Talking Points
• Mexico’s International Reserves Dip in September
• Reserves Follow a Long Run Trend
On November 11, 2014 the Bank of Mexico released information surrounding their recent international reserve holdings. As of date, the Bank of Mexico has 191410 USD Millions, slightly below the previous 191713 USD Millions in October 2014. International reserves are extremely liquid assets held by central banks and can be used to influence exchange rates by buying or selling one’s currency on the FX market, or can be used to ensure payment of its imports. Liquid assets include; gold, foreign denominated bonds, special drawing rights, and of course foreign currencies. The Bank of Mexico, since 1996 has steadily increased the amount of international reserves. In fact, international reserves have increased close to 11% per month with the exception of several months where the Bank of Mexico actually decreased their international reserve holdings. As the graph above indicates, there is a strong indication that international reserves will continue to follow the same upward trend.
As Central Banks amass foreign reserves a greater deal of monetary policy can be implemented. These reserves can be utilized in several ways; they can be used to purchase the domestic currency in order to strengthen said currency. In addition to this, they can be reinvested into the financial markets as a way to earn a rate of return. Finally, foreign reserves can be used as a line of credit. While Mexico continues to amass foreign reserves through exports, external government issued bond purchases, and other financial exchange mediums, they can have a profound impact on the USD/MXN exchange rate.
