Mexican government hikes dollar auction by almost 4 folds; holds rates

By MoneyTimes

Aug 03, 2015 07:55 AM EDT

The continuous fall of peso currency is giving jitters to the Mexican economy. The second largest economy in Latin America is making all the possible efforts to prevent the arrest of its falling peso. It increased dollar auction level by almost four times to support the weakening peso.

The Mexican Central Bank is awaiting US decision on interest rates, so that it can act accordingly.

As part of its crisis management to protect its currency, Mexican Central Bank has decided to increase dollar auctions to $200 million per day from $52 million. The hike in dollar auction is effective till September.

The government has also postponed its decision on interest rates and looking to the US for further cues. The Mexican Central Bank used to offload dollars to the tune of $52 million a day until March this year. However, the record low of peso against the US dollar has forced the Mexican government to up the cap on dollar auction.

Peso against US dollar was recorded as low as 16.45 on Thursday. The peso lost 11% against the US dollar since January 2015 and it recorded an overall drop of 25% in 2014.

The Bank of Mexico believes that the hike in dollar auction will lower the level currency market volatility. If peso drops by over one percent, the Mexican Central Bank will take up additional auction. Earlier, it used to intervene in the forex market whenever peso drops by 1.5% or more.

Peso fell to a record low in last March, when the Mexican central bank announced dollar auctions. The peso steeply fell amid expectations of interest rate hike in the US.

Mexico has facility to draw $70 billion credit line from International Monetary Fund (IMF). Mexico's forex reserves stand at $190.7 billion. 

One has to wait and see whether all these measures taken by Mexican government can deliver the positive results for its ailing economy.

This question making rounds right from a common man to analysts alike. Global rating agency Moody's opinion as quoted by Wall Street Journal (WSJ) reveals that Mexicangovernment's measures are limited and would hardly stop the currency fall in the near future.

In the global economy, no country can dictate where its currency should be placed against a particular currency. The market decides where should be a particular currency as forex dynamics will dictate the currency exchange rates. 

The possible hike in interest rates following the indications by US economic data has triggered the pressure on emerging markets' currencies and so was the Mexican peso. 

The Mexican peso lost 10% year-to-date (YTD) and 20% in the past 12 months. Following this crisis, the Mexican central government held dollar auctions three times since December 2014 so far.

Mexican government opted not to change its interest rates to boost $1.28 trillion economy. The drop in oil production was also another major reason for this decision. Mexico has also postponed its decision on interest rates enabling it to act on US announcement on interest rates.

The inflation rate in Mexico is at the lowest in the last 50 years. The inflation rate fell to 2.87% in June from 2.88% in May and this is the lowest since 1968. Policy makers advise the government to increase the borrowing costs to preserve Mexico's rate differential with the US so that it would support its currency peso.

The inflation in Mexican economy is likely to remain under 3% for next four months owing to sluggishness in the economy.

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