Policymakers are likely to roll over Mexico's current regime of dollar auctions without increasing intervention despite an increase in global financial volatility, according to a Reuters poll. All 15 analysts polled by Reuters expect the country's FX commission will extend its current program of dollar auctions, which is set to expire on September 30.
Twelve of 15 expected the central bank would maintain the same amount of dollars it sells, but none thought it would resort to any new mechanisms to try and support the peso, which hit a fresh record low last week of 17.3410 per dollar. Mexico is committed to a freely-floating currency and analysts said its aversion to intervention would keep it from trying to deploy any new tools to stem pesos losses, unlike Brazil, which stepped up intervention last week.
"Mexico has made a policy decision of being very predictable," said Benito Berber, an analyst at Nomura in New York. "In Mexico they understand that the impact of intervention is limited, in Brazil there is an expectation that it could have a little more impact." Mexico's peso has been punished this year amid a rout in emerging market currencies, largely driven by expectations that higher US borrowing costs will sap demand for riskier assets. Mexico currently sells $200 million a day to the market and offers $200 million more when the peso weakens by 1 percent from its previous fix rate.
Since starting dollar auctions late last year, Mexico has sold more than $15 billion and reserves have fallen by about 5 percent from last December through September to around $183 billion. Analysts said that policymakers are likely becoming concerned by the pace they are burning through reserves. They think Mexico will end the program after the US Federal Reserve raises interest rates, when most analysts expect Mexico to follow suit with a hike.
Mexico's central bank held borrowing costs steady last week, flagging tame inflation and sluggish growth, but signaled it is prepared to raise rates if currency weakness hits consumer prices. Eight out of 15 analysts did not think Mexico would move ahead of the Fed to defend the peso, but seven analysts thought Mexico could hike first if peso losses accelerate.
If the peso surges past 17.50 per dollar and the Fed keeps markets guessing on when it will finally lift borrowing costs, Mexico could raise interest rates first, said Marco Oviedo, an analyst at Barclays in Mexico City. "The Bank of Mexico might want to act in a preemptive way just to give some support to the currency," Oviedo said.