The peso’s retreat in the past few days hasn’t been marked by the kind of liquidity shortage that would dictate additional intervention beyond what’s already happening, according to Mexico’s central bank governor.
The peso fell 2.6 percent last week, the most among 31 world major currencies, after two polls showed leftist presidential candidate Andres Manuel Lopez Obrador widening his lead ahead of the nation’s July 1 election.
Lopez Obrador has unsettled investors with proposals that include canceling a new Mexico City airport and delaying parts of the nation’s oil-industry opening to foreign and private investment. The peso touched the lowest intraday level in a month on Friday after Mexico’s economy minister said there’s still a lot of work to do in Nafta talks.
“For us the critical issue, more than the price swings, is market conditions, and to have liquid and adequate market conditions,” Banco de Mexico’s Alejandro Diaz de Leon said Sunday in an interview in Washington. “So far, that has been the case.”
Mexico’s currency commission, which includes Banxico and the Finance Ministry, began a foreign-exchange hedge program in March 2017 for as much as $20 billion aimed at supporting the peso amid a deepening rout. The program started with a hedge auction of as much as $1 billion, which increased by an additional $4 billion in October to focus on shorter maturities.
Independent of the election, it’s crucial for Mexico to have a good credit rating and environment for growth and job creation, orderly conditions on the macroeconomic front, and stable monetary and fiscal policy, Diaz de Leon said. While Moody’s on April 12 lifted the nation’s credit outlook to stable from negative, citing receding Nafta risk, senior credit officer Jaime Reusche said an abrupt fiscal policy shift could lead to a downgrade.
Diaz de Leon said Banxico would look “carefully” into any future government’s spending policies, as they could have differing effects on aggregate demand and inflation, and may have some effect on risk premium as well.
“It depends on which type of spending is done, how it is financed, and what would be the overall affect on aggregate demand and expectations,” Diaz de Leon said on the sidelines of the International Monetary Fund and World Bank meetings. “Those are the two key things that we would have to gauge in order to determine the monetary policy stance.”
Lopez Obrador has pledged to maintain Mexico’s primary budget surplus, although some of his other promises, such as keeping fuel prices steady in real terms, have led Barclays Plc to express concern that deficits could widen.
Mexico’s central bank kept its benchmark interest rate unchanged at the highest level since 2009 in its decision earlier this month, signaling again that the peso’s impact on inflation will be a more important factor to guide its decisions than moves by the U.S. Federal Reserve. It was the first time since Diaz de Leon took the helm from Agustin Carstens at the end of last year that the bank left borrowing costs on hold.
Diaz de Leon said Sunday that the Fed’s policy decisions are just one factor in an “array of different elements” that the board will consider when deciding on monetary policy.
In its statement this month, the board reiterated that it expects the annual inflation rate to slow to near its 3 percent goal in the first quarter of 2019, while cautioning that this outlook faces risks from peso weakness that could be spurred by the Nafta talks, moves by the Fed, and Mexico’s election. Inflation last month fell to 5.04 percent, the lowest in a year, after the impact of higher gasoline prices abated and the peso rallied on speculation that trade talks with the U.S. and Canada to overhaul Nafta will reach a constructive outcome. That optimism pushed the currency to a six-month high, just ahead of its latest decline.