Mexico’s central bank intervened in the foreign exchange markets to halt the peso’s record slide against the dollar but failed to provide anything more than temporary respite for its battered currency.
The peso responded to the move, the first of its kind since the election of Donald Trump, with a 1.5 per cent rise against the dollar.
Having tumbled to another all-time low of 21.61 pesos on Thursday, the currency rose to 21.12 pesos but retraced the bulk of its gains and was back at slightly below 21.50.
The intervention underlined the central bank’s problems and would not provide lasting support for the peso, said Christian Lawrence, Rabobank market strategist.
“Indeed, we would argue that reserves will start to evaporate very quickly if this continues,” he said
The intervention could be interpreted as a sign that the central bank was averse to raising rates to combat the peso’s slide, Mr Lawrence added.
Banco de México confirmed the intervention in a statement on Thursday, saying it had bought about 51bn pesos to support the currency.
Mexico’s specific Trump-related woes made the peso one of the few emerging market units not to benefit from an across-the-board dollar correction on Wednesday.
“When the dollar came off, the one currency that didn’t seem to know this was going on was the Mexican peso,” said David Bloom, FX strategist at HSBC.
Mr Trump’s election as US president has been pummelling the peso as investors weigh the risks to Mexican policies from his protectionist policies.
It fell 17 per cent against the dollar last year and was among the worst-performing EM currencies.
After a pre-Christmas period of relative calm, traders returned to their desks this week to renew peso selling, triggered by Ford’s announcement on Tuesday that it had abandoned plans to build a €1.6bn car facility in Mexico in favour of further investment in the US.
The decision threatens growth in one of Mexico’s most important industries. A third of Mexico’s total exports to the US are cars or associated components with more than 80 per cent of total car exports (2.7m units) heading to the US or Canada in 2015.
Mr Bloom said further peso pain depended on whether Mr Trump made good on his threats to target Mexico with trade barriers and build a border wall.
“It’s very difficult for them,” said Mr Bloom. “The story for Mexico is not a very good one so we’ve got to get Trump’s inauguration out of the way and let’s see what he really stands for.”
Banxico last intervened with a “shock and awe” move to protect the currency back in February 2016 when it raised interest rates by half a percentage point and sold the dollar.
It raised its benchmark rate by another 50 basis points after Mr Trump’s election in November.
The intervention was “a clear escalation in strategy to stabilise the peso”, said Mike Moran at Standard Chartered, who added that it was likely to have “wrongfooted” the market.
“Banxico has refrained from an intervention-based defence, leaning on rate hikes instead this year,” he said.
The peso suffered a blow last month when Agustín Carstens, the respected central bank governor, announced that he would be leaving this summer to join the Bank of International Settlements.