| | |  Business News | February 2009 
Mexico Pledges Intervention for ‘Foreseeable Future’
 Soraya Permatasari & Angus Whitley - Bloomberg
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| | Banco de Mexico Governor Guillermo Ortiz | |
Mexico’s central bank said it will continue to intervene in the foreign-exchange market for the “foreseeable future” after the peso slumped 30 percent in six months to become Latin America’s worst-performing currency.
Banco de Mexico started buying pesos directly from banks in the currency market late last week. Analysts have said the peso is vulnerable to a deepening recession in the U.S., the biggest buyer of Mexican exports, and may require more central bank intervention to prevent further weakness.
“The current state of the market is such that it has led us to change our typical method of intervention in the foreign- exchange market,” Banco de Mexico Governor Guillermo Ortiz told reporters in Kuala Lumpur today, where he is attending a conference of central bankers. “We will continue to do so for the foreseeable future.”
Ortiz said the central bank isn’t attempting to set the peso at a specific level, though it will continue to intervene should there be excessive volatility. He said he’ll continue to support a floating exchange rate.
The Mexican currency has lost 4.7 percent against the U.S. dollar this year, and yesterday fell 2.3 percent to 14.5253, the biggest drop in two months.
Ortiz said today the bank had to change the way it intervened in the market after the currency was subject to “atypical behavior.” When asked, he didn’t say whether this was due to currency speculation.
Foreign Reserves
The interventions have drained Mexico’s foreign reserves. The central bank bought $1.1 billion worth of pesos directly from banks last week to prop up the currency. Banco de Mexico’s foreign reserves fell $1.5 billion, or 1.8 percent, to $82.1 billion in the week ended Feb. 6.
Ortiz said he expects Mexico’s foreign reserves to be higher at the end of the year than in January, in part after the government hedged oil exports for this year to protect fiscal revenues against a drop in global prices.
The government began buying put options from international financial institutions in late July, Finance Minister Agustin Carstens said in November. The options give Mexico the right to sell oil at $70 per barrel. The options mean that Mexico won’t have to reduce its planned spending if the price of the oil exported by state oil company Petroleos Mexicanos remains below the budgeted price.
Production Slump
Ortiz also said any further monetary policy action by the nation’s central bank will be determined by economic data. While he said January factory output in Mexico probably slumped between 30 percent and 40 percent, he also said inflation should be in line with the central bank’s projections.
The central bank last month cut its benchmark interest rate by a half point to 7.75 percent, the first reduction in almost three years, to bolster a slumping economy hurt by the U.S. recession.
Mexico’s economy will shrink in 2009 for the first time in eight years as a deepening recession in the U.S. damps demand for exports and curbs remittances that migrant workers send back home, analysts have said.
The central bank will reduce the interest rate by a half percentage point this month, according to the median forecast of economists surveyed by Citigroup Inc.’s Banamex unit last week.
To contact the reporters on this story: Angus Whitley in Kuala Lumpur at awhitley1(at)bloomberg.net; Soraya Permatasari in Kuala Lumpur at soraya(at)bloomberg.net |
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