MEXICO CITY (Reuters) – Mexico’s central bank is likely to take stronger measures to support the peso if the currency hits a new low in the coming months, according to analysts polled by Reuters.
Four of seven economists queried at a round table hosted by Reuters in Mexico City expect the central bank to introduce bolder forms of intervention if the peso blows past a record low of 15.6690 per dollar seen in March.
Sergio Luna, an economist at Citigroup in Mexico City, said policymakers are committed to a free floating exchange rate, but that they are thinking “if things happen, I reserve the right to take out my missiles and show them off a bit.”
The peso has been hammered by concerns that a U.S. interest rate hike may push investors to dump emerging market assets.
Mexico’s central bank avoids the direct intervention used by other emerging markets, preferring more market-friendly mechanisms, such as a current auction of $200 million dollars that is triggered by losses of more than 1.5 percent.
Analysts doubted policymakers would resort to discretionary intervention, expecting rather that the central bank could increase the amount of dollars it sells or lower the threshold that would trigger the auction.
The central bank and the finance ministry jointly set currency policy.
Despite the chance for deeper currency losses, all economists saw only a minimal sell-off of peso-denominated bonds. Six out of seven project a drop of around 10 percent in the holdings of foreign investors. One expects foreign holdings to remain stable.
Foreign holdings of Mexican peso-debt have dipped about two percent so far off a record high of 2.18 trillion pesos ($143 billion) seen in February.
Even though Mexican growth has been slower than expected, economists said the country’s relatively strong fundamentals made it stand out from other emerging markets suffering from domestic problems, such as Brazil and Russia.
“As one client put it, ‘It’s a beauty pageant and Mexico continues to be, by far, the least ugly,'” said Alexis Milo, an economist at Deutsche Bank in Mexico City.
Mexico’s central bank slashed its growth outlook for this year on Tuesday by half a percentage point to between 2.0-3.0 percent.
(Reporting by Michael O’Boyle and Jean Luis Arce; Editing by Christian Plumb)