut, sparking speculation about how far it will rise before authorities act. The peso has gained 2.6 percent since the start of the month, the best performance of the 152 currencies tracked by Thomson Reuters, and broken through key levels of 12.50 per dollar for the first time in 18 months.

The rise has come despite a 50 basis point cut in benchmark interest rates to a record low 4 percent on Friday, which only served to fuel investor optimism about the outlook for Latin America’s No. 2 economy.

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Mexico Unexpectedly Cuts Key Rate for First Time Since 2009

Bloomberg, 3-8-2013

Mexico’s central bank unexpectedly cut its benchmark interest rate for the first time since 2009 as inflation remains within the target range and growth slows. The peso strengthened.

Banco de Mexico reduced the overnight lending rate by 50 basis points to a record-low 4 percent, a move forecast by seven of 25 analysts in a Bloomberg survey. The rest predicted the rate would stay on hold. Latin America’s second-largest economy was the only nation in the Group of 20 to leave borrowing costs unchanged and refrain from buying bonds to ease monetary conditions since July 2009.

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Pimco to Norway Love Mexico as New Bond Gauges Use GDP

Bloomberg, 1/22/2013

The world’s biggest investors are moving away from allocating money to government bond markets based on their amount of debt, a strategy that has favored the largest borrowers for three decades.

Norway’s $702 billion sovereign-wealth fund and Pacific Investment Management Co. are starting to shift to indexes that favor less-indebted nations with growing gross domestic product, such as Brazil and South Korea. Pimco boosted the proportion of Mexican holdings while trimming the percentage allocated to U.S. issues in its biggest exchange-traded fund. BlackRock Inc. (BLK), the world’s largest money manager, with $3.8 trillion in assets, has $3 billion tied to a gauge based on credit-worthiness rather than capitalization.

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Mexico Political Consensus Grows on Easing Foreign Stake Limits

Bloomberg, 10/3/2012

Mexico’s incoming and outgoing presidential administrations are finding common ground on the need to ease foreign investment caps, including a 49 percent limit on holdings of land-line phone companies.

President-elect Enrique Pena Nieto may support a bill by Felipe Calderon’s administration to lift foreign direct investment limits in some sectors, Ildefonso Guajardo, a top Pena Nieto economic adviser, said in an interview in Mexico City today.

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Mexico’s Peso Strengthens as China Stimulus Speculation Mounts

Bloomberg, 9/27/2012

Mexico’s peso advanced, following most major currencies higher, as a decline in Chinese industrial profits fueled bets the country’s policy makers will act to stimulate growth, bolstering the global economy

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Mexico Peso Drops To Three-Year Low As Lopez Obrador Gets Boost

Bloomberg, 5/31/2012

Mexico’s peso fell to its weakest since 2009, triggering an intervention from the central bank, after a poll showed gains by a presidential candidate who favors increased public spending and disappointing U.S. jobs reports.

“Until now there has been almost no political risk priced in to Mexico from the elections, and this sparked the possibility in people’s heads,” Eduardo Suarez, a currency strategist at Bank of Nova Scotia (BNS), said by phone from Toronto.

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Mexican finance minister sees peso stable in 2011

Reuters, 1/5/2011

Mexico‘s Finance Minister Ernesto Cordero said on Wednesday that the Mexican peso would be stable in 2011, highlighting local authorities lack of concern about a significantly stronger currency.

“I see (the peso) as very stable,” Cordero said in a radio interview, adding that the Mexican currency MXN= would likely trade in a range between 12.17 per dollar and 12.70 per dollar.

Other Latin America countries like Chile and Brazil have stepped up intervention in foreign exchange markets to weaken their currencies, whose strong gains are hurting exporters.

Mexico’s currency, on the other hand, has yet to strengthen back to levels seen before the 2008 global financial crisis.

The Mexican peso has been held back by a sluggish economic recovery, drug violence and politicians’ failure to pass key tax, energy, labor and security reforms.

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Mexico IMF Line Request ‘Positive’ for Peso, RBC Says

Business Week, 12/15/2010

Mexico’s request for a larger credit line from the International Monetary Fund should be a “positive” for the peso and may reduce the need to add more foreign reserves, according to RBC Capital Markets.

The request for a $73 billion flexible credit line for two years should be approved, Eduardo Suarez, an analyst at RBC, wrote in a note to clients. The original line ends in April.

“The increase in the size of the flexible credit line means Mexico could reduce its target foreign exchange reserve level (whatever that is), which would be supportive for the peso,” Suarez wrote.

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Carstens Tells Economists Mexico Rate Cut Is Possible

Business Week, 11/3/2010

Mexican central bank Governor Agustin Carstens told economists that policy makers could cut interest rates if inflation stays benign and the peso continues to rise, said Rafael de la Fuente, a senior economist at UBS AG.

The central bank would have to be certain that increased capital inflows from investors seeking higher yields will continue before it reduces borrowing costs, Carstens told economists yesterday during a meeting in New York, according to de la Fuente, who attended the discussion.

“He made it look like it wasn’t imminent,” de la Fuente said. “It’s not a decision they would take lightly because they would have to have strong fundamental reasons to cut rates.”

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