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USD/MXN Falls as Bank of Mexico Sells Dollars and Hikes Rates

USD/MXN Falls as Bank of Mexico Sells Dollars and Hikes Rates

Varun Jaitly, Contributor


Talking Points:

  • Bank of Mexico raises overnight rates by 50 basis points to 3.75%
  • Bank of Mexico announces direct intervention, selling USD directly to banks
  • Oil prices and shifting monetary policy seen as large risk to emerging economies.

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In a surprise move, the Bank of Mexico raised its overnight target rate by 50bps (0.50%) to 3.75% Wednesday and announced direct FX intervention. This move comes amid a continued decline in oil prices and a stronger dollar, both factors contributing to the persistent decline of the Peso. The exchange rate intervention is also a break from the bank’s rules based influence. The policy authority previously voiced their opposition to the sale of US Dollars directly to banks as a form of aggressive intervention. The decline of the peso and this recent intervention comes on the heels of recent comments from the Governor of the Bank of Mexico, Augustin Carstens, who warned that emerging markets need to be warry of potential shocks from shifts in monetary policy and consistently low oil prices.

The USDMXN exchange rate dropped more than 4% after news of the intervention came out, at one point leading to the largest single day drop in years. The pair also made new lows for the year, but soon after retreated off the lows. Coming months will tell if the change in intervention has the desired effect, and can stem the Peso’s fall. However, this move will further color a backdrop of emerging markets struggling to keep their economies, financial systems and exchange rates stable in the face of global growth and Dollar pressure.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.