Sat | Dec 10, 2016

Mexican currency sinks alongside oil prices

Published:Wednesday | December 10, 2014 | 12:00 AM

Mexico is ready to intervene in currency markets to fight the peso's fall against the dollar amid concerns over dropping oil prices and a possible increase in US interest rates.

Mexico's Exchange Commission said that as of Tuesday, the government will hold a daily auction of US$200 million whenever the peso falls at least 1.5 per cent from the previous day.

The idea is to provide liquidity to a currency market that has been volatile in recent weeks. Experts attribute the instability to fears that investment in Mexico could slide in coming years in the face of lower oil prices and the possible flight of dollars away from Mexican debt toward higher interest rates elsewhere.

The peso closed Monday at 14.40 per dollar and Tuesday was at 14.36, an improvement that would not trigger a dollar auction.

The commission, composed of the Central Bank and Treasury Department, announced the measure Monday. It was first instituted during the 2008 international financial crisis and has been used in various moments since.

While the peso's depreciation is a boon for Mexican exporters who deal in dollars, over the long term it could be seen as negative for the country as a whole.

Alfredo Coutino, director for Latin America for the consultant Moody's Analytics, said it was oil's plunge that sparked the volatility, "and unfortunately Mexico has a high dependence on oil exports."

"The fall in the price of oil affects investment decisions," he said. One-third of Mexico's revenue comes from oil and the country recently passed historic energy reforms aimed at attracting private investment that could revive the country's declining production. But as oil prices fall, Coutino said, "Mexico isn't as attractive and that could affect big companies' investment decisions in 2015 and 2016."

After reaching US$100 a barrel, oil has slumped in recent months and now sells at US$56.70 a barrel.

Economists also expect the US Federal Reserve to raise interest rates in 2015, after keeping them low for six years trying to stimulate the economy. If that happens, those holding Mexican debt could pull their money out of Mexico to invest in the US

"That generates the mentality that it is time to begin to leave Mexico," Coutino said.

Joel Virgen, assistant director of economic research at Grupo Financiero Banamex, said that so far they have not detected a flight of dollars from the country, but the nervousness is evident in the currency market.

"This should be seen as a preventative measure," he said. "It's like when you buy auto insurance: Basically, you buy it to not use it."

The peso has fallen 10 per cent against the dollar this year, but not much more than other currencies that have reacted similarly.

MetAnalisis, a Mexican consulting company, notes that the Brazilian real has fallen 9.6 per cent, the euro 11.8 per cent, the Chilean peso 16 per cent and the Colombian peso 20 per cent.

- AP