- The Governor of Banxico, Rodríguez Ceja, attributes the volatility of the Peso to external factors, not only to internal political issues.
- USD/MXN soared from 16.91 to 18.99 after the June 2 election, with the 10-year Mbono yield rising to 10.74%.
- Banxico could deploy a $30 billion risk coverage program to stabilize markets; USD/MXN currently retreats below 18.80, down 0.87%.
The Governor of the Bank of Mexico (Banxico), Victoria Rodríguez Ceja, commented on Wednesday that the central bank has the tools to intervene in the markets and restore market order after the Mexican peso depreciated more than 9% after the elections from June 2nd.
Banxico is ready to intervene after the 9% post-election depreciation of the Peso
Rodríguez Ceja said that the volatility is mainly attributed to external factors and refrained from expressing that the USD/MXN exchange rate jumped due to the intentions of Andrés Manuel López Obrador (AMLO) to promote a bill to carry out judicial reform and reforms to eliminate autonomous organizations, which provide certainty to investors.
He said the volatility is due to “idiosyncratic factors” and global issues such as the war in the Middle East and the outlook for US interest rates.
After the election, USD/MXN soared from 16.91 and hit a 14-month high of 18.99 on June 12. In addition, the yield of the 10-year Mexican Bond (Mbono) jumped from 9.76% to 10.74% amid comments from analysts about the lack of offers for Mexican debt.
Banxico Governor Rodríguez commented that they could resort to a $30 billion risk coverage program aimed at stabilizing markets and protecting banks from MXN losses, according to Bloomberg.
USD/MXN reaction
On Thursday, USD/MXN has so far retreated below 18.80, with the emerging market appreciating around 0.87%. Still, upside risks remain unless the pair falls below the April 19 high of 18.15 after the Peso plummeted to a new multi-month low.
Banxico
The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican peso (MXN), and set monetary policy. To do this, its main objective is to maintain low and stable inflation within target levels (at or near its 3% target, the midpoint of a tolerance band between 2% and 4%).
Banxico’s main tool to guide monetary policy is the setting of interest rates. When inflation is above the target, the bank will try to control it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the Mexican Peso (MXN), as they generate higher returns, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken the MXN. The rate differential with the Dollar, or how Banxico is expected to set interest rates compared to the United States Federal Reserve (Fed), is a key factor.
Banxico meets eight times a year and its monetary policy is greatly influenced by the decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee typically meets a week after the Federal Reserve. By doing so, Banxico reacts and sometimes anticipates the monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did so first in an attempt to decrease the chances of a substantial depreciation of the Mexican Peso (MXN) and avoid capital outflows that could destabilize to the country.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
